STAGE STORES INC, S-1/A, 1996-06-27

STAGE STORES INC
S-1/A, 1996-06-27
DEPARTMENT STORES

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As filed with the Securities and Exchange Commission on June 26, 1996

Registration No. 333-5855
==============================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------

AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------

STAGE STORES, INC.
(Exact Name Of Registrant As Specified In Its Charter)

Delaware 76-0407711 5311
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Classification Code Number)
No.)

10201 Main Street, Houston, Texas 77025 Telephone: 713-667-5601
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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

MR. CARL TOOKER

STAGE STORES, INC.
10201 Main Street
Houston, Texas 77025
Telephone: 713-667-5601
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------
Copies to:

LANCE C. BALK, ESQ. MARK A. STEGEMOELLER, ESQ.
Kirkland & Ellis Latham & Watkins
Citicorp Center, 39th Floor Sears Tower, Suite 5800
153 East 53rd Street 233 South Wacker Drive
New York, New York 10022 Chicago, Illinois 60606
Telephone: 212-446-4800 Telephone: 312-876-7700
-------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

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

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. [x]
-------------

The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
==============================================================================
<PAGE>

STAGE STORES, INC.

Cross Reference Sheet Pursuant to Item 501(b) of Regulation S-K
Showing Location in Prospectus of Information Required by Items of
Part I of Form S-1.

<TABLE>
<CAPTION>
Registration Statement
Item Number and Caption Caption or Location in Prospectus
------------------------ ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .............. Outside Front Cover Page

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

3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors
Earnings to Fixed Charges ...........................

4. Use of Proceeds ..................................... Use of Proceeds

5. Determination of Offering Price .................... Underwriting

6. Dilution ........................................... Dilution

7. Selling Security Holders ........................... Principal Stockholders; Overallotment Option

8. Plan of Distribution ............................... Outside Front Cover Page; Underwriting

9. Description of Securities to Be Registered ......... Description of Capital Stock

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

11. Information with Respect to the Registrant .......... Outside Front Cover Page; Prospectus Summary; The
Reorganization; Risk Factors; Use of Proceeds;
Dividend Policy; Capitalization; Selected
Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Description of Capital Stock; Principal
Stockholders; Overallotment Option; Certain
Relationships and Related Transactions; Index to
Financial Statements

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

<PAGE>

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.

SUBJECT TO COMPLETION, DATED JUNE 26, 1996

PROSPECTUS
, 1996

Shares
STAGE STORES, INC.
[Logo]
Common Stock

All of the shares of Common Stock (the "Common Stock") offered hereby are
being offered (the "Offering") by Stage Stores, Inc. ("Stage Stores" or the
"Company").

Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See "Underwriting" for information relating to
the factors to be considered in determining the initial public offering price.

Application has been made for inclusion of the Common Stock in the Nasdaq
Stock Market's National Market under the symbol "STGE".

See "Risk Factors," beginning on page 12, for a discussion of certain
factors which should be carefully considered by prospective purchasers of the
Common Stock offered hereby.

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

- ------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to the
the Public Commissions (1) Company (2)
- ------------------------------------------------------------------------------
Per Share ....... $ $ $
Total (3) ....... $ $ $
- ------------------------------------------------------------------------------

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

(2)Before deducting expenses payable by the Company estimated at $ .

(3)The Underwriters have been granted a 30-day option by certain of the
Company's stockholders to purchase up to additional shares of
Common Stock solely to cover overallotments, if any. If the Underwriters
exercise this option in full, the Price to the Public, Underwriting
Discounts and Commissions, Proceeds to the Company and the proceeds to
such stockholders will total $ , $ , $ and $ ,
respectively. See "Principal Stockholders," "Overallotment Option" and
"Underwriting."

The shares of Common Stock are being offered by the several Underwriters
subject to prior sale, when, as and if issued to and accepted by them, subject
to certain prior conditions, including the right of the Underwriters to reject
any order in whole or in part. It is expected that delivery of the shares of
Common Stock will be made in New York, New York on or about , 1996.

Donaldson, Lufkin & Jenrette
Securities Corporation

Bear, Stearns & Co. Inc.
CS First Boston

<PAGE>

2
<PAGE>

3
<PAGE>

[Pictures to come]

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

DURING THE OFFERINGS, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING
IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR
THE ACCOUNTS OF OTHERS IN THE COMMON STOCK PURSUANT TO EXEMPTIONS FROM RULES
10b-6, 10b-7, AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934.

4
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. References in this Prospectus to the
Company shall, as the context requires, refer to Stage Stores, Inc. ("Stage
Stores"), which was previously known as Apparel Retailers, Inc., together with
its wholly-owned subsidiaries, including Specialty Retailers, Inc. The terms
"fiscal year" and "fiscal" refer to the Company's fiscal year which is the 52
or 53 week period ending on the Saturday closest to January 31 of the
following calendar year (e.g., a reference to "1995" is a reference to the
fiscal year ended February 3, 1996). The term pro forma refers to the basis
described under "Unaudited Pro Forma Combined Financial Data." In addition,
unless the context otherwise requires, the information contained herein
assumes that the Underwriters' over-allotment option is not exercised. See
"Underwriting."

The Company

The Company operates the store of choice for well known, national brand
name family apparel in over 200 small towns and communities across the central
United States. The Company has recognized the high level of brand awareness
and demand for fashionable, quality apparel by consumers in small markets and
has identified these markets as a profitable and underserved niche. The
Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a broad range of
merchandise with a high level of customer service in convenient locations.

The Company currently operates 301 stores through its "Stage", "Bealls" and
"Palais Royal" trade names in 16 states throughout the central United States.
Approximately 76% of these stores are located in small markets and communities
with as few as 4,000 people. The Company's store format (averaging
approximately 18,000 total selling square feet) and merchandising capabilities
enable the Company to operate profitably in these small markets. The remainder
of the Company's stores operate in metropolitan areas, primarily in suburban
Houston. For the twelve months ended February 3, 1996, the Company would have
had pro forma sales and income before extraordinary item of $742.4 million and
$20.7 million, respectively.

Stage Stores' merchandise offerings include a carefully edited but broad
selection of branded, moderately priced, fashion apparel, accessories,
fragrances and cosmetics and footwear for women, men and children. Over 85% of
1995 sales consisted of branded merchandise, including nationally recognized
brands such as Levi Strauss, Liz Claiborne, Chaps/Ralph Lauren, Calvin Klein,
Guess, Hanes, Nike, Reebok and Haggar Apparel.

In recent years, the Company has undertaken several initiatives to realize
the full potential of its unique franchise in small markets, including (i)
recruiting a new senior management team, (ii) embarking on a store expansion
program to capitalize on available opportunities in new markets through new
store openings and strategic acquisitions, (iii) continuing to refine the
Company's retailing concept and (iv) closing unprofitable stores. As a result
of these initiatives, the lower operating costs of small market stores, the
benefits of economies of scale, and its highly automated facilities and
sophisticated information systems, the Company has among the highest operating
income margins in the apparel retailing industry.

Competitively Well Positioned

As a result of its small market focus, Stage Stores generally faces less
competition for brand name apparel because consumers in small markets
generally have only been able to shop for branded merchandise in distant
regional malls. In those small markets where the Company does compete for
brand name apparel sales, such competition generally comes from local
retailers, small regional chains and, to a lesser extent, national department
stores. The Company believes it has a competitive advantage over local
retailers and smaller regional chains due to its (i) economies of scale, (ii)
strong vendor relationships, (iii) proprietary credit card, and (iv)
sophisticated operating systems. The Company believes it has a competitive
advantage in small markets over national department stores due to its (i)
experience with smaller markets, (ii) ability to effectively manage
merchandise assortments in a small store format, and (iii) established
operating systems designed for efficient management within small markets. In
addition, due to minimal merchandise overlap, Stage Stores generally does not
directly compete for branded apparel sales with national discounters such as
Wal-Mart.

5
<PAGE>

Key Strengths

The following factors serve as the Company's key strengths and
distinguishing characteristics:

Ability to Operate Profitably in Smaller Markets. In targeting small
markets, the Company has developed a store format, generally ranging in size
from 12,000 to 30,000 square feet, which is smaller than typical department
stores yet large enough to offer a well edited, but broad selection of
merchandise. This format, together with economies of scale in buying and
merchandising, information systems, distribution and advertising, has enabled
the Company to operate profitably in small markets. In 1995, the Company's
small market stores open for at least one year generated a store contribution
(operating profit before allocation of corporate overhead) as a percentage of
sales of 18%, as compared to 12% for its larger market stores.

Benefits of Strong Vendor Relationships. The Company's large store base
offers major vendors a unique vehicle for accessing multiple small markets in
a cost effective manner. The proliferation of media combined with the
significant marketing efforts of these vendors has created significant demand
for branded merchandise. However, the financial and other limitations of many
local retailers have left vendors of large national brands with limited access
to such markets. Further, these vendors, in order to preserve brand image,
generally do not sell to national discounters. As a result, the Company is
able to carry branded merchandise frequently not carried by local competitors.
Additionally, the Company continuously seeks to expand its vendor base and has
recently added nationally recognized brand names such as Polo, Dockers for
Women, and Oshkosh, and fragrances by Elizabeth Arden, Liz Claiborne and Perry
Ellis. In addition, the Company has successfully increased the participation
by key vendors in joint marketing programs to a level that the Company
believes exceeds the standard programs provided to its smaller, regional
competitors.

Effective Merchandising Strategy. The Company's merchandising strategy is
based on an in depth understanding of its customers and is designed to
accommodate the particular demographic profile of each store. Store layouts
and visual merchandising displays are designed to create a friendly, modern,
department store environment, which is frequently not found in small markets.
The Company's strategy focuses on moderately priced merchandise categories of
women's, men's and children's apparel, accessories, fragrances, cosmetics and
footwear, which have traditionally experienced attractive margins. The Company
utilizes a sophisticated merchandise allocation and transfer system which is
designed to maximize in-stock positions, increase sales and reduce markdowns.
The Company believes that the combination of the size and experience of its
buyer group, strong vendor relationships, effective merchandising systems and
participation in the Associated Merchandising Corporation ("AMC") cooperative
buying service enable it to compete effectively on both price and selection in
its markets.

Focused Marketing Strategy. The Company's primary target customers are
women between the ages of 20 and 55 with household incomes over $25,000 who
are the primary decision makers for family clothing purchases. The Company
uses a multi-media advertising approach to position its stores as the local
destination for fashionable, brand name merchandise. In addition, the Company
heavily promotes its proprietary credit card in order to create customer
loyalty and to effectively identify its core customers. The Company believes
it has a high level of customer awareness due to the small size of its
markets, its aggressive advertising strategy and well developed corporate
programs designed to encourage a high level of customer interaction and
employee participation in local community activities.

Benefits of Proprietary Credit Card Program. The Company aggressively
promotes its proprietary credit card and, as a result, the Company believes it
experiences a higher percentage of proprietary credit card sales (55.6% of net
sales in 1995) than most retailers. The Company considers its credit card
program to be a critical component of its retailing concept because it (i)
enhances customer loyalty by providing a service that few local and regional
competitors or discounters offer, (ii) allows the Company to identify and
regularly contact its best customers, and (iii) creates a comprehensive
database that enables the Company to implement detailed, segmented marketing
and merchandising strategies for each store.

6
<PAGE>

of its service by making over 3,000 calls each month to credit card customers
who have recently made a purchase. The results of these surveys are used to
determine a portion of each store manager's bonus. The Company further extends
its service philosophy to the design of the store, including installing call
buttons in its fitting rooms and, in its small market stores, locating the
store manager on the selling floor to increase accessibility to customers.

Growth Strategy

In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company has
initiated an aggressive growth strategy to capitalize on available
opportunities in new markets through new store openings and strategic
acquisitions. The Company opened 23 new stores and 45 acquired stores in 1995,
has opened 11 new stores and acquired 34 stores to date in 1996, and expects
to open approximately 24 additional new stores during the remainder of 1996.
The Company's goal is to open approximately 55 new stores in 1997.

The following are the primary elements of the Company's strategy for
profitable growth:

New Store Openings in Smaller Markets. As part of its ongoing expansion
program, the Company has identified over 600 additional markets in the central
United States and contiguous states which meet its demographic and competitive
criteria. All of these target markets are smaller communities, where the
Company has historically experienced its highest profit margins.

Strategic Acquisitions. The Company believes that it can benefit from
strategic acquisitions by (i) applying its buying and merchandising
capabilities, sales promotion techniques and customer service methods, (ii)
introducing its proven management systems, and (iii) consolidating overhead
functions. This strategy has been successfully demonstrated by the Company's
acquisition of 45 stores from Beall-Ladymon, Inc. ("Beall-Ladymon") in 1994
and the subsequent reopening of the stores in the first quarter of 1995 under
the Stage name. In 1993, the year prior to their acquisition, the
Beall-Ladymon stores generated sales of approximately $53.4 million, whereas
the newly opened Stage stores in the same locations generated sales for the
twelve months ended May 4, 1996 of $93.1 million, an increase of 74%. Over the
same periods, store contribution more than doubled.

In June 1996, the Company acquired Uhlmans Inc. ("Uhlmans"), a privately
held retailer with 34 locations in Ohio, Indiana and Michigan, where the
Company previously had no stores (the "Uhlmans Acquisition"). These stores are
of similar size and merchandise content to the Company's existing stores and
are compatible with the Company's retailing concept and growth strategy. The
Company believes significant opportunities are available to improve Uhlmans'
financial results through the expansion of certain merchandise categories, the
Company's lower merchandising costs, increased proprietary credit card-based
sales, the implementation of the Company's operating systems and the
elimination of duplicative central and administrative overhead.

Expansion to Micromarkets. The Company recently began targeting its small
market retailing concept towards communities with populations from 4,000 to
12,000 ("micromarkets"). These efforts are designed to capitalize on the
Company's favorable operating experience in markets of this size. Stage Stores
believes that micromarkets may offer a significant avenue for potential
growth, because the Company is able to apply its existing successful store
model in those micromarkets due to its ability to scale its store concept to
the appropriate size (less than 12,000 gross square feet), the generally lower
levels of competition and low labor and occupancy costs. The Company has
identified 1,200 potential micromarkets in the central United States and
contiguous states which meet these criteria.

7
<PAGE>

The Offering

Offering .................................... shares

Common stock to be outstanding after the
Offering (1) ............................. shares

Use of Proceeds ............................. The net proceeds to be
received by the Company from
the Offering are estimated to
be approximately $ million and
will be used to purchase for
cash up to all of the
Company's outstanding 12-3/4%
Senior Discount Debentures due
2005 (the "Senior Discount
Debentures") in a tender offer
(the "Tender Offer") and to
pay a consent fee for
elimination or amendment of
certain covenants in the
Senior Discount Debentures, to
pay consent fees for
amendments to certain
covenants in the indebtedness
of SRI, and to make a payment
of a $2.0 million fee to
terminate the Professional
Services Agreement (as
defined). Any remaining
proceeds will be used for
general corporate purposes.
See "Use of Proceeds" and
"Certain Relationships and
Related Transactions."

Proposed Nasdaq National Market Symbol ...... "STGE"

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

(1) Includes 1,468,750 shares issuable upon the conversion of non-voting Class
B Common Stock, $0.01 par value per share (the "Class B Common Stock"),
which are convertible into Common Stock on a share-for-share basis,
subject to certain restrictions. See "Description of Capital Stock."
Excludes 1,448,237 shares that may be issued upon the exercise of options
granted pursuant to the 1993 Stock Option Plan (as defined). See
"Management--1993 Stock Option Plan."

Prospective purchasers of the Common Stock offered hereby should carefully
consider the "Risk Factors" immediately following this Prospectus Summary.

The executive offices of the Company are located at 10201 Main Street,
Houston, Texas 77025. The Company's telephone number is (713) 667-5601.

8
<PAGE>

Summary Consolidated Historical and
Pro Forma Combined Financial and Operating Data

The following table sets forth summary consolidated historical and pro
forma combined financial and operating data of the Company for the periods
indicated. The Company's summary consolidated historical financial data were
derived from the Company's Consolidated Financial Statements. The summary pro
forma combined financial data were derived from the Unaudited Pro Forma
Combined Financial Data of the Company and give effect to the Uhlmans
Acquisition, including the issuance of the SRPC Notes (as defined), and the
Offering. The information in the table should be read in conjunction with
"Selected Consolidated Historical Financial and Operating Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Unaudited Pro Forma Combined Financial Data", the Company's Consolidated
Financial Statements and the Financial Statements of Uhlmans, included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
------------------------------------------------------------- -----------------------------
Pro
Pro Forma
Forma April 29, May 4, May 4,
1991 1992 1993(1) 1994 1995(2) 1995(2) 1995 1996 1996
-------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales ......................... $447,142 $504,401 $557,422 $581,463 $682,624 $742,373 $142,353 $163,177 $175,324
Gross profit ...................... 135,569 154,265 172,579 182,804 214,277 229,498 46,283 52,081 54,775
Selling, general and
administrative expenses ......... 116,403 129,193 135,011 134,715 159,625 168,936 33,816 38,878 40,890
Service charge income (3) ......... 22,840 29,670 20,003 8,515 10,523 11,374 2,683 2,913 3,117
Store opening and closure costs ... 255 120 199 5,647 3,689 3,689 315 71 71
Operating income (4) .............. 41,751 54,622 57,372 50,957 61,486 68,247 14,835 16,045 16,931
Net interest expense .............. 33,407 31,771 36,377 40,010 43,989 34,713 10,564 11,588 9,004
Income before extraordinary item .. 3,961 12,235 13,426 6,630 10,730 20,673 2,438 2,652 4,803
Pro forma earnings per common
share ........................... -- -- -- -- -- -- --

Margin and other data:
Gross profit margin ............... 30.3% 30.6% 31.0% 31.4% 31.4% 30.9% 32.5% 31.9% 31.2%
Selling, general and
administrative expense rate ..... 26.0% 25.6% 24.2% 23.2% 23.4% 22.8% 23.8% 23.8% 23.3%
Operating income margin (4) ....... 9.3% 10.8% 10.3% 8.8% 9.0% 9.2% 10.4% 9.8% 9.7%
Adjusted operating income margin .. 8.1% 8.7% 8.4% 9.2% 9.4% 9.4% 9.7% 8.6% 8.4%
Adjusted operating income (5) ..... $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $ 70,036 $ 13,797 $ 14,033 $ 14,765
Depreciation and amortization ..... 10,049 9,065 9,259 9,997 12,816 13,712 2,700 3,149 3,371
Capital expenditures .............. 4,768 7,631 8,503 19,706 28,638 -- 12,495 6,449 --

Store data: (6)
Comparable store sales growth:
Bealls/Stage (7) ................. 4.1% 5.1% 7.2% 4.8% 3.3% -- 4.1% 7.4% --
Palais Royal ..................... (2.8)% (9.8)% 0.8% 1.7% 1.4% -- (3.3)% 7.7% --
Total Company (8) ................ 2.9% 1.8% 6.3% 4.1% 1.0%(9) -- (0.6)% 7.4% --
Net sales per selling square foot:
Bealls/Stage (7) ................ $ 113 $ 118 $ 129 $ 138 $ 142 -- -- -- --
Palais Royal ..................... 228 191 200 205 203 -- -- -- --
Total Company (8) ................ 138 138 149 157 157 -- -- -- --
Total selling square footage (10) . 3,354 3,418 3,472 3,516 4,581 -- 4,317 4,753 --
Number of stores open at end of
period (11) ..................... 159 175 180 188 256 290 239 267 301

Balance sheet data (at end of period):
Working capital ............................................................................................ $171,666 $207,581
Total assets ............................................................................................... 406,612 446,794
Total long-term debt ...................................................................................... 383,667 300,316
Stockholders' (deficit) equity ............................................................................. (69,638) 51,172
</TABLE>

9
<PAGE>

Notes to Summary Consolidated Historical and
Pro Forma Combined Financial and Operating Data

(1) During 1993, Stage Stores was formed and concurrently became the direct
parent of Specialty Retailers, Inc. ("SRI") when the existing stockholders
of SRI exchanged all of their common stock for common stock of Stage
Stores. Concurrent with the formation of Stage Stores, the Company
completed the refinancing of its existing debt and preferred stock (the
"Refinancing"). As a result of the Refinancing, the Company recorded an
after-tax extraordinary charge of $16.2 million.

(2) 1995 includes 53 weeks.

(3) Service charge income for 1993, 1994 and 1995 decreased as compared to
levels achieved during 1991 and 1992 due to the sale of accounts
receivable to the SRI Receivables Master Trust (the "Trust") established
as part of the Refinancing in which the Company adopted an accounts
receivable securitization program (the "Accounts Receivable Program").
Without giving effect to the Accounts Receivable Program, service charge
income for 1993, 1994 and 1995 would have been $32.5 million, $35.2
million and $41.3 million, respectively. For a complete summary of the
impact of the Company's proprietary credit card program and the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements, Note 5 below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts Receivable
Program."

(4) Operating income and operating income margin decreased during 1994
compared to 1993 due primarily to the impact of the adoption of the
Accounts Receivable Program (See Note 2 to the Company's Consolidated
Financial Statements and Note 5 below) combined with a $5.2 million
provision associated with the closure of a majority of the stores operated
under the Fashion Bar name (the "Store Closure Plan") (substantially all
of which were underperforming). See Note 4 to the Company's Consolidated
Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

(5) Adjusted operating income represents operating income adjusted to
eliminate store opening and closure costs, and the positive impact on
operating income of the Company's proprietary credit card program
(including the Accounts Receivable Program).

<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
--------------------------------------------------------- --------------------------------
Pro
Forma April 29, May 4, Pro Forma
1991 1992 1993 1994 1995 1995 1995 1996 May 4, 1996
------- ------- ------- ------- ------- ------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income ................ $41,751 $54,622 $57,372 $50,957 $61,486 $68,247 $14,835 $16,045 $16,931
Plus: Store opening and closure
costs ......................... 255 120 199 5,647 3,689 3,689 315 71 71
Less: Positive impact of
proprietary credit card program
on operating income ........... 5,942 11,062 10,743 2,927 1,179 1,900 1,353 2,083 2,237
------- ------- ------- ------- ------- ------- ------- ------- -------
Adjusted operating income ....... $36,064 $43,680 $46,828 $53,677 $63,996 $70,036 $13,797 $14,033 $14,765
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The impact of the Company's proprietary credit card program (including the
Accounts Receivable Program) on operating income is calculated as: (i) the
reported service charge income less (ii) the servicing and bad debt costs
reflected in the Company's selling, general and administrative expenses
less (iii) the gain (or plus the loss) associated with the sale of
receivables to the Trust. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounts
Receivable Program" and Note 7 to Selected Consolidated Historical
Financial and Operating Data.

Although adjusted operating income and adjusted operating income margin do
not represent operating income or any other measure of financial
performance under generally accepted accounting principles, the Company
believes they are helpful in understanding the profitability of the
Company's retailing operations prior to the impact of its credit card
program, the Accounts Receivable Program and store opening and closure
costs.

(6) Store data exclude Bealls stores scheduled to be closed under the Bealls
1988 store closure program, except as otherwise noted in Note 11 below,
and also exclude the Fashion Bar stores included in the Store Closure
Plan. Comparable store sales growth and net sales per selling square foot
for 1995 have been determined based on a comparable fifty-two week period.
Sales are considered comparable after a store has been in operation
fourteen months. Net sales per selling square foot are calculated for
stores open the entire year.

10
<PAGE>

(7) Excludes for all the periods presented the six Bealls stores located on
the border of Mexico which were adversely affected by the peso
devaluation in 1994. Comparable stores sales growth and net sales per
selling square foot for Bealls/Stage including these stores were:

<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year ------------------
-------------------------------------------- April 29, May 4,
Bealls/Stage 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth ....... 5.4% 6.7% 7.7% 4.6% 0.2% 0.4% 7.2%
Net sales per selling square foot ... $119 $125 $137 $146 $145 -- --
</TABLE>

(8) Total Company comparable store sales growth and net sales per selling
square foot including the stores which were part of the Store Closure
Plan were as follows:

<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year ------------------
-------------------------------------------- April 29, May 4,
Total Company 1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth ....... 2.9% 1.8% 5.4% 3.2% 0.5% (0.7)% 6.5%
Net sales per selling square foot ... $138 $138 $143 $151 $150 -- --
</TABLE>

(9) Excluding the six Bealls stores located on the border of Mexico which
were adversely affected by the peso devaluation in 1994, total Company
comparable store sales growth for 1995 would have been 3.3%.

(10) Excludes data related to the stores which were included in the Store
Closure Plan. Data is in thousands and is as of the end of the period.

(11) Number of stores open at the end of each period presented also exclude
stores in the Store Closure Plan. Stores open at the end of 1992 and 1993
included one and six stores, respectively, which were previously excluded
under the Bealls 1988 store closure program. Such stores are only
included in the Company's results of operations subsequent to their
removal from the Bealls 1988 store closure program. Both the Store
Closure Plan and the Bealls 1988 store closure program were substantially
completed before the end of 1995.

11
<PAGE>

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before making an investment in the Common Stock offered hereby.

Leverage and Restrictive Covenants

Although the Company will use the proceeds from the Offering to reduce
certain high-cost debt, the Company will remain significantly leveraged
following the Offering. As of May 4, 1996, on a pro forma basis, the Company's
total consolidated indebtedness would have been $300.6 million and total
stockholders' equity would have been $51.2 million. See "Capitalization."

Although the Offering is designed to improve the Company's long-term
financial and operating flexibility, due to the level of the Company's
remaining indebtedness after giving effect to the Offering, any material
adverse development affecting the business of the Company could significantly
limit its ability to withstand competitive pressures and adverse economic
conditions, to take advantage of expansion opportunities or other significant
business opportunities that may arise, or to meet its obligations as they
become due. The Company's debt that remains outstanding following the Offering
will continue to impose operating and financial restrictions on the Company
and certain of its subsidiaries. Such restrictions limit, among other matters,
the Company's ability to incur additional indebtedness, to make dividend
payments and to make capital expenditures. See Note 5 to the Company's
Consolidated Financial Statements and "Description of Certain Indebtedness."
The Company will begin to incur significant scheduled principal repayment
obligations on its indebtedness beginning in 1999, and expects that it will be
necessary to refinance this indebtedness upon the respective maturity of such
debt through additional debt issuances or through additional equity financing.
No assurance can be given that the Company will be able to obtain such
financing, or that such financing will be available on favorable terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

Future Growth and Recent Acquisitions; Liquidity

Key components of the Company's growth strategy are to (i) continue to
identify and acquire new store locations where the Company believes it can
operate profitably and (ii) identify and negotiate strategic acquisitions.
Such expansions and acquisitions could be material in size and cost. The
Company's ability to achieve its expansion plans is dependent upon many
factors, including the availability and permissibility under restrictive
covenants of financing, general and market specific economic conditions, the
identification of suitable markets, the availability and leasing of suitable
sites on acceptable terms, the hiring, training and retention of qualified
management and other store personnel and the integration of new stores into
the Company's information systems and operations. As a result, there can be no
assurance that the Company will be able to achieve its targets for opening new
stores (including acquisitions) or that such new stores will operate
profitably when opened or acquired. The Company recently completed the
acquisition of Uhlmans; however, there can be no assurance that the Company
will be able to successfully integrate the stores acquired or that they will
operate profitably or as profitably as previously acquired stores. If the
Company is unable to successfully locate or integrate new and acquired stores
or operate them profitably, the Company's business and financial condition
could be materially adversely affected.

The Company's growth strategy may significantly expand the Company's
working capital requirements, and the Company's ability to meet those working
capital requirements may be adversely affected by the Company's level of
indebtedness and the restrictive covenants contained therein, especially in
periods of economic downturn.

Economic and Market Conditions; Seasonality

Substantially all of the Company's operations are located in the central
United States. In addition, many of the Company's stores are situated in small
towns and rural environments that are substantially dependent upon the local
economy. The retail apparel business is dependent upon the level of consumer
spending, which may be adversely affected by an economic downturn or a decline
in consumer confidence. An economic downturn, particularly in the central
United States and any state (such as Texas) from which the Company derives a
significant portion of its net sales, could have a material adverse effect on
the Company's business and financial condition. The Company currently has six
stores located near the Texas-Mexico border and has plans to open several
additional stores in that region. Economic conditions in Mexico, and
particularly a significant devaluation of the Mexican peso, have adversely
affected, and in the future may adversely affect, the Company's business and
financial condition.

12
<PAGE>

The Company's success depends in part upon its ability to anticipate and
respond to changing consumer preferences and fashion trends in a timely
manner. Although the Company attempts to stay abreast of emerging lifestyle
and consumer preferences affecting its merchandise, any sustained failure by
the Company to identify and respond to such trends could have a material
adverse effect on the Company's business and financial condition.

The Company's business is seasonal and its quarterly sales and profits
traditionally have been lower during the first three fiscal quarters of the
year and higher during the fourth fiscal quarter (November through January).
In addition, working capital requirements fluctuate throughout the year,
increasing substantially in October and November in anticipation of the
holiday season due to requirements for significantly higher inventory levels.
Any substantial decrease in sales for the last three months of the year could
have a material adverse effect on the Company's business and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Competition

The retail apparel business is highly competitive. Although competition
varies widely from market to market, the Company faces substantial
competition, particularly in its Houston area markets, from national, regional
and local department and specialty stores. Some of the Company's competitors
are considerably larger than the Company and have substantially greater
financial and other resources than the Company. Although the Company currently
offers branded merchandise not available at certain other retailers (including
large national discounters) in its small market stores, there can be no
assurance that such other retailers will not begin to carry similar branded
merchandise, which could have a material adverse effect on the Company's
business and financial condition.

Dependence on Key Personnel

The success of the Company depends to a large extent on its executive
management team, including the Company's President and Chief Executive
Officer, Carl Tooker. Although the Company has entered into employment
agreements with each of the Company's executive officers, it is possible that
members of executive management may leave the Company, and such departures
could have a material adverse effect on the Company's business and financial
condition. The Company does not maintain key-man life insurance on any of its
executive officers. See "Management."

Consumer Credit Risks

Private Label Credit Card Portfolio. Sales under the Company's private
label credit card program represents a significant portion of the Company's
business, accounting for approximately 55.6% of the Company's net sales for
1995. In recent years, aggregate increases in finance charges and late fee
collections have more than offset the impact of substantial increases in the
rate of charge-offs on the Company's accounts receivable, which continued in
first quarter of 1996; however, further deterioration in the quality of the
Company's accounts receivable portfolio or any adverse changes in laws
regulating the granting or servicing of credit (including late fees and the
finance charge applied to outstanding balances) could have a material adverse
effect on the Company's business and financial condition. There can be no
assurance that the Company's accounts receivable portfolio will continue to
perform at or above the levels achieved in recent years.

Accounts Receivable Program. The Company currently securitizes
substantially all of the receivables derived from its proprietary credit card
accounts. Under the Accounts Receivable Program, the Company causes such
receivables to be transferred to the Trust, which from time to time issues
certificates to investors backed by such receivables. The Accounts Receivable
Program has provided the Company with substantially more liquidity (through
the issuance and sale of such certificates) than it would have had without
this program. There can be no assurance that the Trust will continue to
purchase the Company's accounts receivable or issue additional certificates.
There can be no assurance that receivables will continue to be generated by
credit cardholders, or that new credit card accounts will continue to be
established, at the rate historically experienced by the Company. Any decline
in the generation of receivables or in the rate or pattern of cardholder
payments on accounts could have a material adverse effect on the Company's
business and financial condition. In addition, significant increases in the
floating rates paid on investor certificates and/or significant deterioration
in the performance of the Company's receivables portfolio could trigger an
early repayment requirement, which could materially adversely affect
liquidity. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Accounts Receivable Program."

13
<PAGE>

Interest Rate Risk. Although the Company is protected to a certain extent
by interest rate caps, investors in the receivables-backed certificates of the
Trust receive interest payments on such certificates based on a floating rate.
If the interest rate on these certificates increases, the profitability of the
Company's Accounts Receivable Program and the Company's operating income could
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Accounts Receivable Program."

Control by Existing Stockholders

Upon consummation of the Offering, Bain Capital ("Bain") and certain of its
affiliates will beneficially own %, Acadia Partners, L.P. ("Acadia") and
certain of its affiliates will beneficially own %, Court Square Capital
Limited ("Court Square"), a subsidiary of Citicorp Banking Corporation
("Citicorp"), will beneficially own % (assuming conversion of all shares of
Class B Common Stock to shares of Common Stock) and Bernard Fuchs, the
Company's Chairman will beneficially own % of the Company's outstanding
Common Stock. To the knowledge of the Company, upon consummation of the
Offering, there will be no agreements among the Company's principal
stockholders relating to the voting of Common Stock or otherwise relating to
corporate governance issues. Upon consummation of the Offering, if such
parties were to vote their shares together, such parties would possess % of
the combined voting power of the Company's Common Stock and would have
sufficient voting power to control the election of the Board of Directors and
to direct the affairs of the Company. See "Principal Stockholders" and
"Management."

Dilution

Based upon an assumed public offering price of $ per share, the
Offering will result in immediate and substantial dilution of $ per share
of the Common Stock to investors purchasing shares of Common Stock. See
"Dilution."

Absence of Public Market and Possible Volatility of Stock Price

Prior to the Offering, there has been no public market for the Common
Stock. Although the Company has applied to list the Common Stock for trading
on the Nasdaq National Market, there can be no assurance that an active
trading market for the Common Stock will develop or be sustained. The initial
public offering price of the Common Stock offered hereby will be determined by
negotiations among the Company and the representatives of the Underwriters and
may not be indicative of the market price for the Common Stock after the
Offering. The market price for shares of the Common Stock may be volatile and
may fluctuate based upon a number of factors, including, without limitation,
business performance of the Company and the retail sector, news announcements
or changes in general market and economic conditions. See "Underwriting."

Shares Eligible for Future Sale

Upon completion of the Offering, the Company will have shares of
Common Stock outstanding. The shares of Common Stock sold in the Offering will
be freely tradeable without restriction or further registration under the
Securities Act of 1933 (the "Securities Act") unless held by an "affiliate" of
the Company, as that term is defined under Rule 144 of the Securities Act,
which shares will be subject to the resale limitations of Rule 144. In
addition, certain existing stockholders, including holders of restricted
Common Stock, have registration rights with respect to Common Stock held by
them. In connection with the Offering, nearly all existing stockholders
holding in the aggregate shares (or % of total outstanding shares)
have agreed not to dispose of any shares for a period of 180 days from the
date of this Prospectus, and the Company has agreed not to dispose of any
shares (other than shares sold by the Company in the Offering or issuances by
the Company of certain employee stock options and shares covered thereby) for
a period of 180 days from the date of this Prospectus, without the prior
written consent of representatives of the Underwriters. Upon expiration of
such 180-day period, shares of Common Stock will be eligible for sale
subject to certain volume and other limitations of Rule 144 under the
Securities Act applicable to "affiliates" of the Company. No prediction can be
made as to the effect, if any, that market sales of shares of Common Stock or
the availability of shares of Common Stock for sale will have on the market
price of the Common Stock from time to time. The sale of a substantial number
of shares held by the existing stockholders, whether pursuant to a subsequent
public offering or otherwise, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock and could
materially impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."

14
<PAGE>

The Company intends to file a registration statement on Form S-8 under the
Securities Act to register the sale of the 2,000,000 shares of Common Stock
reserved for issuance under the 1993 Stock Option Plan (as defined) and the
Incentive Plan (as defined). As a result, any shares issued upon exercise of
stock options granted under such plans will be available, subject to
limitations on sales by affiliates under Rule 144, for resale in the public
market after the effective date of such registration statement, subject to
applicable lock-up arrangements. See "Management--1993 Stock Option Plan" and
"Management--1996 Equity Incentive Plan."

Restriction on Payment of Dividends on Common Stock

Since its inception, the Company has not customarily declared or paid any
regular cash or other dividends on the Common Stock other than in connection
with the Distribution and does not expect to pay dividends for the foreseeable
future. The indentures governing SRI's indebtedness generally restrict the
ability of SRI to make payments to the Company, which effectively limits the
ability of the Company to pay dividends. The Company's credit agreements also
contain restrictive covenants that restrain the Company from paying dividends.
See "Dividend Policy" and "--Leverage and Restrictive Covenants."

Anti-Takeover Provisions

Certain provisions of the Company's certificate of incorporation and
by-laws may inhibit changes in control of the Company not approved by the
Company's board of directors (the "Board of Directors" or the "Board") and
could limit the circumstances in which a premium may be paid for the Common
Stock in proposed transactions or a proxy contest for control of the Board.
These provisions include (i) a prohibition on stockholder action through
written consents, (ii) advance notice requirements for stockholder proposals
and nominations, (iii) limitations on the ability of stockholders to amend,
alter or repeal certain provisions of the Company's certificate of
incorporation and by-laws, (iv) the authority of the Board to issue, without
stockholder approval, preferred stock (of which 2,500 shares are authorized)
with such terms as the Board may determine and (v) a "fair price" provision
pursuant to which certain transactions involving an interested stockholder and
the Company require super-majority shareholder approval. The Company will also
be afforded the protections of Section 203 of the Delaware General Corporation
Law, which could have similar effects. See "Description of Capital Stock."

15
<PAGE>

USE OF PROCEEDS

The net proceeds to be received from the sale of the shares of
Common Stock by the Company in the Offering (after deducting the underwriting
discounts and estimated expenses of the Offering payable by the Company) are
estimated to be approximately $____ million, based on an assumed initial
public offering price of $ per share. The Company intends to use such
net proceeds (i) to purchase, through the Tender Offer, up to all of the
Senior Discount Debentures, and pay a consent fee for elimination and
amendment of certain covenants in the Senior Discount Debentures for an
aggregate amount of approximately $130.4 million, (ii) to pay consent fees for
amendments to certain covenants in the indebtedness of SRI and (iii) make a
payment of a $2.0 million fee to terminate the Professional Services Agreement
(as defined). Any remaining proceeds will be used for general corporate
purposes. The Company will receive no proceeds from the sale of shares by
certain stockholders if the Underwriters' overallotment option is exercised.
See "Description of Certain Indebtedness--Long-Term Indebtedness--Senior
Discount Debentures" and "Certain Relationships and Related Transactions."

DIVIDEND POLICY

Since its inception, the Company has not declared or paid any regular cash
or other dividends on its Common Stock other than in connection with the
Distribution, and does not expect to pay dividends for the foreseeable future.
The Company anticipates that for the foreseeable future, earnings will be
reinvested in the business and used to service indebtedness. The Company's
indebtedness limits its ability to pay dividends. The declaration and payment
of dividends by the Company are subject to the discretion of the Board. Any
future determination to pay dividends will depend on the Company's results of
operations, financial condition, capital requirements, contractual
restrictions under its current indebtedness and other factors deemed relevant
by the Board. See "Risk Factors--Leverage and Restrictive Covenants;
Liquidity."

16
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at May 4, 1996 and as adjusted to give effect to the Uhlmans
Acquisition, including the issuance of the SRI Receivables Purchase Co., Inc.
("SRPC") 12.5% Trust Certificate-Backed Notes (the "SRPC Notes"), and the
Offering. This presentation should be read in conjunction with the Company's
Consolidated Financial Statements, the Unaudited Pro Forma Combined Financial
Data of the Company, the Selected Consolidated Historical Financial and
Operating Data and other information appearing elsewhere in this Prospectus.

May 4, 1996
-------------------------
Historical As Adjusted
---------- -----------
(in thousands)
Long-term debt, including current portion:
Revolving credit agreement (1) .......... $ -- $ --
Senior Discount Debentures, net (2) ..... 113,351 --
Senior Notes ............................ 130,000 130,000
Senior Subordinated Notes, net (2) ...... 116,568 116,568
SRPC Notes .............................. -- 30,000
Other long-term debt .................... 24,039 24,039
-------- --------
Total long-term debt ................... 383,958 300,607
Stockholders' equity (deficit) (3): ...... (69,638) --
-------- --------
Total capitalization ................... $314,320 $ --
======== ========

- -------------
(1) The Company currently has a revolving credit agreement under which it may
draw up to $25.0 million with an additional seasonal availability of $10.0
million from August 15 through January 15 of each year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."

(2) The Senior Discount Debentures and the Senior Subordinated Notes have
unamortized original issue discounts of $35,731 and $1,682, respectively.

(3) Following the consummation of the Offering, the authorized capitalization
of the Company will consist of (i) 75,000,000 shares of Common Stock, of
which shares will be outstanding, (ii) 3,000,000 shares of non-voting
Class B Common Stock, of which 1,468,750 shares will be issued and
outstanding and (iii) 2,500 shares of Preferred Stock, par value $1.00 per
share, of which no shares will be outstanding. Options to purchase
1,448,237 shares of Common Stock will be outstanding immediately following
consummation of the Offering. See "Unaudited Pro Forma Combined Balance
Sheet".

17
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of May 4, 1996,
without giving effect to the Offering, was approximately $(111.0) million, or
$( ) per share of common stock. Net tangible book value per share represents
the amount of the Company's total tangible assets less its total liabilities,
divided by the number of shares of common stock outstanding. After giving
effect to (i) the receipt of $133.8 million of estimated net proceeds from the
sale by the Company of shares of common stock in the Offering and (ii) the use
of such net proceeds as described under "Use of Proceeds", the pro forma net
tangible book value of the Company at May 4, 1996 would have been
approximately $ million, or $ per share of common stock. This
represents an immediate reduction in negative net tangible book value of $
per share to the existing stockholders and an immediate net tangible book
value dilution of $( ) per share to new investors purchasing shares in the
Offering.

The following table illustrates this dilution:

Assumed initial public offering price per share ........ $
Pro forma net tangible book value per share,
without giving effect to the Offering ................ $
Increase in pro forma net tangible book value
per share attributable to new investors .............
------
Pro forma net tangible book value per share
after the Offering ...................................
------

Dilution per share to new investors ..................... $
======

The foregoing computations assume no exercise of stock options after June
25, 1996. As of June 25, 1996, there were outstanding stock options to
purchase an aggregate of 1,448,237 shares of common stock at a weighted
average exercise price of approximately $3.15 per share. If all of the
foregoing options had been exercised at May 4, 1996, the pro forma net
tangible book value per share of common stock, without giving effect to the
Offering at such date would have been $( ) and the pro forma net tangible
book value per share after giving effect to the Offering would have been
$ , representing an immediate dilution to new investors of $ per share
and an immediate increase in net tangible book value of $ per share
attributable to the Offering.

18
<PAGE>

SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA

The following table sets forth selected consolidated historical financial
and operating data of the Company for the periods indicated. The Company's
selected consolidated historical financial data were derived from the
Company's Consolidated Financial Statements. The data for the unaudited
three-month periods ended April 29, 1995 and May 4, 1996, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results of the interim
periods. The Company's business is seasonal and the results of operations for
these three-month periods are not necessarily indicative of the results
expected for a complete fiscal year or any other interim period. The
information in the table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company's Consolidated Financial Statements and the Financial Statements of
Uhlmans, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
-------------------------------------------------------- -------------------
April 29, May 4,
1991 1992 1993(1) 1994 1995(2) 1995 1996
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales ..................................... $447,142 $504,401 $557,422 $581,463 $682,624 $142,353 $163,177
Cost of sales and related buying, occupancy
and distribution expenses ................... 311,573 350,136 384,843 398,659 468,347 96,070 111,096
-------- -------- -------- -------- -------- -------- --------
Gross profit .................................. 135,569 154,265 172,579 182,804 214,277 46,283 52,081
Selling, general and administrative expenses .. 116,403 129,193 135,011 134,715 159,625 33,816 38,878
Service charge income (3) ..................... 22,840 29,670 20,003 8,515 10,523 2,683 2,913
Store opening and closure costs ............... 255 120 199 5,647 3,689 315 71
-------- -------- -------- -------- -------- -------- --------
Operating income (4) .......................... 41,751 54,622 57,372 50,957 61,486 14,835 16,045
Other non-operating income (expense) .......... 359 (2,276) -- -- -- -- --
Net interest expense (5) ...................... 33,407 31,771 36,377 40,010 43,989 10,564 11,588
-------- -------- -------- -------- -------- -------- --------
Income before income tax and extraordinary item 8,703 20,575 20,995 10,947 17,497 4,271 4,457
Income tax expense ............................ 3,993 8,340 7,569 4,317 6,767 1,833 1,805
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item .............. 4,710 12,235 13,426 6,630 10,730 2,438 2,652
Minority interest expense ..................... (749) -- -- -- -- -- --
Extraordinary item ............................ -- -- 16,208 308 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ............................. $ 3,961 $ 12,235 $ (2,782) $ 6,322 $ 10,730 $ 2,438 $ 2,652
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share(6) ........... $ 0.10 $ 0.77 $ (0.37) $ 0.47 $ 0.78 $ 0.18 $ 0.19
======== ======== ======== ======== ======== ======== ========
Margin and other data:
Gross profit margin ........................... 30.3% 30.6% 31.0% 31.4% 31.4% 32.5% 31.9%
Selling general and administrative expense rate 26.0% 25.6% 24.2% 23.2% 23.4% 23.8% 23.8%
Operating income margin (4) ................... 9.3% 10.8% 10.3% 8.8% 9.0% 10.4% 9.8%
Adjusted operating income margin .............. 8.1% 8.7% 8.4% 9.2% 9.4% 9.7% 8.6%
Adjusted operating income(7) .................. $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $ 13,797 $ 14,033
Depreciation and amortization ................. 10,049 9,065 9,259 9,997 12,816 2,700 3,149
Capital expenditures .......................... 4,768 7,631 8,503 19,706 28,638 12,495 6,449

Store data:(8)
Comparable store sales growth:
Bealls/Stage(9) .............................. 4.1% 5.1% 7.2% 4.8% 3.3% 4.1% 7.4%
Palais Royal ................................. (2.8)% (9.8)% 0.8% 1.7% 1.4% (3.3)% 7.7%
Total Company(10) ............................ 2.9% 1.8% 6.3% 4.1% 1.0%(11) (0.6)% 7.4%
Net sales per selling square foot:
Bealls/Stage(9) .............................. $ 113 $ 118 $ 129 $ 138 $ 142 -- --
Palais Royal ................................. 228 191 200 205 203 -- --
Total Company(10) ............................ 138 138 149 157 157 -- --
Total selling square footage(12) .............. 3,354 3,418 3,472 3,516 4,581 4,317 4,753
Number of stores open at end of period(13) .... 159 175 180 188 256 239 267

Balance sheet data (at end of period):
Working capital ............................... $200,050 $214,430 $156,782 $148,229 $170,108 $142,763 $171,666
Total assets .................................. 365,381 403,824 347,055 369,730 412,333 368,015 406,612
Long-term debt ................................ 298,266 296,587 347,468 349,775 380,039 352,945 383,667
Redeemable preferred stock .................... 15,200 17,500 -- -- -- -- --
Stockholders' (deficit)(14) ................... (19,500) (9,605) (87,727) (81,193) (72,314) (78,611) (69,638)
</TABLE>

19
<PAGE>

NOTES TO SELECTED CONSOLIDATED HISTORICAL
FINANCIAL AND OPERATING DATA

(1) During 1993, Stage Stores was formed and concurrently became the direct
parent of SRI when the existing stockholders of SRI exchanged all of their
common stock for common stock of Stage Stores. Concurrent with the
formation of Stage Stores, the Company completed the Refinancing. As a
result of the Refinancing the Company recorded an after-tax extraordinary
charge of $16.2 million.

(2) 1995 includes 53 weeks.

(3) Service charge income for 1993, 1994 and 1995 decreased as compared to
levels achieved during 1991 and 1992 due to the sale of accounts
receivable to the Trust as part of the Accounts Receivable Program.
Without giving effect to the Accounts Receivable Program, service charge
income for 1993, 1994 and 1995 would have been $32.5 million, $35.2
million and $41.3 million, respectively. For a complete summary of the
impact of the Company's proprietary credit card program and the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements, Note 6 below and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General-Accounts Receivable
Program."

(4) Operating income and operating income margin decreased during 1994
compared to 1993 due primarily to the impact of the adoption of the
Accounts Receivable Program (See Note 2 to the Company's Consolidated
Financial Statements and Note 6 below) combined with a $5.2 million
provision associated with the Store Closure Plan. See Note 4 to the
Company's Consolidated Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Store
Closure Plan."

(5) Net interest expense includes $6.8 million, $5.2 million and $2.4 million
for 1991, 1992 and 1993, respectively, that represented the interest
expense associated with the Company's accounts receivable facility
outstanding prior to the adoption of the Accounts Receivable Program.

(6) Earnings (loss) per common share for 1993 includes the impact of the
extraordinary item associated with the Refinancing which reduced earnings
per common share by $1.18. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletins and Staff policy, common stock options issued
during the twelve months prior to the Offering have been included in the
calculation of earnings (loss) per common share as if such options were
outstanding during 1933, 1944, 1955 and the three months ended May 4, 1996.

(7) Adjusted operating income represents operating income adjusted to
eliminate store opening and closure costs and the positive impact on
operating income of the Company's proprietary credit card program
(including the Accounts Receivable Program) as follows.

<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
------------------------------------------- ------------------
April 29, May 4,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income .......................... $41,751 $54,622 $57,372 $50,957 $61,486 $14,835 $16,045
Plus: Store opening and closure cost ...... 255 120 199 5,647 3,689 315 71
Less: Positive impact of proprietary credit
card program on operating income ........ 5,942 11,062 10,743 2,927 1,179 1,353 2,083
------- ------- ------- ------- ------- ------- -------
Adjusted operating income ................. $36,064 $43,680 $46,828 $53,677 $63,996 $13,797 $14,033
======= ======= ======= ======= ======= ======= =======
</TABLE>

20
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
-------------------------------------------------- -------------------
April 29, May 4,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Service charge income:
Consolidated ............................. 22,840 29,670 32,547 35,183 41,321 9,703 11,977
Certificateholders' portion .............. -- -- 12,544 26,668 30,798 7,020 9,064
-------- -------- -------- -------- -------- -------- --------
Reported service charge income (i) ....... 22,840 29,670 20,003 8,515 10,523 2,683 2,913
-------- -------- -------- -------- -------- -------- --------
Servicing and bad debt costs:
Consolidated ............................ 16,898 18,608 21,374 22,504 28,551 5,400 7,538
Certificateholders' portion .............. -- -- 8,814 15,956 19,400 3,212 5,322
-------- -------- -------- -------- -------- -------- --------
Reported in selling, general and
administrative expenses (ii) ........... 16,898 18,608 12,560 6,548 9,151 2,188 2,216
Loss (gain) on sale of receivables:
Certificateholders' portion of service
charge income .......................... -- -- 12,544 26,668 30,798 7,020 9,064
Certificateholders' portion of servicing
and bad debt costs ..................... -- -- 8,814 15,956 19,400 3,212 5,322
Return to Certificateholders ............. -- -- 3,219 8,200 11,529 2,781 2,852
Other .................................... -- -- (2,789) 1,552 62 169 (496)
-------- -------- -------- -------- -------- -------- --------
Total (gain) loss on sale of receivables
(iii) .................................... -- -- (3,300) (960) 193 (858) (1,386)
-------- -------- -------- -------- -------- -------- --------
Total positive impact of proprietary
credit card program on operating income
[(i)-(ii) -(iii)] .............. $ 5,942 $ 11,062 $ 10,743 $ 2,927 $ 1,179 $ 1,353 $ 2,083
</TABLE>

Although adjusted operating income and adjusted operating income margin
do not represent operating income or any other measure of financial
performance under generally accepted accounting principles, the Company
believes they are helpful in understanding the profitability of the
Company's retailing operations prior to the impact of its credit card
program, the Accounts Receivable Program and store opening and closure
costs.

(8) Store data exclude Bealls stores scheduled to be closed under the Bealls
1988 store closure program, except as otherwise noted in Note 12 below
and also exclude the Fashion Bar stores included in the Store Closure
Plan. Comparable store sales growth and net sales per selling square foot
for 1995 have been determined based on a comparable fifty-two week
period. Sales are considered comparable after a store has been in
operation fourteen months. Net sales per selling square foot are
calculated for stores open the entire year.

(9) Excludes for all the periods presented the six Bealls stores located on
the border of Mexico which were adversely affected by the peso
devaluation in 1994. Comparable stores sales growth and net sales per
selling square foot for Bealls/Stage including these stores were:

<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year ------------------
-------------------------------------------- April 29, May 4,
Bealls/Stage 1991 1995 1996 1992 1993 1994 1995
---- ---- ---- ---- ---- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth ........... 5.4% 6.7% 7.7% 4.6% 0.2% 0.4% 7.2%
Net sales per selling square foot ....... $119 $125 $137 $146 $145 -- --
</TABLE>

(10) Total Company comparable store sales growth and net sales per selling
square foot including the stores which were part of the Store Closure
Plan were as follows:

<TABLE>
<CAPTION>
Three Months Ended
Fiscal Year ------------------
-------------------------------------------- April 29, May 4,
Total Company 1991 1995 1996 1992 1993 1994 1995
---- ---- ---- ---- ---- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth ........... 2.9% 1.8% 5.4% 3.2% 0.5% (0.7)% 6.5%
Net sales per selling square foot ....... $138 $138 $143 $151 $150 -- --
</TABLE>

(11) Excluding the six Bealls stores located on the border of Mexico which
were adversely affected by the peso devaluation in 1994, total Company
comparable store sales growth for 1995 would have increased to 3.3%.

(12) Excludes data related to the stores which were in the Store Closure
Plan. Data is in thousands and is as of the end of the period.

(13) Number of stores open at the end of each period presented also exclude
stores in the Store Closure Plan. Stores open at the end of 1992 and 1993
included one and six stores, respectively, which were previously excluded
under the Bealls 1988 store closure program. Such stores are only
included in the Company's results

21
<PAGE>

of operations subsequent to their removal from the store closure program.
Both the Store Closure Plan and the Bealls 1988 store closure program
were substantially completed before the end of 1995.

(14) Beginning in 1993, Stockholders' deficit includes the impact of the
extraordinary charge associated with the Refinancing ($16.2 million) and
the dividend associated with a cash distribution to the Company's
stockholders ($74.8 million).

22
<PAGE>

UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following unaudited pro forma combined financial data give effect to
the Uhlmans Acquisition, the issuance of the SRPC Notes and the application of
the net proceeds of the Offering. The unaudited pro forma financial data are
based on the historical consolidated financial statements for the Company, the
historical financial statements of Uhlmans and the assumptions and adjustments
described in the accompanying notes. The unaudited pro forma combined
statements of operations were prepared as if the transactions described above
had occurred at the beginning of the earliest period presented and do not (i)
purport to represent what the Company's results of operations actually would
have been if the Uhlmans Acquisition and the Offering had occurred as of the
dates indicated or will be for any future periods or (ii) give effect to
certain non-recurring charges expected to result from the application of the
net proceeds of the Offering. The unaudited pro forma combined balance sheet
was prepared as if the transactions described above had occurred on the
balance sheet date. The unaudited pro forma financial data are based upon
assumptions deemed appropriate by the management of the Company. The unaudited
pro forma combined financial data should be read in conjunction with the
Company's Consolidated Financial Statements and the Financial Statements of
Uhlmans included elsewhere in this Prospectus.

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED FEBRUARY 3, 1996

<TABLE>
<CAPTION>
Historical
------------------- Acquisition Offering Pro Forma
Company Uhlmans Adjustments(1) Adjustments(2) Combined
-------- ------- -------------- -------------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales ......................... $682,624 $59,749 $ -- $ -- $742,373
Cost of sales and related buying,
occupancy and distribution
expenses ........................ 468,347 46,129 (1,601)(a) -- 512,875
-------- -------- -------- -------- --------
Gross profit ...................... 214,277 13,620 1,601 -- 229,498
Selling, general and
administrative expenses ......... 159,625 12,232 (2,408)(b) (513)(k) 168,936
Service charge income ............. 10,523 851 -- -- 11,374
Store opening and closure costs ... 3,689 -- -- -- 3,689
-------- -------- -------- -------- --------
Operating income .................. 61,486 2,239 4,009 513 68,247
-------- -------- -------- -------- --------
Interest expense, net ............. 42,129 1,637 2,113(c) (13,070)(l) 32,809
Amortization of debt issue costs .. 1,860 -- 482(d) (438)(m) 1,904
-------- -------- -------- -------- --------
43,989 1,637 2,595 (13,508) 34,713
-------- -------- -------- -------- --------
Income before income tax and
extraordinary item .............. 17,497 602 1,414 14,021 33,534
Income tax expense (3) ............ 6,767 -- 766(e) 5,328(n) 12,861
-------- -------- -------- -------- --------
Income before extraordinary
item (4) ........................ $ 10,730 $ 602 $ 648 $ 8,693 $ 20,673
======== ======== ======== ======== ========

Earnings per common share data:
Earnings per common share before
extraordinary item .............. $ 0.78 $
Weighted average common shares
outstanding ..................... 13,680
======== ========
</TABLE>

23
<PAGE>

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MAY 4, 1996

<TABLE>
<CAPTION>
Historical
------------------- Acquisition Offering Pro Forma
Company Uhlmans Adjustments(1) Adjustments(2) Combined
-------- ------- -------------- -------------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales ......................... $163,177 $12,147 $ -- $ -- $175,324
Cost of sales and related buying,
occupancy and distribution
expenses ........................ 111,096 9,856 (403)(f) -- 120,549
-------- ------- -------- -------- --------
Gross profit ...................... 52,081 2,291 403 -- 54,775
Selling, general and
administrative expenses ......... 38,878 2,752 (615)(g) (125)(o) 40,890
Service charge income ............. 2,913 204 -- -- 3,117
Store opening and closure costs ... 71 -- -- -- 71
-------- ------- -------- -------- --------
Operating income (loss) ........... 16,045 (257) 1,018 125 16,931
-------- ------- -------- -------- --------
Interest expense, net ............. 11,119 357 581(h) (3,534)(p) 8,523
Amortization of debt issue
costs ........................... 469 -- 121(i) (109)(q) 481
-------- ------- -------- -------- --------
11,588 357 702 (3,643) 9,004
-------- ------- --------- -------- --------
Income (loss) before income tax
and extraordinary item .......... 4,457 (614) 316 3,768 7,927
Income tax expense (benefit) (3) .. 1,805 -- (113)(j) 1,432(r) 3,124
-------- ------- -------- -------- --------
Income (loss) before extraordinary
item (4) ........................ $ 2,652 $ (614) $ 429 $ 2,336 $ 4,803
======== ======= ======== ======== ========

Earnings per common share data:
Earnings per common share
before extraordinary item ....... $ 0.19 $
======== ========
Weighted average common shares
outstanding ..................... 13,618
======== ========
</TABLE>

24
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

Note 1--Acquisition Adjustments

Uhlmans Consolidation Program

The Company has formally adopted and is in the process of implementing a
consolidation program to absorb the Uhlmans general office functions,
including accounting, data processing, merchandising, personnel, credit and
distribution into similar functions provided by the Company (the "Uhlmans
Consolidation Program"). As a part of the acquisition agreement with the
former stockholders of Uhlmans, the Company has contractually agreed to a
severance schedule for each individual whose employment will be terminated as
a result of the Uhlmans Consolidation Program. Additionally, all leases
associated with Uhlmans corporate offices and distribution center have been
converted to month-to-month leases under the terms of the acquisition
agreement.

Although the consolidation of the Uhlmans general office functions is
expected to take place over a period of three months, the pro forma combined
statements of operations reflect the elimination of the separate Uhlmans
general office expenses assuming the consolidation had been fully implemented
at the beginning of the respective periods.

The adjustments to Uhlmans historical net income are based on management's
estimates and are not necessarily indicative of the level of permanent savings
for future periods. These pro forma adjustments only give effect to those
amounts that are directly related to the Uhlmans Consolidation Program. The
actual application by the Company of the Uhlmans Consolidation Program could
result in different levels of savings from the amounts presented in the pro
forma combined statements of operations.

The accompanying pro forma combined statements of operations do not reflect
certain cost savings or improvements in sales volume or gross margin related
to the acquisition of Uhlmans which the Company believes can be realized. For
instance, the Company believes it should be able to receive better pricing and
vendor participation programs on the merchandise it purchases for the acquired
stores given the Company's historical ability to negotiate better pricing
structures with its vendors as compared to those historically obtained by
Uhlmans. Additionally, the Company intends to expand certain merchandise
categories in the acquired stores such as footwear, which Uhlmans has
historically offered on a limited basis in only certain stores. Finally, the
Company believes it should be able to increase the penetration of Uhlmans'
proprietary credit card as compared to historical levels, since Uhlmans has
not aggressively promoted its proprietary credit card.

Purchase Accounting

The application of purchase accounting to the Uhlmans Acquisition results
in an excess of the purchase price over the estimated fair value of the assets
acquired and liabilities assumed. This excess is treated as goodwill. Based
upon the strategic positioning of the Uhlmans stores in relation to the
Company's growth strategy, the stores purchased by the Company and the long
operating history and historical profitability of these stores, management
believes a forty year amortization period for this goodwill is appropriate.
Such acquisition will be accounted for as an asset purchase for tax purposes,
and accordingly, the annual goodwill amortization will be tax deductible.

Acquisition Financing

The Company financed the Uhlmans Acquisition through the issuance of $30.0
million in aggregate principal amount of SRPC Notes. The pro forma combined
statements of operations reflect additional interest expense relating to
these notes. See "Description of Certain Indebtedness--Other Debt--SRPC
Notes."

25
<PAGE>

The pro forma combined statements of operations reflect the impact of the
aforementioned items as follows (in thousands):

Year ended February 3, 1996:
(a) Elimination of Uhlmans' historical personnel costs associated with the
buying and distribution functions which the Company is currently
absorbing into its existing central office of $(1,908) offset by
incremental freight due to the use of the Company's distribution center
of $307.

(b) Elimination of Uhlmans' historical personnel costs associated with the
accounting, advertising, data processing and credit functions and
occupancy costs associated with leases the Company is terminating in
connection with the Uhlmans Consolidation Program aggregating $(2,676)
offset by amortization of goodwill resulting from the acquisition of
$268.

(d) Amortization of debt issue costs associated with the SRPC Notes of
$482.

(e) Additional income tax expense associated with the Uhlmans' historical
income of $229 and the remaining acquisition adjustments of $537.

Three months ended May 4, 1996:
(f) Elimination of Uhlmans' historical personnel costs associated with the
buying and distribution functions which the Company is currently
absorbing into its existing central office of $(477) offset by
incremental freight due to the use of the Company's distribution center
of $74.

(g) Elimination of Uhlmans' historical personnel costs associated with the
accounting, advertising, data processing and credit functions and
occupancy costs associated with leases the Company is terminating in
connection with the Uhlmans Consolidation Program aggregating $(682)
offset by amortization of goodwill resulting from the acquisition of
$67.

(h) Elimination of Uhlmans' historical interest expense of $(357) offset by
interest on the SRPC Notes of $938.

(i) Amortization of debt issue costs associated with the SRPC Notes of
$121.

(j) Income tax benefit of Uhlmans' historical loss of $(233) offset by
additional income tax expense associated with remaining acquisition
adjustments of $120.

Note 2--Offering Adjustments

The unaudited pro forma combined statements of operations should be read in
conjunction with the discussion of the Offering included under "Use of
Proceeds." The completion of the Offering at the beginning of the pro forma
periods presented would have resulted in the following adjustments (in
thousands):

Year ended February 3, 1996:
(k) Elimination of the expense associated with the termination of the
Professional Services Agreement (as defined) of $(513). See "Certain
Relationships and Related Transactions--Professional Services
Agreement."

(l) Elimination of historical interest expense associated with the Senior
Discount Debentures of $(13,070).

(m)Elimination of historical amortization of debt issue costs associated
with the Senior Discount Debentures of $(438).

(n) Income tax expense associated with the Offering adjustments of $5,328.

Three months ended May 4, 1996:
(o) Elimination of the expense associated with the termination of the
Professional Services Agreement (as defined) of $(125).

(p) Elimination of historical interest expense associated with the Senior
Discount Debentures of $(3,534).

26
<PAGE>

(q) Elimination of historical amortization of debt issue costs associated
with the Senior Discount Debentures of $(109).

(r) Income tax expense associated with the Offering adjustments of $1,432.

Note 3--Income Taxes

Pro forma adjustments to record the provision or benefit for income taxes
have been made assuming a tax rate of 38%, based upon the statutory federal
and state income tax rates. These adjustments result in a pro forma combined
effective tax rate of 38% and 39% for the year ended February 3, 1996, and the
three months ended May 4, 1996, respectively.

Note 4--Non-Recurring Charges

In the fiscal quarter in which the Offering is consummated (currently
expected to be the second or third quarter of 1996), the Company expects to
incur non-recurring charges, net of tax, totaling approximately $-- million in
connection with the early retirement of the Senior Discount Debentures and the
write-off of related debt issue costs and the termination of the Professional
Services Agreement (as defined).

27
<PAGE>

UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MAY 4, 1996

<TABLE>
<CAPTION>
Historical
-------------------- Acquisition Offering Pro Forma
Company Uhlmans Adjustments(1) Adjustments(2) Combined
--------- ------- -------------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents ....... $ 10,412 $ 1,054 $ 490(a) $ 3,527(k) $ 15,483
Accounts receivable ............. 50,587 5,519 -- -- 56,106
Merchandise inventories ......... 166,303 13,154 -- -- 179,457
Prepaid expenses and other
current assets ................ 23,452 251 (78)(b) 14,554(l) 38,179
-------- ------- ------- --------- --------
Total current assets ........... 250,754 19,978 412 18,081 289,225
Property, equipment and leasehold
improvements, net ............. 96,901 3,983 (28)(c) -- 100,856
Goodwill, net ................... 30,606 -- 10,719(d) -- 41,325
Other assets .................... 28,351 188 2,077(e) (15,228)(m) 15,388
-------- ------- ------- --------- --------
Total assets ................... $406,612 $24,149 $13,180 $ 2,853 $446,794
======== ======= ======= ========= ========
Liabilities and Stockholders'
Equity
Accounts payable ................ $ 41,153 $ 3,857 $ 398(f) -- $ 45,408
Accrued interest ................ 6,580 101 -- -- 6,681
Accrued expenses and other
current liabilities ........... 27,272 1,796 549(g) (4,606)(n) 25,011
Accrued taxes, other than income
taxes ......................... 4,083 461 -- -- 4,544
-------- ------- ------- --------- --------
Total current liabilities ...... 79,088 6,215 947 (4,606) 81,644

Long-term debt .................. 339,467 13,809 16,191(h) (113,351)(o) 256,116
Related party debt .............. 44,200 1,060 (1,060)(h) -- 44,200
Other long-term liabilities ..... 13,495 344 (177)(i) -- 13,662
-------- ------- ------- --------- --------
Total liabilities .............. 476,250 21,428 15,901 (117,957) 395,622
Stockholders' equity (deficit) .. (69,638) 2,721 (2,721)(j) 120,810(p) 51,172
-------- ------- ------- --------- --------
Total liabilities and
stockholders' equity ......... $406,612 $24,149 $13,180 $ 2,853 $446,794
======== ======= ======= ========= ========
</TABLE>

28
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

Note 1--Acquisition Adjustments

The pro forma acquisition adjustments represent the estimated purchase
accounting adjustments necessary to state the historical assets and
liabilities of Uhlmans at their estimated fair values and the recognition of
the excess of the purchase price over the estimated fair value of the assets
acquired and liabilities assumed as goodwill. Certain assets and liabilities
associated with the trucking operations of Uhlmans at the date of its
acquisition by the Company were retained by its former stockholders. The pro
forma combined condensed balance sheet includes adjustments to remove the
historical value of such assets and liabilities. The acquisition adjustments
shown on the pro forma combined condensed balance sheet reflect (in
thousands):

(a) Cash received from the issuance of the SRPC Notes of $27,829 net of
fees and expenses, less cash paid to former owners of Uhlmans of
$(11,613) and the retirement of Uhlmans total long term debt (including
current portion) $(15,726).

(b) Write-off of Uhlmans' prepaid pension expenses of $(78).

(d) Recognition of goodwill.

(e) Recognition of debt issue costs associated with the issuance of the
SRPC Notes.

(f) Adjustment for certain trucking liabilities not assumed of $(18) and
recognition of deferred purchase price due the former owners of Uhlmans
of $416.

(g) Accrual for severance due certain Uhlmans' employees of $1,406, net of
the retirement of the current portion of Uhlmans' debt of $(857).

(h) Issuance of the SRPC Notes of $30,000, net of the retirement of
Uhlmans existing debt of $(14,869).

(i) Elimination of Uhlmans' historical pension liability which is not being
assumed by the Company of $(177).

(j) Elimination of Uhlmans' historical equity accounts.

Note 2--Offering Adjustments

The pro forma offering adjustments, assuming completion of the Offering at
an initial public offering price of $ per share, at May 4, 1996, reflect the
following (in thousands):

(k) Sources and uses of cash as follows:

Sources of Funds--
Net proceeds from the Offering ................................... $133,840
Uses of Funds--
Retirement of Senior Discount Debentures ......................... (128,313)
Payment to terminate the Professional Services Agreement (as
defined) ......................................................... (2,000)
--------
Net change in cash and cash equivalents ......................... $ 3,527
========

A portion of the cash remaining after the Offering is expected to be
used to pay consent fees with respect to SRI's outstanding
indebtedness. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

(l) Recognition of income tax receivable due to early retirement of Senior
Discount Debentures of $14,554.

(m) Write-off of debt issue cost related to the Senior Discount Debentures
of $(4,054) and reclassification of the historical deferred tax asset
related to the interest component of the debentures to income tax
receivable of $(11,174).

(n) Reclassification of income taxes payable existing at May 4, 1996 to
income tax receivable due to the tax implications of the retirement of
the Senior Discount Debentures of $(4,606).

(o) Retirement of Senior Discount Debentures.

(p) Net proceeds from the Offering of $133,840, net of after-tax
extraordinary charge for loss on early retirement of debt of $(11,790)
and payment to terminate the Professional Services Agreement, net of
tax of $(1,240).

29
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

Overview. The Company operates the store of choice for well known national
brand name family apparel in over 200 small towns and communities across the
central United States. The Company has recognized the high level of brand
awareness and demand for fashionable, quality apparel by consumers in small
markets and has identified these markets as a profitable and underserved
niche. The Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a broad range of
merchandise with a high level of customer service in convenient locations.

In recent years, the Company has undertaken several initiatives to realize
the full potential of its unique franchise in small markets, including (i)
recruiting a new senior management team, (ii) embarking on a store expansion
program to capitalize on available opportunities in new markets through new
store openings and strategic acquisitions, (iii) continuing to refine the
Company's retailing concept and (iv) closing unprofitable stores. As a result
of these initiatives, the lower operating costs of small market stores, the
benefits of economies of scale and its highly automated facilities and
sophisticated information systems, the Company has among the highest operating
income margins in the apparel retailing industry.

Recent Acquisitions. The Company acquired 45 stores from Beall-Ladymon in
1994 and subsequently reopened the stores in the first quarter of 1995 under
the Stage name. In 1993, the year prior to their acquisition, the
Beall-Ladymon stores generated sales of approximately $53.4 million, whereas
the newly opened Stage stores in the same locations generated sales for the
twelve months ended May 4, 1996 of $93.1 million, an increase of 74%. Over the
same periods, store contribution more than doubled. The Company believes that
the following key strengths have contributed to its successful expansion and
acquisition plan: (i) ability to operate profitably in smaller markets, (ii)
benefits of strong vendor relationships, (iii) effective merchandising
strategy, (iv) focused marketing strategy, (v) benefits of proprietary credit
card program, (vi) emphasis on customer service, and (vii) sophisticated
operating and information systems.

On June 3, 1996 the Company consummated the Uhlmans Acquisition for $28.7
million, including the repayment of certain indebtedness of Uhlmans. For the
year ended February 3, 1996, Uhlmans had net sales of $59.7 million and
operating income of $2.2 million. The Company is in the process of
implementing a consolidation program to absorb the Uhlmans general office
functions, including accounting, data processing, merchandising, personnel,
credit and distribution into similar functions provided by the Company. The
Company estimates that through the Uhlmans Consolidation Plan, cost savings of
approximately $4.0 million can be realized from the elimination of duplicative
central, administrative and distribution functions. In addition to any
improvements in operating results that may be achieved through the opportunity
to expand the business above its historical levels, the Company believes it
should be able to receive better pricing and vendor participation programs on
the merchandise it purchases for the acquired stores given the Company's
historical ability to negotiate better pricing structures with its vendors as
compared to those historically obtained by Uhlmans. Additionally, the Company
intends to introduce certain expanded merchandise categories in the acquired
stores such as footwear, which Uhlmans has historically offered in only
certain stores. Finally, the Company believes it should be able to increase
the penetration of the Company's proprietary credit card as compared to
historical levels since Uhlmans had not aggressively promoted its proprietary
credit card.

Store Closure Plan. During the fourth quarter of 1994, the Company approved
the Store Closure Plan which provided for the closure of 40 underperforming
Fashion Bar stores. These stores were primarily located in major regional
malls within the Denver area. Management determined that the merchandising
strategy and market positions of such stores were not compatible with the
Company's overall strategy. Accordingly, the Company accrued $5.2 million for
the expected costs associated with the Store Closure Plan during 1994. The
Store Closure Plan was substantially completed in 1995.

Accounts Receivable Program. Pursuant to the Accounts Receivable Program,
the Company sells, on a daily basis, substantially all of the accounts
receivable generated from purchases by the holders of the Company's
proprietary credit card to SRPC. SRPC is a separate limited-purpose
subsidiary that is operated in a manner intended to ensure that its assets
and liabilities are distinct from those of the Company and its other
affiliates so that SRPC's creditors have a claim on its assets prior to such
assets becoming available to any creditor of the Company. SRPC

30
<PAGE>

sells, on a daily basis, the accounts receivable purchased from the Company to
the Trust in exchange for cash or a certificate representing an undivided
interest in the Trust (together with SRPC's interest in receivables previously
sold to the Trust, the "Retained Interest"). The Company's Retained Interest
at May 4, 1996 was $48.4 million, which represented 22.3% of total receivables
outstanding in the Trust. The remaining interest in the Trust is held by
third-party investors. The Retained Interest is effectively subordinated to
the interests of such third-party investors, and is pledged to secure the SRPC
Notes.

Prior to the implementation of the Accounts Receivable Program in 1993,
operating income included all service charge income and servicing costs
attributable to the Company's accounts receivable and credit card operations.
The cost of financing the Company's accounts receivable was included in
interest expense. Subsequent to the implementation of the Accounts Receivable
Program, service charge income only includes the amount of service charge
income attributable to the Company's Retained Interest. Additionally, the
Company's selling, general and administrative expenses are decreased or
increased by a gain or loss, respectively, on the sale of receivables to the
Trust. This gain or loss is calculated based upon the projected cash receipts
from the receivables sold to the Trust (primarily service charge income) and
reduced by the projected payments of returns to the holders of the Trust
Certificates, and projected credit expenses. Selling, general and
administrative expenses are also affected by adjustments to previously
recorded gains and losses. Bad debt expenses on the Company's entire portfolio
were reflected in selling, general and administrative expenses prior to the
adoption of the Accounts Receivable Program. Under the Accounts Receivable
Program, bad debt expenses remain effectively included in selling, general and
administrative expenses because they directly affect the profitability of the
Accounts Receivable Program.

The financial information, discussion and analysis that follow should be
read in conjunction with the Company's Consolidated Financial Statements
included elsewhere herein.

Results of Operations

The following sets forth certain components of operations as a percentage
of sales for the periods indicated.

<TABLE>
<CAPTION>
Fiscal Year Three Months Ended
--------------------------------------------- -------------------
April 29, May 4,
1991 1992 1993 1994 1995 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales and related buying,
occupancy and distribution
expenses ........................... (69.7) (69.4) (69.0) (68.6) (68.6) (67.5) (68.1)
----- ----- ----- ----- ----- ----- -----
Gross profit ......................... 30.3 30.6 31.0 31.4 31.4 32.5 31.9
Selling, general and administrative
expenses ........................... (26.0) (25.6) (24.2) (23.2) (23.4) (23.8) (23.8)
Service charge income ................ 5.1 5.9 3.6 1.5 1.5 1.9 1.8
Store opening and closure costs ...... (0.1) -- -- (1.0) (0.5) (0.2) --
----- ----- ----- ----- ----- ----- -----
Operating income ..................... 9.3 10.8 10.3 8.8 9.0 10.4 9.8
Net interest expense ................. (7.5) (6.3) (6.5) (6.9) (6.4) (7.4) (7.1)
Income before income tax, minority
interest and extraordinary item .... 1.9 4.1 3.8 1.9 2.6 3.0 2.7
Income before extraordinary item ..... 0.9 2.4 2.4 1.1 1.6 1.7 1.6
===== ===== ===== ===== ===== ===== =====
Other data:
Adjusted operating income (1) ........ 8.1% 8.7% 8.4% 9.2% 9.4% 9.7% 8.6%
</TABLE>

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

(1) Adjusted operating income represents operating income adjusted to
eliminate the income and expense associated with the Company's proprietary
credit card program (including the Accounts Receivable Program) and store
opening and closure costs. See Note 7 to the Selected Consolidated
Historical Financial and Operating Data.

Because of the 53-week year in 1995, the Company's quarterly accounting
periods for 1996 occur one week later than their 1995 counterparts. Other
factors being equal, this calendar shift, combined with the timing of the
Company's promotional events and holidays, is likely to affect year-to-year
comparable store performance for 1996 favorably in the second quarter and
unfavorably in the third and the fourth quarters.

31
<PAGE>

Three Months Ended May 4, 1996 compared to Three Months Ended April 29, 1995

Sales for the first quarter of 1996 increased 14.6% to $163.2 million from
$142.4 million in the comparable period of 1995. The increase was due to a
$13.0 million increase in sales from stores opened during 1996 and 1995
combined with a 7.4% increase in comparable store sales excluding stores in
the Store Closure Plan and 6.5% including such stores. The significant
increase in comparable store sales was primarily attributable to strong
performance at the Company's Bealls stores combined with a one-week shift in
the comparable calendar period due to the 53-week year in 1995.

Gross profit increased 12.5% to $52.1 million for the first quarter of
1996, from $46.3 million in the comparable period of 1995. Gross profit as a
percent of sales for the first quarter of 1996 declined to 31.9% compared to
32.5% for the comparable period in 1995 due to the favorable impact of vendor
discount programs to support the opening of 51 new stores during the first
quarter of 1995 (as compared to 11 new store openings in the first quarter of
1996) combined with lower markdowns experienced by these stores, as is
generally the case with newly opened stores during their first six months of
operations. Such impact was offset in part by benefits from the application of
fixed buying, occupancy and distribution costs over a larger sales base in
1996.

Selling, general and administrative expenses as a percentage of sales
remained unchanged at 23.8% despite the inclusion of a $0.8 million reversal
of a litigation reserve as a result of a favorable court ruling in the first
quarter of 1995 and a $1.9 million increase in the level of bad debt expense
associated with the Company's proprietary credit card program during the first
quarter of 1996. These were offset by the benefits of applying the Company's
selling, general and administrative expenses to a larger sales volume. Without
the reversal of the litigation reserve, selling, general and administrative
expenses as a percent of sales for the first quarter of 1995 would have been
24.3%. Selling, general and administrative expenses for the first quarter of
1996 increased by 15.1% to $38.9 million from $33.8 million for the comparable
period in 1995.

Service charge income for the first quarter of 1996 increased 7.4% to $2.9
million from $2.7 million for the comparable period in 1995. Service charge
income increased due to the increased yield on the accounts receivable
portfolio resulting primarily from an increase in the late fee charges applied
to delinquent payments.

Operating income for the first quarter of 1996 increased 8.1% to $16.0
million from $14.8 million for the first quarter of 1995 due to the factors
described above.

Net interest expense for the first quarter of 1996 increased 9.4% to $11.6
million from $10.6 million for the comparable period in 1995. The increase was
due to an increase in the accretion on the Senior Discount Debentures as well
as the issuance of $18.3 million of 11% Series D Senior Subordinated Notes in
August 1995 (the "Series D Senior Subordinated Notes").

As a result of the foregoing, the Company's net income for the first
quarter of 1996 increased by 12.5% to $2.7 million from $2.4 million for the
comparable period in 1995.

1995 Compared to 1994

1995 was highlighted by the positive initial results of management's growth
strategy to expand into small markets. Sales increased 17.4% to $682.6 million
in 1995 from $581.5 million in 1994. This increase was due to (i) a $112.5
million increase in sales from stores opened during 1994 and 1995, (ii) a 1.0%
increase in comparable store sales in 1995 and (iii) $10.0 million in sales
due to the inclusion of one extra week in 1995 as a result of 1995 being a
53-week year. Such increases were partially offset by the effects of the Store
Closure Plan which was substantially completed in 1995. During 1995, the
devaluation of the Mexican peso, which resulted in extremely weak economic
conditions throughout Mexico, negatively impacted sales at the Company's six
stores located on the Texas/Mexico border. Excluding these stores, comparable
store sales growth for 1995 would have been 3.3%.

Gross profit increased 17.2% to $214.3 million in 1995 from $182.8 million
in 1994. Gross profit as a percent of sales was 31.4% for both 1995 and 1994.
Gross profit for 1995 was favorably impacted by (i) the opening of new stores,
which traditionally experience lower markdown activity during their first six
months of operations, (ii) vendor discount programs granted to the Company to
support new store openings, (iii) the application of buying, occupancy and
distribution costs over a larger sales base, and (iv) LIFO credits. These
items were offset by an increase in markdowns resulting from additional
promotional events during the Christmas season intended to increase sales and
reduce inventories and an increase in the level of shrinkage. Management
believes that the increased shrinkage was primarily due to the Company's focus
on improving ticketing compliance on merchandise

32
<PAGE>

in 1995 as well as the rapid expansion of stores during the same year. In
response, management has put several new programs in place, including shortage
awareness programs, which are intended to return the level of shrinkage to
historical levels.

Selling, general and administrative expenses as a percent of sales were
23.4% for 1995 and 23.2% for 1994. The increase resulted from incremental
costs associated with opening stores in new markets, increased costs
associated with the certificates issued by the Trust to third party investors
under the Accounts Receivable Program and an increase in the charge-off ratio
associated with the Company's credit card program (including those resulting
from sales of the Mexican border stores) from 6.0% of average balances in 1994
to 7.9% in 1995. These increases were partially offset by the application of
fixed costs to a greater volume of sales and the reversal of a $0.8 million
litigation reserve as a result of a favorable court ruling. Selling, general
and administrative expenses for 1995 increased 18.5% to $159.6 million from
$134.7 million in 1994. Advertising expenses as a percentage of sales for 1995
and 1994 were 3.9% and 3.8%, respectively; the increase was primarily a result
of the Company's expansion into new markets.

Service charge income for 1995 increased 23.5% to $10.5 million from $8.5
million in 1994. Such increase was due to an increase in average accounts
receivable balances resulting from the 17.4% increase in sales discussed
above, an increase in the late fee rate charged on delinquent accounts as well
as the fifty-third week of 1995.

The 1995 store opening and closure costs of $3.7 million were comprised of
store opening costs related to 68 new stores. The 1994 store opening and
closure costs were comprised of a $5.2 million provision for the Store Closure
Plan and $0.4 million for store opening costs related to 10 new stores.

Operating income for 1995 increased 20.6% to $61.5 million from $51.0
million for 1994 due to the factors discussed above. Operating income as a
percent of sales was 9.0% in 1995 as compared to 8.8% for 1994.

Interest expense for 1995 increased 10.0% to $44.0 million from $40.0
million for 1994. The increase in interest expense was due primarily to an
increase in the accretion on the Senior Discount Debentures combined with
interest related to the Series D Senior Subordinated Notes issued in August
1995.

As a result of the factors described above, the Company's net income for
1995 increased 69.8% to $10.7 million from $6.3 million for 1994.

1994 Compared to 1993

Sales for 1994 increased 4.3% to $581.5 million from $557.4 million for
1993. The overall increase in sales was a result of a 3.2% increase in
comparable store sales combined with an increase in sales from new stores
opened during 1994.

Gross profit for 1994 increased 5.9% to $182.8 million from $172.6 million
in 1993. Gross profit as a percentage of sales for 1994 increased to 31.4%
from 31.0% for 1993. The increase in the gross profit percentage was due
primarily to a reduced level of markdowns as a result of better inventory
management.

Selling, general and administrative expenses as a percentage of sales
declined to 23.2% in 1994 from 24.2% in 1993. Selling, general and
administrative expenses for 1994 decreased to $134.7 million from $135.0
million in 1993. These decreases were primarily due to the sale of accounts
receivable pursuant to the Accounts Receivable Program that began during
August 1993, offset in part by an increase in the level of bad debt expense
associated with the Company's credit card program. Excluding the effect of the
Accounts Receivable Program, selling, general and administrative expenses as a
percentage of sales for 1994 would have been 26.1% as compared to 26.4% in
1993. Such decrease was due to the Company's ability to effectively manage
variable selling, general and administrative expenses. Advertising expenses as
a percentage of sales for 1994 and 1993 were 3.8% and 4.0%, respectively, a
decrease of 0.2%.

Service charge income decreased to $8.5 million for 1994 from $20.0 million
for 1993 due to the implementation of the Accounts Receivable Program. Without
giving effect to the Accounts Receivable Program, 1994 service charge income
would have increased 8.1% from 1993 as a result of an increase in average
accounts receivable balances due to the increase in sales and the purchase of
certain accounts receivable from Beall-Ladymon.

Store opening and closure costs for 1994 comprised the $5.2 million accrual
related to the Store Closure Plan and $0.4 million related primarily to the 10
stores opened during 1994.

Operating income for 1994 decreased 11.1% to $51.0 million from $57.4
million for 1993. Operating income as a percentage of sales for 1994 decreased
to 8.8% from 10.3% for 1993 as a result of the items discussed above.

33
<PAGE>

Such decreases were due to the $5.2 million provision associated with the
Store Closure Plan combined with the impact of the implementation of the
Accounts Receivable Program in 1993 (see Note 2 to the Company's Consolidated
Financial Statements). Adjusted operating income, which excludes the above two
factors and store opening costs increased 14.7% to $53.7 million (or 9.2% of
sales) from $46.8 million (or 8.4% of sales).

Net interest expense in 1994 increased 9.9% to $40.0 million from $36.4
million in 1993. The increase in net interest expense is due to a full year of
discount accretion in 1994 related to the Senior Discount Debentures versus
six months of accretion in 1993. Such increase was partially offset by a
decrease in interest expense due to the purchase and retirement of $20.0
million of Senior Notes, and by a reduction in interest expense and the impact
on interest expense of the Accounts Receivable Program adopted in 1993.

As a result of the factors described above, the Company's net income in
1994 increased to $6.3 million from a net loss of $2.8 million in 1993 which
included a $16.2 million extraordinary charge associated with the Refinancing.

Seasonality and Inflation

The Company's business is seasonal and its quarterly sales and profits
traditionally are lower during the first three quarters and higher during the
fourth quarter (November through January). In addition, working capital
requirements fluctuate throughout the year, increasing substantially in
October and November in anticipation of the holiday season due to requirements
for significantly higher inventory levels.

<TABLE>
<CAPTION>
1994 1995
----------------------------------------- ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales .......... $128,073 $132,060 $134,939 $186,391 $142,353 $154,578 $159,161 $226,532
Gross profit (1) .... 39,856 39,163 41,110 62,675 46,283 46,555 48,659 72,780
Operating income .... 11,943 10,576 10,029 18,409 14,835 11,074 9,724 25,853
Quarters'
operating income
as a percent of
annual income ..... 23% 21% 20% 36% 24% 18% 16% 42%
Income before
extraordinary
item .............. $ 1,197 $ 463 $ 52 $ 4,918 $ 2,438 $ 221 $ (899) $ 8,970
Net income .......... 871 463 90 4,898 2,438 221 (899) 8,970
Adjusted operating
income (2) ........ 9,868 9,081 9,387 25,341 13,797 11,337 10,364 28,498
</TABLE>

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

(1) The Company states its inventories at the lower of cost or market, cost
being determined on the last-in first-out method. See Note 1 to the
Company's Consolidated Financial Statements.
(2) Adjusted operating income represents operating income adjusted to
eliminate the income and expense associated with the Company's proprietary
credit card program (including the Accounts Receivable Program) and store
opening and closure costs.

The Company does not believe that inflation had a material effect on its
results of operations during the past two years. However, there can be no
assurance that the Company's business will not be affected by inflation in the
future.

Liquidity and Capital Resources

At May 4, 1996, the Company's consolidated long-term debt included $130.0
million of Senior Notes, $116.6 million of Senior Subordinated Notes, Senior
Discount Debentures with an accreted value of $113.4 million, and certain
other debt. See Note 5 to the Company's Consolidated Financial Statements.

On June 3, 1996, the Company purchased Uhlmans for approximately $28.7
million including the repayment of certain existing indebtedness of Uhlmans.
The Company, through SRPC, issued $30.0 million in aggregate principal amount
of SRPC Notes on May 30, 1996. The SRPC Notes are secured by the Company's
Retained Interest. Interest on the SRPC Notes is payable semi-annually on June
15 and December 15 of each year, commencing December 15, 1996 from amounts
received by SRPC from its Retained Interest. The scheduled amortization of
principal will commence in December 1999 and is subject to the collection
experience regarding the receivables underlying the Trust Certificates at that
time. The Company issued the SRPC Notes to finance the

34
<PAGE>

Uhlmans Acquisition. The issuance of the SRPC Notes does not impact the
ability of the Company to issue additional certificates under the Accounts
Receivable Program to third-party investors.

Total working capital of $171.7 million at May 4, 1996 remained essentially
unchanged from February 3, 1996, although the components of working capital
including cash, inventory and accounts receivable varied. Merchandise
inventories increased and cash decreased primarily due to the seasonal build
in inventories and the opening of 11 stores during the first quarter of 1996.
Accounts receivable decreased $15.2 million during the first quarter of 1996
as a result of the seasonal liquidation of accounts receivable generated
during the Christmas season.

Working capital at February 3, 1996 increased 14.8% to $170.1 million from
$148.2 million at January 28, 1995. The increase in working capital during
1995 was primarily the result of an increase in inventories required to
support the Company's larger store base.

The Company's primary capital requirements are for working capital, debt
service and capital expenditures. Based upon the current capital structure,
management anticipates interest payments to be approximately $5.8 million
higher than the 1995 level during 1996 and 1997 due to the issuance of the
Series D Senior Subordinated Notes and the SRPC Notes. Generally, capital
expenditures are for new store openings, remodeling of existing stores and
customary store maintenance. Capital expenditures increased from $19.7 million
during 1994 to $28.6 million during 1995 as a result of opening 68 new stores
during 1995 compared to 10 new stores during 1994. Management expects capital
expenditures to be approximately $28.0 million during 1996 consisting
primarily of the opening of 35 new stores, the conversion of all of the
Uhlmans stores to Stage stores, routine store maintenance, store remodels and
renovations at the corporate headquarters. Required aggregate principal
payments on debt total $2.4 million during 1996 and 1997.

The Company's short-term liquidity needs are provided by (i) existing cash
balances, (ii) operating cash flows, (iii) the Accounts Receivable Program
which provides a source of funds from the sale of accounts receivable to the
Trust and (iv) the Revolving Credit Agreements (as defined below). The Company
expects to fund its long term liquidity needs from cash flow from operations,
through the issuance of debt and/or equity securities, the securitization of
its accounts receivable and bank borrowings.

The Company has a revolving credit agreement with a bank (the "Revolving
Credit Agreement") under which it may draw up to $25.0 million. Of this
amount, $15.0 million may be used to support letters of credit. As of May 4,
1996, no borrowings were outstanding under the Revolving Credit Agreement. As
of May 4, 1996, $8.5 million of the total commitment was used to collateralize
letters of credit resulting in available funds of $16.5 million. The Company
also has a separate agreement with the bank under which it may borrow an
additional $10.0 million for seasonal working capital needs (the "Seasonal
Credit Agreement" and together with the Revolving Credit Agreement, the
"Revolving Credit Agreements"). Funds are available under the Seasonal Credit
Agreement from August 15 through January 15 of each calendar year (the
"Seasonal Period"). The Revolving Credit Agreements are available through
February 3, 1998. During 1995, the availability under the Revolving Credit
Agreement was never less than $4.5 million. During the Seasonal Period, the
availability under the Revolving Credit Agreements was never less than $11.5
million.

SRI is soliciting consents to certain amendments to the indentures
governing its Senior Notes, its Series B Senior Subordinated Notes and its
Series D Senior Subordinated Notes to, among other things increase the maximum
amount of revolving senior secured borrowing capacity to $40.0 million
(subject to a reduction to $25.0 million for a 45-day period annually) and
relax the limitations on the incurrence of additional indebtedness.

These amendments are intended to provide the Company with additional
financial flexibility in meeting its expansion plans and the working capital
requirements of its growing store base, and are conditioned on the
consummation of the Offering.

Since its inception, the Trust has issued $165.0 million of term
certificates and a $40.0 million revolving certificate (collectively, the
"Trust Certificates") representing undivided interests in the Trust. The
holder of the revolving certificate agreed to purchase interests in the Trust
equal to the amount of accounts receivable in the Trust above the level
required (aggregating $200.1 million at May 4, 1996) to support the term
certificates (and, during the fourth quarter, a seasonal minimum retained
interest of SRPC), up to a maximum of $40.0 million. If receivable balances in
the Trust fall below the level required to support the term certificates, the
seasonal retained interest and revolving certificates, certain principal
collections may be retained in the Trust until such time as the accounts
receivable balances exceed the amount of accounts receivable required to
support the Trust Certificates and any

35
<PAGE>

required transferor's interest. SRPC receives distributions from the Trust of
cash in excess of amounts required to satisfy the Trust's obligations to
third-party investors on the Trust Certificates. Cash so received by SRPC may
be used to purchase additional accounts receivable from, or make distributions
to, the Company after SRPC has satisfied its obligations on the SRPC Notes. As
of May 4, 1996, the outstanding balance under the revolving certificate was
$3.7 million. The Trust may issue additional series of certificates from time
to time on various terms. Terms of any future series will be determined at the
time of issuance.

Recent Accounting Pronouncements

During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"),
and Statement of Financial Accounting Standard No. 123, Accounting for Stock
Based Compensation ("SFAS 123"). Neither the adoption of SFAS 121 or SFAS 123
had a material impact on the Company's financial position or results of
operations. With the adoption of SFAS 123, the Company continues to measure
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees, and will provide pro forma
disclosures of net income and earnings per share as if the fair value based
method prescribed by SFAS 123 had been applied in measuring compensation
expense in its annual financial statements.

36
<PAGE>

BUSINESS

General

The Company operates the store of choice for well known national brand name
family apparel in over 200 small towns and communities across the central
United States. The Company has recognized the high level of brand awareness
and demand for fashionable, quality apparel by consumers in small markets and
has identified these markets as a profitable and underserved niche. The
Company has developed a unique franchise focused on small markets,
differentiating itself from the competition by offering a carefully edited,
but broad range of merchandise with a high level of customer service in
convenient locations. Stage Stores' product offerings include fashion apparel,
accessories, fragrances and cosmetics and footwear for women, men and
children. Over 85% of 1995 sales consisted of branded merchandise, including
nationally recognized names such as Levi Strauss, Liz Claiborne, Chaps/Ralph
Lauren, Calvin Klein, Guess, Hanes, Nike, Reebok and Haggar Apparel.

In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company began
recruiting a new senior management team commencing in 1993. This new
management team has (i) initiated an aggressive growth strategy to capitalize
on available opportunities through new store openings and strategic
acquisitions in new markets, (ii) refined the Company's retailing concept,
(iii) implemented new merchandising and operating programs, and (iv) closed
unprofitable stores. The Company has made substantial progress in implementing
its growth strategy by opening or acquiring 68 stores in 1995 and 45 stores to
date in 1996, and expects to open approximately 24 additional stores during
the remainder of 1996. In addition, the Company's goal is to open
approximately 55 new stores in 1997.

Competitively Well Positioned

As a result of its small market focus, Stage Stores generally faces less
competition for brand name apparel, because consumers in small markets
generally have only been able to shop for branded merchandise in distant
regional malls. In those small markets where the Company does compete for
brand name apparel sales, such competition generally comes from local
retailers, small regional chains and, to a lesser extent, national department
stores. The Company believes it has a competitive advantage over local
retailers and smaller regional chains due to (i) the economies of scale of its
large store base, (ii) strong vendor relationships which provide it with a
broad selection of branded merchandise at a lower cost, (iii) a proprietary
credit card, which enables it to provide an independent source of credit and
which generates a significant customer database that supports the Company's
promotion and marketing efforts, and (iv) sophisticated operating systems for
efficient management. The Company believes it has a competitive advantage in
small markets over national department stores due to its (i) experience with
smaller markets, (ii) ability to effectively manage merchandise assortments in
a small store format, and (iii) operating systems designed for efficient
management within small markets. In addition, due to minimal merchandise
overlap, Stage Stores generally does not directly compete for branded apparel
sales with national discounters such as Wal-Mart.

Key Strengths

The following factors serve as the Company's key strengths and
distinguishing characteristics.

Ability to Operate Profitably in Smaller Markets. The Company has
recognized that customers in small markets are generally as aware of current
fashion trends and as sophisticated as consumers in larger urban centers due
to the proliferation of electronic, computer and print media. However, these
consumers have not traditionally had convenient access to broad assortments of
quality, brand name merchandise. The Company operates in small markets with
populations ranging from 4,000 to 100,000, has developed a store format,
generally ranging in size from 12,000 to 30,000 square feet, which is smaller
than typical department stores yet large enough to offer a well edited, but
broad selection of merchandise. This format has enabled the Company to operate
profitably in small markets. Historically, the Company has achieved higher
profit margins in its small market stores. For 1995, store

37
<PAGE>

contribution (operating profit before allocation of corporate overhead) as a
percentage of sales for small market stores open for at least one year was
18%, as compared to 12% for larger market stores. In addition, by operating
more than 300 stores, the Company benefits from economies of scale in buying
and merchandising, information systems, distribution and advertising which,
combined with the lower cost structure of the smaller market stores, has
resulted in operating margins which are among the highest in the retailing
industry.

Benefits of Strong Vendor Relationships. The Company's large store base
offers major vendors a unique vehicle for accessing multiple small markets in
a cost effective manner. The proliferation of media combined with the
significant national marketing efforts of these vendors has created
significant demand for branded merchandise in small markets. However, the
financial and other limitations of many local retailers has left large
national brands with limited access to such markets. Furthermore, these large
vendors generally do not sell through national discounters in order to
preserve their brand image. The Company's new management team recognized this
significant opportunity and continuously seeks to expand its vendor base and
has recently added nationally recognized name brands such as Polo, Dockers for
Women and Oshkosh, as well as fragrances by Elizabeth Arden, Liz Claiborne and
Perry Ellis during 1996. In addition, the Company has also increased the
participation by key vendors in joint marketing programs to a level that the
Company believes exceeds the standard vendor programs provided to its smaller
competitors. For example, the Company is among the largest customers of Levi
Strauss, Liz Claiborne and Haggar Apparel and enjoys significant support from
such vendors in sales promotions, advertising and store fixture programs.

Effective Merchandising Strategy. The Company's merchandising strategy is
based on an in-depth understanding of its customers and is designed to
accommodate the particular demographic profile of each store. This
understanding is attributable to over 70 years of experience operating in its
markets coupled with 42 buyers who average approximately 10 years of service
with the Company. Store layouts and visual merchandising displays are designed
to create a friendly, modern and convenient department store atmosphere which
is frequently not found in small markets. The Company's strategy focuses on
moderately priced merchandise categories which have traditionally yielded
attractive margins. The Company offers an edited assortment of quality,
moderately priced merchandise that is divided into distinct departments
including misses, women's, men's, boy's, footwear, intimate apparel, junior's,
children's, accessories, cosmetics, fragrances and gifts.

To augment its branded merchandise offerings, the Company also offers a
quality assortment of higher margin, private label merchandise which comprises
less than 15% of total sales. The Company's private label merchandise includes
its highly successful Graphite(R) label for apparel, accessories and footwear
as well as its new Whispers(R) line of bath and body products and intimate
apparel. The Company procures the majority of its private label merchandise
through AMC, a cooperative buying service whose participants include
nationally recognized retailers, such as Federated Department Stores.

The Company also utilizes a sophisticated merchandise allocation and
transfer system which is designed to maximize in-stock positions, increase
sales and reduce markdowns. The Company believes that the combination of the
size and experience of its buyer group, its vendor relationships, its strong
merchandising systems and its participation in AMC allow the Company to
compete effectively on both price and selection in its markets.

Focused Marketing Strategy. The Company's primary target customers are
women between the ages of 20 and 55 with household incomes over $25,000 who
are the primary decision makers for family clothing purchases. The Company
uses a multi-media advertising approach, including newspaper, radio, direct
mail and television, to position its store as the local destination for
fashionable, brand name merchandise. In addition, the Company heavily promotes
its proprietary credit card in order to create customer loyalty and to
effectively identify its core customers. The Company believes it is better
able to maintain personal contact with its customers due to the small size of
its markets, aggressive advertising strategy and well-developed corporate
customer service programs designed to encourage a high level of customer
interaction. Stage Stores seeks to enhance its image in the communities it
serves by encouraging its store managers and employees to be involved in local
activities such as youth groups, civic activities and athletic events.

Benefits of Proprietary Credit Card Program. The Company aggressively
promotes its proprietary credit card and, as a result, experiences a higher
percentage of proprietary credit card sales (55.6% of net sales in 1995) than
most retailers. The Company considers its credit card program to be a critical
component of its retailing concept because it (i) enhances customer loyalty by
providing customers with a service that few of its local and regional

38
<PAGE>

competitors or discounters offer, (ii) allows the Company to identify and
regularly contact its best customers, and (iii) helps create a comprehensive
database that allows the Company to implement detailed, segmented marketing
and merchandising strategies for each store. In addition, the Company has
established a VIP program which offers special services and benefits to
customers with credit card purchases over $750 annually. VIP customers are
rewarded with certain extra services such as free gift-wrapping, emergency
check cashing, free credit card registration, discounts on alterations, and
other benefits. While these customers only represent approximately 9.5% of
total active cardholders, credit sales to these customers during 1995
comprised 36.6% of total cardholder sales. Sales associates are encouraged to
focus their selling efforts on these customers to increase the productivity of
the Company's marketing efforts.

Emphasis on Customer Service. A primary corporate objective is to provide
excellent customer service through stores staffed with highly trained and
motivated sales associates. All sales associates are evaluated based upon the
attainment of specific customer service standards such as offering prompt
assistance, suggesting complementary items, sending thank-you notes to charge
customers and establishing consistent contact with customers in order to
create a customer base for each associate. The Company continuously monitors
the quality of its service by making over 3,000 calls each month to its credit
card customers who have recently made a purchase. The results of these surveys
are used to determine a portion of each store manager's bonus. In addition,
the Company has extended this service philosophy to the design of the store;
for example, in nearly all stores it has installed call buttons in the fitting
rooms and in smaller market stores, has adopted a "Team One" concept which
locates the store manager on the selling floor. The Team One concept is also
designed to help the store manager ensure that sales associates focus on
selling and customer service.

Sophisticated Operating and Information Systems. The Company supports its
retail concept with highly automated, sophisticated and integrated systems in
areas such as merchandising, distribution, sales promotions, credit, personnel
management, store design and accounting. The Company's merchandising systems
assist merchandise planners in allocating merchandise assortments for each
store based on specific characteristics and recent sales trends. The Company's
point of sale systems include bar code scanning, electronic credit and check
authorization, all of which allow the Company to capture customer specific
sales data for use in its merchandising system. Other systems allow the
Company to identify and mark down slow moving merchandise or efficiently
transfer it to stores selling such items more rapidly, and to maintain high
levels of in-stock positions in basic items including jeans and hosiery
through such systems as base stock replenishment. The Company is focused on
expanding its use of electronic data interchange (EDI) and has made
significant progress in doing so over the last two years. These systems have
enabled the Company to efficiently manage its inventory, improve sales
productivity, reduce costs, which have contributed to the Company's relatively
high operating income margins. The Company has developed and utilizes an
automated store personnel scheduling system that analyzes historical hourly
and projected sales trends to efficiently schedule sales personnel. This
system is designed to minimize labor costs while producing a higher level of
customer service.

Growth Strategy

In order to fully realize the potential of its unique market position and
proven ability to operate profitably in small markets, the Company, through
its new management team, has (i) initiated an aggressive growth strategy to
capitalize on available opportunities through new store openings and
acquisitions and (ii) refined its retailing concept to focus on very small
markets with populations of less than 12,000.

New Store Openings in Smaller Markets. The Company opened 23 new stores and
45 acquired stores in 1995, has opened 11 new stores and acquired 34 stores to
date in 1996, and expects to open approximately 24 additional new stores
during the remainder of 1996. In addition, the Company's goal is to open
approximately 55 new stores in 1997. Since 1994, store additions have allowed
the Company to begin operating in 10 additional states. As part of new
management's ongoing expansion strategy, the Company has identified over 600
additional markets in the central United States and contiguous states which
meet the Company's demographic and competitive criteria. All of these target
markets are smaller communities, where the Company has historically
experienced its highest profit margins. In addition, the Company believes it
has a competitive advantage over local retailers in these markets which are
typically underserved by department stores. Based on the Company's historical
operating experience, small market stores typically experience lower
incremental opening costs and lower occupancy and operating expenses than
larger markets. When combined with the Company's operating systems in
merchandising, credit, distribution and store personnel scheduling, the
smaller market stores have typically generated higher

39
<PAGE>

margins than metropolitan market stores. For 1995, store contribution as a
percentage of sales for small market stores open for at least one year was 18%
as compared to 12% for larger market stores.

The Company utilizes a proprietary model which is designed to allow
management to identify suitable markets for new stores. The Company targets
communities for new store openings with populations generally ranging from
12,000 to 30,000, an average household income of $25,000 or more, and which
are located at least 30 miles from the nearest regional mall. Such locations
generally face limited competition from national retailers. In addition to
satisfying the above criteria, only those markets that management believes
have the potential to exceed certain minimum sales and profitability standards
and have available, suitable, low cost real estate are selected for new store
openings. Historically, the Company's new store model has conservatively
forecasted sales based on the above factors.

In opening a new store, the Company's investment consists primarily of
inventory, net of vendor payables, and furniture, fixtures, equipment and
leasehold improvements. For the Company's stores opened in 1995, inventory
investment per store was approximately $450,000, with average vendor payables
equal to approximately $110,000 for a net investment per store of
approximately $340,000 and investment in furniture, fixtures, equipment and
leasehold improvement was approximately $313,000 per store. In addition,
pre-opening expenses (which are deferred and expensed in the fiscal year the
store opens) for the new stores opened in 1995 averaged approximately $60,000
per new store.

The Company believes that numerous acquisition opportunities are available
in its target markets on favorable terms due in part to (i) financially
weakened local retailers and regional chains which, due to their lack of
merchandise differentiation, have been adversely impacted by national
discounters, (ii) the limited exit strategies available to owners of regional
chains who wish to sell, (iii) the relatively limited availability of
favorable credit terms from vendors/factors and (iv) competitive pressures
created by cost effective retailers such as Stage Stores.

This strategy has been successfully demonstrated by the Company's
acquisition of 45 stores from Beall- Ladymon in 1994 and the subsequent
reopening of the stores in the first quarter of 1995 under the Stage name. In
1993, the year prior to their acquisition, the Beall-Ladymon stores generated
sales of $53.4 million, whereas the newly opened Stage stores in the same
locations generated sales for the twelve months ended May 4, 1996 of $93.1
million, an increase of 74%. Over the same periods, store contribution more
than doubled.

In June 1996, the Company acquired Uhlmans, a privately held apparel
retailer with 34 locations in Ohio, Indiana and Michigan, where the Company
previously had no stores. These stores are of similar size and merchandise
content to the Company's existing stores and are compatible with the Company's
retailing concept and growth strategy. Uhlmans generated 1995 sales of $59.7
million. The Company believes significant opportunities are available to
improve Uhlmans' financial results through the expansion of certain
merchandise categories, the Company's lower merchandising costs, increased
proprietary credit card-based sales, the implementation of the Company's
operating systems and the elimination of overlapping administrative costs. See
"Risk Factors--Future Growth and Recent Acquisitions."

Expansion to Micromarkets. The Company recently began targeting its small
market retailing concept toward communities with populations ranging from
4,000 to 12,000 with stores of less than 12,000 gross square feet. These
efforts are designed to build on the Company's favorable operating experience
in markets of this size. Stage Stores believes that micromarkets may offer a
significant additional avenue for potential growth, because it can
successfully apply its existing store model in those micromarkets due to its
ability to scale its store concept to the appropriate size, the generally
lower levels of competition and low labor and occupancy costs. The Company has
identified 1,200 such potential sites in and around the central United States
and contiguous states.

40
<PAGE>

Company Operations

Merchandise Purchasing and Allocation. The Company offers a select
assortment of quality, moderately priced soft goods, which are divided into
departments including misses, women's, men's, boys, juniors, children's,
intimate, petites, accessories, cosmetics, fragrances, gifts and footwear
departments. Merchandise mix may vary significantly from store to store to
accommodate differing demographic factors. The Company modifies its
assortments to focus on merchandise its buyers expect will have the broadest
appeal to its targeted customers based upon sales analyses and individual
store attributes.

The Company purchases merchandise from a vendor base of over 2,000
suppliers. The Company's leading vendors for 1995 were Levi Strauss, Liz
Claiborne, Haggar Apparel, Guess, Hanes, Nike, Chorus Line, Parson Place and
Reebok. The Company was one of Levi Strauss's top ten customers in 1995. No
one supplier accounted for more than 9% of the Company's 1995 purchases. The
Company is also a member of the cooperative buying service AMC, and as such is
entitled to make purchases of imported merchandise for its private label
program. The membership provides the Company with group purchasing
opportunities. Private label products result in better gross margins for the
Company and excellent value for the customer as a result of the lower cost of
such apparel as compared to branded items in the same categories. Private
label purchases were approximately 8%, 10% and 11% of total purchases in 1993,
1994 and 1995, respectively. The Company currently intends to keep private
label merchandise sales below 15% of total purchases in order to focus on
sales of branded merchandise.

Set forth below is certain information regarding the percentage of net
sales by major merchandise departments for the Company for 1994 and 1995.

Department 1994 1995
- ---------- ---- ----
Mens and Young Men ........ 20% 22%
Misses Sportswear ......... 15 15
Juniors ................... 15 13
Accessories and Gifts ..... 10 9
Children ................. 9 9
Footwear ................. 8 8
Intimate ................. 6 6
Special Sizes ............ 5 5
Cosmetics ................. 4 5
Misses Dresses ............ 4 4
Boys ...................... 3 3
Furs and Coats ............ 1 1
--- ---
Total .................... 100% 100%
=== ===

The Company's integrated merchandising systems are designed to provide its
buyers with the information and analytical support needed to maximize
efficiency, increase sales, reduce markdowns and increase inventory turnover
through better inventory management. These systems include, among others: (i)
an automated merchandise, financial planning and allocation system which
recognizes the attributes and current merchandise needs of each store; (ii) a
staple stock replenishment system to ensure the Company is in stock on basic
items such as hosiery, foundation garments, dress shirts and jeans; (iii)
markdown and merchandise transfer analysis; and (iv) an assortment planning
system which enables the Company to closely tailor the merchandise assortment
in each store based on local demographics and historical trends and
automatically allocate merchandise accordingly. In addition, electronic
point-of-sale ("POS") terminals at each store record and transmit to the
Company's corporate headquarters a real time, full accounting of each day's
sales by transaction and item. The Company utilizes its information systems to
monitor slow and fast moving merchandise for the purpose of enabling the
Company to transfer slower moving merchandise from one store to another store
where such merchandise is selling more rapidly. The Company believes that its
inventory transfer system improves in-stock positions, increases sales and
reduces markdowns, thereby increasing profit margins.

Credit Services. The Company offers its own private label credit card
program, which enhances the Company's relationship with core customers by
tailoring credit availability to individual customers and facilitating
frequent communication of promotional offering. The number of private label
credit accounts and dollar volume of charges reflects an important element in
the Company's marketing strategy. The Company believes that private label
credit card holders shop more regularly and purchase more merchandise than
customers who pay cash or use bankcards. In addition, the Company maintains a
database of all proprietary charge purchases of these customers.

41
<PAGE>

Management believes that this data base is a significant competitive advantage
over competitors who lack such programs, allowing the Company to target
promotional material, via direct mail, to its regular customers. At May 4,
1996, there were more than 1.5 million active accounts. Private label credit
card purchases generated approximately 55.6% of net sales in 1995. The Company
seeks to expand the volume of such credit card purchases through a marketing
strategy emphasizing (i) direct mail of promotional materials to existing
cardholders to communicate new merchandise offerings, (ii) promotion of
customer incentive programs and (iii) the issuance of new credit through the
opening of new accounts and extension of credit on existing accounts. It is
the Company's policy to expand the number and use of private label credit card
accounts on a controlled basis by utilizing computerized systems such as
point-scoring for approving new accounts and behavioral scoring for monitoring
account performance and approving additional purchases.

The Company administers its private label credit card program through a
dedicated in-house facility and staff located in Jacksonville, Texas. The
Company's internally developed, fully computerized and highly automated credit
systems analyze customer payment histories, automatically approve or reject
new sales at point of sale and enable account representatives to efficiently
manage delinquent account collections.

Management Information Systems. In addition to its merchandising systems
described above, the Company relies on proprietary management information
systems to maximize productivity and minimize costs in the other
labor-intensive areas of its business, including distribution, personnel
management, credit and accounting. In each store, the Company's POS system
uses bar code scanning and includes electronic credit and check authorization.
The Company has made substantial investments in its systems and utilizes a
central mainframe computer to coordinate store level information and to
support almost every aspect of the business. By linking the corporate
headquarters with each store, the Company's systems allow the merchandising
department to track sales of all items at all stores at any time and enable
immediate POS credit approval for the use of private label credit cards. These
systems have enabled the Company to better manage and plan its inventory while
reducing costs and have contributed to the Company's relatively high operating
margins.

Distribution. The Company's 450,000 square foot automated and centralized
distribution center in Jacksonville, Texas enables it to distribute most
merchandise within 48 hours of receipt and has the current capacity (with
minimal incremental investment) to support in excess of 800 stores. The
Company's centralized distribution system results in more efficient
distribution costs per unit, lower freight costs and reduced accounts payable
processing costs than certain of the Company's competitors. In 1995, the
Company entered into an arrangement with a major freight forwarder for the
delivery of merchandise from the distribution center to all of the Company's
stores on a daily basis. This arrangement is a more cost-efficient method of
distribution than the Company's previous method of multiple common carriers.
Distribution expenses, net of handling fees charged to vendors, were less than
0.5% of net sales in each of 1994 and 1995, which the Company believes is
below industry averages.

Competition

The retail apparel business is highly competitive. Retailers generally
compete on the basis of convenience of location, merchandise selection,
service and price. Although competition varies widely from market to market,
the Company faces substantial competition, particularly in metropolitan
markets, from national, regional and local department and specialty stores.
Some of the Company's competitors are considerably larger than the Company and
have substantially greater financial and other resources than the Company. The
Company believes that its distinctive retail concept, combined with its
emphasis on operating systems and technology, distinguishes it from department
store and specialty store competitors, especially in small markets. The
Company believes that its knowledge of small markets has enabled it to
establish a strong franchise in those markets.

Employees

During 1995, the Company employed an average of 9,946 employees, of which
1,069 were salaried and 8,877 were hourly. The central offices (which includes
corporate, credit and distribution center offices) averaged 296 salaried and
684 hourly employees during 1995. In its stores, the Company employed an
average of 773 salaried and 8,193 hourly employees during 1995. Such averages
will vary during the year as the Company traditionally hires additional
employees and increases the hours of part-time employees during peak seasonal
selling periods. At May 31, 1996, the Company employed 10,105 employees,
including 980 central employees and 921 employees acquired in connection with
the Uhlmans Acquisition. There are no collective bargaining agreements in
effect with respect to any of the Company's employees. The Company believes
that it has a good relationship with its employees.

42
<PAGE>

The Company has implemented performance monitoring systems designed to
assure achievement of selling and service standards at the store level. Most
of the Company's sales associates participate in incentive-based compensation
programs with objectives that are defined at the individual department and
store level. During 1995, 95% of all Company personnel participated in
incentive and recognition programs based on individual performance.

Properties

The Company's corporate headquarters is located in a 130,000 gross square
foot building in Houston, Texas. The Company leases the land and building at
its Houston facility. See "Certain Relationships and Related
Transactions--Transactions with Management." The Company owns its distribution
center and its credit department facility, both located in Jacksonville,
Texas. In connection with the Uhlmans Acquisition, the Company acquired 34
stores, all of which are leased.

The Company currently operates stores located in the following states and
expects to open stores in Arizona, South Dakota, Minnesota and Nebraska during
1996:

Number of Stores (1)
----------------------------------
Year End Year End June 25,
Location 1994 1995 1996
-------- ---------- ---------- ---------
Alabama ............................. 3 3 3
Arkansas ............................ -- 12 13
Colorado ............................ 11 12 11
Illinois ............................ -- 5 11
Indiana (2) ......................... -- -- 2
Iowa ................................ -- 3 4
Kansas ............................. -- 2 2
Louisiana .......................... -- 26 26
Michigan (2) ....................... -- -- 6
Mississippi ......................... -- 6 7
Missouri ............................ 1 4 4
New Mexico .......................... 8 8 9
Ohio (2) ............................ -- -- 26
Oklahoma ............................ 11 13 13
Texas ............................... 153 161 162
Wyoming ............................. 1 1 1
--- --- ---
Total ............................. 188 256 300
=== === ===

- -------------
(1) Excluding the stores included in the Store Closure Plan.
(2) Represents stores acquired in connection with the Uhlmans Acquisition.

Stores range in size from 4,000 to 46,000 selling square feet with the
majority between 12,000 and 30,000 selling square feet. In general, Bealls
stores are located in small markets primarily in Texas, Oklahoma and New
Mexico, Stage stores are located in small markets in states other than Texas,
Oklahoma and New Mexico and Palais Royal stores are located in metropolitan
Houston and suburban areas. These stores are primarily located in strip
shopping centers. All store locations are leased except for three Bealls
stores and two Stage stores that are owned. All leases provide for a base rent
amount plus contingent rentals, generally based upon a percentage of gross
sales. The recently acquired Uhlmans stores, the majority of which will be
operated by the Company as Stage stores, range in size between 4,100 and
32,900 selling square feet, with the majority between 12,000 and 20,000
selling square feet.

Litigation

From time to time the Company and its subsidiaries are involved in various
litigation matters arising in the ordinary course of its business. Management
believes that none of the matters in which the Company or its subsidiaries are
currently involved, either individually or in the aggregate, is material to
the financial position, results of operations or cash flows of the Company or
its subsidiaries.

43
<PAGE>

MANAGEMENT

Directors and Executive Officers

The directors and executive officers of the Company and their respective
ages and positions are as follows:

Name Age Position
- ----- --- --------

Bernard Fuchs(1) 69 Chairman and Director

Carl Tooker 48 Chief Executive Officer, President and
Director

Mark Shulman 47 Executive Vice President/Chief Merchandising
Officer

James Marcum 36 Executive Vice President/Chief Financial
Officer

Stephen Lovell 40 Executive Vice President/Director of Stores

Ron Lucas 49 Senior Vice President/Human Resources

Jerry Ivie 63 Senior Vice President, Secretary and
Treasurer

Joshua Bekenstein(1) 37 Director

Adam Kirsch(2) 34 Director

Peter Mulvihill(2) 37 Director

Lasker Meyer 70 Director

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

The Company expects to expand the size of the Board to add three
directorships in 1996, at least two of which will be filled with independent,
outside directors.

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee oversees actions taken by the
Company's independent auditors, recommends the engagement of auditors and
reviews the Company's internal accounting policies and practices. The
Compensation Committee approves the compensation of executives of the Company,
makes recommendations to the Board of Directors with respect to standards for
setting compensation levels and administers the Company's incentive plans.

Mr. Fuchs has been involved in retailing since 1944. He began his career
with Grayson Shops of California and subsequently served as Executive Vice
President and Chief Operating Officer of S. Klein in New York from 1960
through 1967. He came to Palais as Executive Vice President and Chief
Operating Officer in 1967 and became President and Chief Executive Officer in
1979. Mr. Fuchs was Chairman and Chief Executive Officer of the Company and
SRI from December 1988 until July 1994 when Mr. Tooker was appointed Chief
Executive Officer. Mr. Fuchs continues to serve as Chairman.

Mr. Tooker joined the Company as a Director, President and Chief Operating
Officer on July 1, 1993. On July 1, 1994, Mr. Tooker was appointed Chief
Executive Officer. Mr. Tooker has 24 years of experience in the retail
industry, 18 of which were spent in the May Co. where he served as Chairman
and Chief Operating Officer of Filene's of Boston from 1988 to 1990. In 1990,
Mr. Tooker joined Rich's, a division of Federated Department Stores, Inc., as
President and Chief Operating Officer, and in 1991 Mr. Tooker was promoted to
Chief Executive Officer of Rich's where he served until joining the Company
in 1993.

Mr. Shulman joined the Company in January 1994 as Executive Vice President
and Chief Merchandising Officer with 24 years of retailing experience. Prior
to joining the Company, Mr. Shulman held varying positions with
Bloomingdales, Rikes and I. Magnin, all of which are divisions of Federated
Department Stores, Inc. Mr. Shulman served as President and CEO of Ann Taylor
from 1985 to 1987, President and Chief Executive Officer

44
<PAGE>

of Henri Bendel (a division of the Limited) from 1987 to 1990, President and
Chief Operating Officer of Bonjour, Inc. from 1990 to 1992, and president of
Leslie Fay Dress Division from 1992 to 1994.

Mr. Marcum joined the Company in June 1995 as Executive Vice President and
Chief Financial Officer. Prior to joining the Company, Mr. Marcum held various
positions at the Melville Corporation where he was employed since 1983 and
where he served as Treasurer from 1986 to 1989, Vice President and Controller
of Marshalls, Inc., a division of the Melville Corporation, from 1989 to 1990
and from 1990 to 1995 as Senior Vice President and Chief Financial Officer of
Marshalls, Inc. From 1980 to 1983, Mr. Marcum was employed at Coopers and
Lybrand L.L.P.

Mr. Lovell joined the Company in June 1995 as Executive Vice President and
Director of Stores. Before joining the Company, Mr. Lovell served in various
positions at Hit or Miss, a division of TJX Companies, where he was employed
since 1980 and where he served since January 1987 as Senior Vice President and
Director of Stores.

Mr. Lucas joined the Company in July 1995 as Senior Vice President, Human
Resources. Between 1987 and 1995, Mr. Lucas served as Vice President, Human
Resources at two different divisions of Limited, Inc., the Limited Stores
Division and Lane Bryant. Previously, he spent seventeen years at the Venture
Stores Division of May Co. where from 1985 to 1987 he was Vice President,
Organization Development.

Mr. Ivie has served as Senior Vice President, Secretary and Treasurer of
the Company since December 1988. Between 1976 and 1990, he served in various
capacities with Palais. From 1959 to 1976, Mr. Ivie was employed in the
finance department of Burdine's, a division of Federated Department Stores,
Inc.

Mr. Bekenstein has been a director since December 1988 and was Vice
Chairman of the Board of Directors and Chief Financial Officer of the Company
from May 1992 until June 1995 when Mr. Marcum was appointed Chief Financial
Officer. In March 1996, Mr. Bekenstein resigned as Vice Chairman. Mr.
Bekenstein continues to serve as a director. Mr. Bekenstein has been a
Managing Director of Bain Capital, Inc. since May 1993 and a General Partner
of Bain Venture Capital since its inception in 1987. Mr. Bekenstein also
currently serves on the Board of Directors of Waters Corporation.

Mr. Kirsch has been a Managing Director of Bain Capital, Inc. since May
1993 and a General Partner of Bain Venture Capital since 1990 and was an
associate and principal of Bain from 1987 to 1990. Mr. Kirsch also currently
serves as a director of Brookstone, Inc., Duane Reade Holding Corp., Dade
Holdings Inc. and the Wesley-Jessen Corporation.

Mr. Mulvihill has been a director since December 1988. Mr. Mulvihill has
served as a Managing Director of Oak Hill Partners, Inc. (the management
company for Acadia) since 1993. From June 1987 to 1993, Mr. Mulvihill worked
for and was associated with Rosecliff, Inc. (the predecessor of Oak Hill).
Prior to joining Rosecliff, Mr. Mulvihill was an investment banker with
Drexel Burnham Lambert Incorporated in the corporate finance department from
1985 to 1987. Mr. Mulvihill also serves as a director of Harvest Foods, Inc.,
an Arkansas-based grocery chain.

Mr. Meyer served as Vice-Chairman and Chief Merchandising Officer of SRI
from May 1989 until he retired in December 1993. Mr. Meyer has been a
director since 1988. Mr. Meyer was at Foley's from 1959 until 1987, when he
retired from his position as Chairman and Chief Executive Officer.

At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or
removal. Currently, certain members of the Board of Directors are elected
pursuant to a stockholders agreement, which will be terminated upon completion
of the Offering. See "Certain Relationships and Related Transactions." There
are no family relationships between any of the Directors or executive officers
of the Company. Following the consummation of the Offering each director shall
serve until the following annual meeting when a successor is duly elected and
qualified or until his or her earlier death, resignation or removal.

45
<PAGE>

Executive Compensation

Summary Compensation Table

The following summarizes the principal components of compensation of the
Company's Chief Executive Officer and the four highest compensated executive
officers. The compensation set forth below fully reflects compensation for
work performed on behalf of the Company.

<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Other
Annual Securities All Other
Fiscal Salary Bonus Compensation Underlying Comp.
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($) (1)
- --------------------------- ------ ------ ----- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bernard Fuchs, 1995 437,500 28,870 189,375(2) -- 252
Chairman and 1994 450,000 65,265 35,625(3) -- 1,260
Director ............................... 1993 450,000 59,200 3,713,000(4) 197,000 1,260

Carl Tooker, 1995 538,416 43,305 67,600(5) -- 87
President, 1994 468,750 56,128 67,600(5) 50,000 174
Chief Executive Officer and Director... 1993 247,916 75,000 132,116(6) 200,000 --

Mark Shulman, 1995 302,082 75,000 9,600(7) 15,000 783
Executive Vice President and 1994 276,614 41,250 93,984(8) 100,000 160
Chief Merchandising Officer ........... 1993 -- -- -- -- --

James Marcum, 1995 183,333 55,000 184,722(9) 100,000 173
Executive Vice President and 1994 -- -- -- -- --
Chief Financial Officer ............... 1993 -- -- -- -- --

Stephen Lovell, 1995 183,333 55,000 173,535(10) 75,000 268
Executive Vice President, 1994 -- -- -- -- --
Director of Stores .................... 1993 -- -- -- -- --
</TABLE>

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

(1) Amounts shown for 1995 reflect premiums paid for life insurance coverage.

(2) Amount shown reflects a distribution related to options vested of $35,625
and the value realized upon the exercise of options for Common Stock of
$153,750. Value realized is based upon the fair market value of the stock
at the exercise date minus the exercise price.

(3) Amount shown reflects a distribution related to options vested.

(4) Amount shown reflects the value realized upon the exercise of options for
Common Stock. Value realized is based upon the fair market value of the
stock at the exercise date minus the exercise price.

(5) Amount shown reflects a distribution related to options vested of $38,000
and housing and automobile allowances of $29,600 paid to Mr.
Tooker during 1994 and 1995.

(6) Amount shown reflects moving expenses of $114,861 and housing and
automobile allowances of $17,255 paid to Mr. Tooker during 1993.

(7) Amount shown reflects housing and automobile allowances paid to Mr.
Shulman during 1995.

(8) Amount shown reflects moving expenses of $385,184 and housing and
automobile allowances of $8,800 paid to Mr. Shulman during 1994.

(9) Amount shown reflects moving expenses paid to Mr. Marcum during 1995.

(10) Amount shown reflects moving expenses of $167,935 and housing and
automobile allowances of $5,600 paid to Mr. Lovell during 1995.

46
<PAGE>

Option/SAR Grants in Last Fiscal Year

The following discloses options granted during 1995 for the executives
named in the compensation table above.

Individual Grants Potential Realizable
----------------------------------------------- Value at Assumed Annual
Number of % of Total Rates of Stock Price Appreciation
Securities Options/SARs for Option Term
Underlying Granted to -----------------------------------
Options/SARs Employees in Exercise of Expiration 5% Annual 10% Annual
Name Granted(#)(1) Fiscal Year(%) Base Price($) Date Growth Rate($) Growth Rate($)
- ---------------- -------------- -------------- ------------ ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Shulman..... 15,000 3.5 2.88 6/10/05 27,000 68,850
James Marcum..... 100,000 23.2 2.88 6/01/05 180,000 459,000
Stephen Lovell... 75,000 17.4 2.88 6/01/05 135,000 344,250

</TABLE>

- -------------
(1) All of such options were granted under the 1993 Option Plan (as defined).
The options granted under such plan are subject to vesting and repurchase
provisions upon termination of employment.

Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year End Option/SAR Values

The following summarizes exercises of stock options (granted in prior
years) during 1995 by the executives named in the compensation table above in
the past year, as well as the number and value of all unexercised options held
by the named officers at the end of 1995.

<TABLE>
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options/SARs In-the-Money
at Options/SARs at
FY-End (#) FY-End ($)(2)
------------ -----------------
Shares Value
Acquired on Realized Exercisable/ Exercisable/
Name Exercise(#) ($)(1) Unexercisable Unexercisable
- --------- ----------- ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Bernard Fuchs...... 84,400 153,750 46,900/65,700 210,540/264,120
Carl Tooker ....... -- -- 90,000/160,000 420,000/702,000
Mark Shulman ...... -- -- 40,000/75,000 114,000/202,800
James Marcum ...... -- -- -/100,000 -/212,000
Stephen Lovell .... -- -- -/75,000 -/159,000
</TABLE>

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

(1) Value is based upon the fair market value of the stock at the applicable
date minus the exercise price (the "Fair Market Value"). Fair Market Value
has been determined in good faith by the Board of Directors based upon
historical and projected financial performance.

(2) Value is based upon the Fair Market Value of the stock as of February 3,
1996 minus the exercise price.

Compensation of Directors

During 1995, Mr. Meyer received cash compensation of $25,000 for services
rendered as a director. The Company expects that its independent outside
directors will be paid in a manner and at a level consistent with industry
practice.

Compensation Committee Interlocks and Insider Participation

The current members of the Compensation Committee are Mr. Fuchs and Mr.
Bekenstein, who served in such capacities during the last fiscal year. Mr.
Fuchs abstains from voting on matters relating directly to his compensation
as an executive officer. See "Certain Relationships and Related Transactions"
for a description of certain transactions between Mr. Fuchs and the Company
and Bain and the Company.

47
<PAGE>

Management And Employment Agreements

Fuchs Management Agreement

The Company, Bain and certain of its affiliates, Citicorp and Bernard Fuchs
entered into a management agreement (the "Fuchs Management Agreement"), dated
as of May 26, 1989 and amended effective February 1, 1993, pursuant to which
(i) the Company employed Mr. Fuchs as an executive officer and (ii) Mr. Fuchs
purchased from Bain and certain of its affiliates, and an affiliate of
Citicorp, in the aggregate, 293,750 shares of the Company's common stock for
$0.09 per share and 250 shares of the Company's senior preferred stock for
$1,000 per share (subsequently redeemed in connection with the Refinancing).
The Fuchs Management Agreement provides that transfers of common stock by Mr.
Fuchs are subject to certain rights to first offer and refusal of the Company
and the other parties to the Fuchs Management Agreement.

Pursuant to the Fuchs Management Agreement, Mr. Fuchs served as Chairman of
the Board and Chief Executive Officer until July 1, 1994 when Mr. Tooker was
appointed Chief Executive Officer. Mr. Fuchs continues to serve as Chairman.
The Fuchs Management Agreement, as amended, provides for a base salary plus an
annual incentive bonus based on an increase in the Company's pretax income
(excluding any increase or decrease in pretax income attributable to any
financial restructuring) as compared to the fiscal year in which the Company
recorded its highest pretax income prior to the fiscal year for which the
bonus is being paid. The incentive bonus is applicable to fiscal years 1993
through 1998. Mr. Fuchs may also be awarded discretionary bonuses by the
Company's Compensation Committee elected by the Board of Directors. The Fuchs
Management Agreement generally restricts Mr. Fuchs from competing with the
Company or its subsidiaries for a period of 24 months after his termination,
except for termination without cause. Pursuant to the Fuchs Management
Agreement, Mr. Fuchs' base salary for 1996, 1997 and 1998 shall be $300,000,
$200,000 and $100,000, respectively.

In connection with the February 1993 amendment to the Fuchs Management
Agreement, the Company also entered into a stock option agreement with Mr.
Fuchs providing the grant of options to acquire up to 150,000 shares of SRI's
common stock at an original purchase price of $5.00 per share. Such options
are subject to vesting and repurchase restrictions. In connection with the
formation of the Company, such options were converted into options to acquire
shares of Common Stock at a price of $0.10 per share and the right to receive
payments equaling $0.95 per option share ratably over the vesting schedule.

Tooker Employment Agreement

In June 1996, the Company and Carl Tooker entered into an employment
agreement (the "Tooker Employment Agreement") providing for Mr. Tooker's
employment as President and Chief Executive Officer. The Tooker Employment
Agreement provides for an initial base salary of $600,000 plus an annual
incentive bonus as agreed to with the Compensation Committee. The Tooker
Employment Agreement also provides for annual performance and salary reviews,
and for participation in all other bonus and benefit plans available to
executive officers of the Company.

If the Company terminates Mr. Tooker other than for good cause, (as defined
in the Tooker Employment Agreement) or if Mr. Tooker voluntarily terminates
his employment at a time when he is not a member of the Board, Mr. Tooker is
then entitled to one year's base salary, any accrued or unpaid bonus, salary
and deferred compensation, any expense allowances and any earned but unpaid
benefits under the Company's benefit plans. The Tooker Employment Agreement
also provides that, following a change in control (as defined in the Tooker
Employment Agreement) if Mr. Tooker is terminated other than for good cause or
Mr. Tooker resigns other than for good reason (as defined in the Tooker
Employment Agreement), Mr. Tooker is entitled to three year's base salary (as
opposed to eighteen months) plus the amounts referred to above. In the event
of a change of control of the Company, in which the Company does not survive,
all unvested options for the purchase of Common Stock held by Mr. Tooker vest
immediately. The Tooker Employment Agreement contains certain non-compete and
confidentiality provisions.

Other Employment Agreements

In June 1996, the Company entered into employment agreements with Messrs.
Shulman, Marcum, Lovell and Lucas which provide for their initial base
salaries as well as annual incentive bonuses as agreed to with the
Compensation Committee. The employment agreements also provide for annual
performance reviews, salary increases at the discretion of the Compensation
Committee, and participation in all other bonus and benefit plans

48
<PAGE>

available to executive officers of the Company. The initial base salaries
provided for in the individual employment agreements are as follows:

<TABLE>
<CAPTION>
Initial Base
Executive Position Salary
------------- ----------------------------------- ------------
<S> <C> <C>
Mark Shulman Executive Vice President and $350,000
Chief Merchandising Officer
James Marcum Executive Vice President and $300,000
Chief Financial Officer
Stephen Executive Vice President and $300,000
Lovell Director of Stores
Ron Lucas Senior Vice President, Human Resources $190,000
</TABLE>

If the Company terminates any of the aforementioned individuals, other than
for good cause (as defined in the respective employment agreements), then the
terminated individual is entitled to one years's base salary, any accrued or
unpaid bonus, salary and deferred compensation, any expense allowances, and
any earned but unpaid benefits under the Company's benefit plans. The
employment agreements also provide that, following a change of control (as
defined in the respective employment agreements), the respective individual is
entitled to two years' base salary (as opposed to one) plus the amounts
referred to above. In the event of a change of control of the Company in which
the Company does not survive, all uninvested options for the purchase of
Common Stock held by the aforementioned individuals vest immediately. The
employment agreements contain certain non-compete and confidentiality
provisions.

1993 Stock Option Plan

In 1993, the Company adopted the Third Amended and Restated Stock Option
Plan, a successor plan to prior SRI plans (the "1993 Stock Option Plan")
designed to provide incentives to present and future executive, managerial,
marketing, technical, other key employees, and consultants and advisors of the
Company and its subsidiaries as selected in the sole discretion of the Board
of Directors. The 1993 Stock Option Plan provided for aggregate option grants
of up to 2,000,000 shares. As of June 25, 1996, options to purchase an
aggregate of 1,448,237 shares of Common Stock at prices from $0.10 to $10.00
are currently outstanding under the 1993 Stock Option Plan. In connection with
the Offering, the Compensation Committee intends to grant options to purchase
[ ] shares of Common Stock under this plan to members of executive management
and other key executives at a price equal to or greater than the initial
public offering price. No additional grants shall be made under the 1993 Stock
Option Plan after the consummation of the Offering.

1996 Equity Incentive Plan

In connection with the Offering, the Company has adopted the 1996 Equity
Incentive Plan (the "Incentive Plan") designed to update and replace the 1993
Stock Option Plan.

The Incentive Plan provides for the granting to employees and other key
individuals who perform services for the Company and its subsidiaries
("Participants") of the following types of incentive awards: stock options,
stock appreciation rights ("SARs"), restricted stock, performance units,
performance grants and other types of awards that the Compensation Committee
of the Board of Directors (the "Committee") deems to be consistent with the
purposes of the Incentive Plan. An aggregate of 1,500,000 shares of Common
Stock have been reserved for issuance under the Incentive Plan; however, no
Participant shall be entitled to receive grants of Common Stock, stock options
or SARs with respect to Common Stock, in any calendar year in excess of
400,000 shares in the aggregate. The Incentive Plan affords the Company
latitude in tailoring incentive compensation for the retention of key
personnel, to support corporate and business objectives, and to anticipate and
respond to a changing business environment and competitive compensation
practices.

The Committee will have exclusive discretion to select the Participants and
to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all
other determinations which it deems necessary or desirable in the
interpretation and administration of the Incentive Plan. The Incentive Plan is
scheduled to terminate ten years from the date that the Incentive Plan was
initially approved and adopted by the stockholders of the Company, unless
extended for up to an additional five years by action of the Board of
Directors. With limited exceptions, including termination of employment as a
result of death, disability or retirement, or except as otherwise determined
by the Committee, rights to these forms of contingent compensation are
forfeited if a recipient's employment or performance of services terminates
within

49
<PAGE>

a specified period following the award. Generally, a Participant's rights and
interest under the Incentive Plan will not be transferable except by will or
by the laws of descent and distribution.

Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock
at a price fixed by the Committee. The option price may be less than, equal to
or greater than the fair market value of the underlying shares of Common
Stock, but in no event less than the fair market value on the date of grant.
Options generally will expire not later than ten years after the date on which
they are granted. Options will become exercisable at such times and in such
installments as the Committee shall determine. Payment of the option price
must be made in full at the time of exercise in such form (including, but not
limited to, cash or Common Stock of the Company) as the Committee may
determine.

A SAR may be granted alone, or in tandem with another option or award, or a
holder of an option or other award may be granted a related SAR, either at the
time of grant or by amendment thereafter. In the event that an SAR is granted
in tandem with another award, the holder of the SAR must surrender the SAR and
surrender, unexercised, any related option or other award, and the holder will
receive in exchange, at the election of the Committee, cash or Common Stock or
other consideration, or any combination thereof, equal in value to the
difference between the exercise price or option price per share and the fair
market value per share on the last business day preceding the date of
exercise, times the number of shares subject to the SAR or option or other
award, or portion thereof, which is exercised.

A restricted stock award is an award of a given number of shares of Common
Stock which are subject to a restriction against transfer and to a risk of
forfeiture during a period set by the Committee. During the restriction
period, the Participant generally has the right to vote and receive dividends
on the shares. Dividends received while under restriction are treated as
compensation.

Performance grants are awards whose final value, if any, is determined by
the degree to which specified performance objectives have been achieved during
an award period set by the Committee, subject to such adjustments as the
Committee may approve based on relevant factors. Performance objectives are
based on such measures of performance, including, without limitation, measures
of industry, Company, unit or Participant performance, or any combination of
the foregoing, as the Committee may determine. The Committee may make such
adjustments in the computation of any performance measure as it deems
appropriate. A target value of an award is established (and may be amended
thereafter) by the Committee and may be a fixed dollar amount, an amount that
varies from time to time based on the value of a share of Common Stock, or an
amount that is determinable from other criteria specified by the Committee.
Payment of the final value of an award is made as promptly as practicable
after the end of the award period or at such other time or times as the
Committee may determine.

Upon the liquidation or dissolution of the Company all outstanding awards
under the Incentive Plan shall terminate immediately prior to the consummation
of such liquidation or dissolution, unless otherwise provided by the
Committee. In the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger of the Company with or into another
corporation, all restrictions on any outstanding awards may lapse and
Participants may be entitled to the full benefit of such awards, as determined
by the Committee, immediately prior to the closing date of such sale or
merger.

Certain Federal Tax Consequences under the Incentive Plan

The following discussion addresses certain federal income tax consequences
under current law to recipients of awards made under the Incentive Plan. The
following discussion is intended only as a general summary of the federal
income tax consequences arising under the Incentive Plan based upon the
Internal Revenue Code (the "Code") as currently in effect. Because federal
income tax consequences will vary as a result of individual circumstances,
each Participant should consult his tax advisor with respect to the tax
consequences of such participation. Moreover, the following summary relates
only to a Participants' federal income tax treatment, and the state, local and
foreign tax consequences may be substantially different.

A Participant to whom a nonqualified stock option is granted will not
recognize any income at the time of the grant. When a Participant exercises a
nonqualified stock option, he generally will recognize ordinary compensation
income equal to the difference, if any, between the fair market value of the
Common Stock he receives at such time and the option's exercise price. The
Participant's tax basis in such shares will be equal to the exercise price
paid plus the amount includable in his gross income as compensation, and his
holding period for such shares will begin on the day on which he recognizes
taxable income in respect of such shares.

50
<PAGE>

A Participant to whom an incentive stock option is granted will not
recognize any ordinary income at the time of grant or at the time of exercise.
However, upon the exercise of an incentive stock option, the Participant
generally will be required to include the excess of fair market value of the
Common Stock over the option's exercise price in his alternative minimum
taxable income and, as a result, he may be subject to an alternative minimum
tax ("AMT"). In order to obtain incentive stock option treatment for federal
income tax purposes, a Participant (i) must be an employee of the Company or a
subsidiary continuously from the date of grant until any termination of
employment and (ii) in the event of such a termination, must exercise an
incentive stock option within three months after such termination, except if
disabled, in which case exercise may occur within one year from the date of
termination of employment. If a Participant holds Common Stock received upon
the exercise of an incentive stock option for more than one year after
exercise and more than two years after the option was granted (the "Statutory
Holding Periods"), then upon a sale of such Common Stock he will recognize
long-term capital gain or loss equal to the difference, if any, between the
sale price of such shares and the option's exercise price. If the Participant
has not held such shares for the Statutory Holding Periods, when he sells such
share (a "disqualifying disposition") he will recognize ordinary compensation
income equal to the lesser of (i) the excess, if any, of the fair market value
of such shares on the date of exercise over the exercise price or (ii) the
excess, if any, of the sale price over the exercise price. Any additional gain
or any loss on such sale will constitute capital gain or loss, short- or
long-term depending upon whether the Participant has held the Common Stock for
more than one year after the exercise date. The tax basis of such shares to
the Participant, for purposes of computing such other gain or loss, will be
equal to the exercise price paid plus the amount includable in his gross
income as compensation, if any.

A participant will not recognize any taxable income as a result of the
inclusion of SARs in a nonqualified stock option or an incentive stock option.
At the time of exercise, a Participant generally will recognize ordinary
compensation income in an amount equal to the cash and the fair market value
of the Common Stock he receives to satisfy his SARs. The Participant's tax
basis in any such shares received pursuant to a SAR will be equal to the
amount includable in his gross income as compensation in respect of such
shares, and the Participant's holding period therefor will begin on the day on
which he recognizes taxable income in respect of such shares.

With respect to restricted stock awards, unless he files a timely election
with the Internal Revenue Service under Section 83(b) of the Code (a "Section
83(b) election"), a Participant who receives Common Stock pursuant to a
restricted stock award will not recognize any taxable income upon the receipt
of such award, but will recognize taxable compensation income at the time his
interest in such shares is no longer subject to the repurchase option imposed
by the Plan in an amount equal to the fair market value of such shares at such
time. Alternatively, by filing a Section 83(b) election within 30 days after
the shares are granted, the Participant may elect to recognize ordinary income
equal to the fair market value of the shares on the grant date. In either
event, the Participant's tax basis in such shares will be equal to the amount
includable in his gross income as compensation, and his holding period for
such shares will begin on the date his compensation income is determined. If a
Participant does not make a Section 83(b) election, dividends paid on
restricted stock awards will be includable in his income as compensation when
received.

A Participant to whom a performance grant award is made will not recognize
taxable income at the time such award is made. Such Participant generally will
recognize taxable income, however, at the time cash, Common Stock or other
Company securities or property are paid to him pursuant to such award in an
amount equal to the amount of such cash and the fair market value at such time
of such shares, securities or property. The tax basis of any such shares,
securities or property received by a Participant pursuant to a performance
grant award will be equal to the amount includable in his gross income as
compensation in respect of such shares, securities or property, and the
holding period therefor will begin on the day on which he recognizes taxable
income in respect of such shares, securities or property. Any income
equivalents paid to a Participant with respect to his performance grant award
should generally be regarded as compensation.

If a Participant who receives Common Stock under the Incentive Plan
(whether pursuant to the exercise of an option, as a restricted stock award,
or as a performance grant award) is subject to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (such recipient, an
"Insider"), the tax consequences may be different from those described above.
Generally, an Insider will not recognize income (or, in the case of the
exercise of an incentive stock option, alternative minimum taxable income) on
receipt of Common Stock until he is no longer subject to liability with
respect to the disposition of such Common Stock. However, by filing a Section
83(b) election with the Internal Revenue Service no later than 30 days after
the date of transfer of property (e.g.,

51
<PAGE>

after exercise of a nonqualified stock option that was granted within six
months of such exercise), an Insider may elect to be taxed based upon the fair
market value of the Common Stock at the time of such transfer.

Subject to certain limitations described in the next paragraph, the company
for which a Participant is performing services generally will be allowed to
deduct amounts that are includable in the Participant's income as ordinary
compensation income at the time such amounts are so includable, provided that
such amounts qualify as reasonable compensation for personal services actually
rendered.

With limited exceptions, the Company may not deduct certain compensation
paid to its chief executive officer or any of its four other highest paid
executives to the extent such compensation exceeds $1 million in any taxable
year. Depending on the circumstances, some or all of the compensation paid to
such an executive under the Incentive Plan may be nondeductible.

Company Retirement Plans

Retirement Plan. The Specialty Retailers, Inc. Restated Retirement Plan
(the "Retirement Plan") is a qualified defined benefit plan. Benefits under
the Retirement Plan are administered through a trust arrangement providing
benefits in the form of monthly payments or a single lump sum payment. The
Retirement Plan covers substantially all employees who have completed one year
of service with 1,000 hours of service. The Retirement Plan is administered by
the retirement plan committee (the "Retirement Committee"), and its three to
five members are appointed by the Company. All determinations of the
Retirement Committee are made in accordance with the provisions of the
Retirement Plan in a uniform and nondiscriminatory manner.

Generally, a participant is eligible for a benefit on his/her normal
retirement date, which is the later of age 65 or the fifth anniversary of the
date of hire. A participant may elect an early retirement benefit if he/she is
at least 55 years old, has 10 Years of Service (as defined below) and retires
from active employment with the Company. Early retirement benefits are reduced
according to a formula established in the Retirement Plan based upon each full
month that the participant's age is less than 65 on the date the payments
commence. If a participant who is vested terminates employment, he/she is
entitled to a deferred benefit payable at his/her normal retirement date or an
earlier date, if requested, but not before age 55.

The amount of a participant's retirement benefit is based on each Year of
Credited Service (as defined below) and on his/her earnings for that year. The
individual yearly benefits are then totaled to determine the annual benefit at
age 65. A participant's accrued benefits in the superseded plan are determined
in accordance with the terms of those plans except as modified by the terms of
the Retirement Plan. The annual amount of the participant's normal retirement
benefit is derived, subject to certain limitations, by adding (i) 1% of
earnings up to $30,600 plus 1-1/2% of the excess of such earnings over $30,600
for each Year of Credited Service earned on or after July 1, 1989 through
December 31, 1991, (ii) 1% of earnings up to $31,800 plus 1-1/2% of the excess
of such earnings over $31,800 for each Year of Credited Service earned after
December 31, 1991, (iii) 1% of earnings up to $42,500 plus 1-1/2% of the
excess of such earnings over $42,500 for each Year of Credited Service earned
after December 31, 1994 and (iv) accrued benefits determined in accordance
with the terms of the Retirement Plan under any superseded plan. The normal
retirement benefit formula produces an annual benefit which is paid to the
participant in equal monthly installments. The standard form of payment for a
single participant is a monthly benefit payable for the participant's life
only. The standard form of payment for a married participant is a 50% joint
and survivor benefit, which provides a reduced monthly benefit to the
participant during his/her lifetime, and 50% of that benefit to the
participant's spouse for his/her lifetime in the event of the participant's
death. Other forms of the payment are also provided including lump sum
payouts, but they require participant election. In addition, the Retirement
Committee may elect to pay the benefit equivalent of a benefit payable at
normal retirement date in the form of a lump sum payment, if the lump sum
payment does not exceed $3,500.

Any participant who is credited with 1,000 or more hours of service in a
calendar year receives a "Year of Service", while any participant who is
credited with 1,284 or more hours of service in a calendar year receives a
"Year of Credited Service". Years of Service determine a participant's
eligibility for benefits under the Retirement Plan, and the percentage vested
in those benefits. After five Years of Service, a participant is 100% vested.
Participants in any superseded plan earn Years of Service and Years of
Credited Service pursuant to sightly different criteria for plan years
beginning prior to January 1, 1990.

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<PAGE>

The Retirement Plan is funded entirely by Company contributions which are
held by a trustee for the exclusive benefit of the participants. The Company
voluntarily agreed to contribute the amounts necessary to provide the assets
required to meet the future benefits payable to Retirement Plan participants.
Under the Retirement Plan, contributions are not specifically allocated to
individual participants. Although the Company intends to continue the
Retirement Plan indefinitely, it can terminate the plan at any time, upon
which all participants will become 100% vested in any benefit accrued to the
extent funds are available in trust. In this event, assets will be allocated
to benefit categories in the order specified in the Retirement Plan.

The Specialty Retailers, Inc. Benefit Equalization Plan (the "Equalization
Plan") is a nonqualified defined benefit plan which is intended to replace the
benefits that cannot be provided under the terms of the Retirement Plan on
account of certain limitations imposed under the Internal Revenue Code (for
example, the Retirement Plan cannot consider compensation for a participant
which is in excess of $150,000 when determining the participant's benefit).
The Equalization Plan is unfunded. However, upon a change of control as
defined in the Equalization Plan, the Company is required to deposit into a
rabbi trust sufficient funds to cover all obligations then accrued under the
Equalization Plan.

Supplemental Employee Retirement Plan. In 1996, the Company adopted the
Specialty Retailers, Inc. Supplemental Employee Retirement Plan (the "SERP").
The SERP provides for certain retirement benefits for the Company's senior
management upon retirement at or after age 65 with at least 15 years of
credited service with the Company. The SERP provides for annual retirement
compensation of 50% of the retiree's average annual base salary for the three
years preceding retirement, less amounts received under the Company's defined
benefit retirement plans. Participants in the SERP may elect to receive early
retirement benefits at or after age 55 with at least 15 years of credited
service. Early retirement benefits are reduced by 4% for each year an
executive retires before age 65. SERP Benefits are vested after 15 years of
service. Upon a change of control as defined in the SERP, the Company is
required to deposit into a rabbi trust sufficient funds to cover all
obligations then accrued under the SERP. (If a participant's employment is
terminated by the Company after a change in control without cause as defined
in the SERP, the participant will be fully vested in the benefit that would
have been payable at age 55. This amount will be paid to the participant in a
lump sum upon termination of employment.)

As of February 3, 1996, the estimated annual benefits payable upon
retirement under the Retirement Plan, Equalization Plan and SERP at normal
retirement age, subject to certain adjustments permitted by applicable federal
law, for the individuals named in the cash compensation table above would be
as follows (assuming no increase in compensation): Mr. Fuchs--$0; Mr.
Tooker--$300,000; Mr. Shulman--$175,000; Mr. Marcum--$150,000; and Mr.
Lovell--$150,000. No amounts were paid or distributed during 1995 pursuant to
the Retirement Plan to any of the individuals named or included in the group
in the cash compensation table above.

Company Deferred Compensation Plan

On February 26, 1996 and effective April 1, 1996, the Company adopted the
Specialty Retailers, Inc. Deferred Compensation Plan (the "Deferred
Compensation Plan") that provides officers of the Company with the opportunity
to participate in an unfunded, deferred compensation program that is not
qualified under the Internal Revenue Code of 1986, as amended (the "Code").
Generally, the Code and the Employee Retirement Income Security Act of 1974,
as amended, restrict contributions to a 401(k) plan by highly compensated
employees. The Deferred Compensation Plan is intended to allow officers to
defer income at the same rates as those employees not restricted by such
regulations. Under the Deferred Compensation Plan, participants may defer up
to 15% of their salary and bonus (not otherwise covered by the Company's
401(k) plan) and earn a rate of return based on select indices chosen by each
participant. The Company may, but is not obligated to, establish a grantor
trust for the purposes of holding assets to provide benefits to the
participants. The Company will match 25% of the first 6% of each participant's
contributions to the Deferred Compensation Plan not otherwise covered by the
Company's 401(k) plan. Company contributions vest over five years of service.

53
<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Transactions with Management

The Company's corporate headquarters in Houston and the land and buildings
upon which six Palais stores are located are leased from PR Investments, a
partnership in which Mr. Fuchs, his wife and certain former owners of Palais
are general partners. The lease relating to the Company's corporate
headquarters is for a term of 50 years expiring in 2032 and includes an
established minimum annual rent adjusted periodically for changes in the
Consumer Price Index ("CPI"). Three of the Palais store leases with PR
Investments are for terms of 20 years expiring in the years 1999, 1999 and
2000, respectively. The remaining three Palais store leases with PR
Investments are for 25-year terms expiring in the years 2005, 2010 and 2010,
respectively. All of the Palais store leases with PR Investments provide
Palais with the option to extend the term of the lease for two consecutive
five-year terms. One of the Palais leases with PR Investments provides Palais
with the option to extend the term of the lease for an additional 20 years. In
addition to an established minimum annual rent adjusted annually for changes
in the CPI, the above described store leases include additional rent
calculated at 4% of gross sales exceeding established levels per store. During
1993, 1994 and 1995, the Company paid PR Investments an aggregate of $1.9
million, $2.0 million and $2.1 million, respectively, under the leases
described above.

During 1993, the Company entered into an employment agreement with its
President and Chief Executive Officer, Mr. Tooker. As part of this agreement,
the Company loaned Mr. Tooker $300,000. The loan is due October 2, 1997,
subject to extension, and bears a market rate of interest. In addition, on May
1, 1996, the Company loaned Mr. Tooker $140,000 which is repayable on or
before April 15, 1997, subject to extension, and which bears a market rate of
interest.

In connection with his relocation to Houston, the Company loaned Mr. Lovell
$150,000. The loan is due June 1, 2000, subject to extension, and bears a
market rate of interest.

Professional Services Agreement

Pursuant to a professional service agreement (the "Professional Services
Agreement"), Bain received fees from the Company for professional services
rendered and expense reimbursements in the aggregate amount of $1.5 million in
1993, $0.6 million in 1994, $0.8 million in 1995 and $0.5 million to date in
1996. Upon consummation of the Offering, Bain will receive a fee of $2.0
million to terminate this agreement.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The Company's authorized equity consists of Common Stock and Class B Common
Stock. Except as otherwise described herein, all shares of Common Stock and
Class B Common Stock are identical and entitle the holders thereof to the same
rights and privileges (except with respect to voting privileges). Holders of
Class B Common Stock may elect at any time to convert any or all of such
shares into Common Stock, on a share-for-share basis, to the extent the holder
thereof is not prohibited from owning additional voting securities by virtue
of regulatory restrictions. The holders of Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. Except as
required by law, holders of Class B Common Stock do not have the right to vote
on any matters to be voted upon by the stockholders. As of June 25, 1996,
1,468,750 shares of Class B Common Stock were outstanding, 1,320,198 of which
were owned by Court Square. Except for the column relating to voting power,
the numbers and percentages of shares of Common Stock held by holders of the
Class B Common Stock are calculated assuming all Class B Common Stock is
converted.

The table below sets forth certain information regarding ownership of
Common Stock as of June 25, 1996 assuming exercise of options exercisable
within sixty days of such date by (i) each person or entity who owns of record
or beneficially 5% or more of the Common Stock, (ii) each director and named
executive officer and (iii) all executive officers and directors as a group.

<TABLE>
<CAPTION>
Percentage
of Percentage
Number of Voting of
Shares of Power Total Shares Percentage of
Common Prior to Owned Prior Total Shares
Stock the to the Owned After
Name Owned Offering Offering the Offering(1)
---- ---------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Bain Capital Funds (2) ........... 5,291,911 44.7% 39.7%
Acadia (3) ....................... 3,515,466 29.7 26.4
Court Square (4) ................. 1,710,865 3.3 12.8
Bernard Fuchs (5) ................ 1,126,950 9.5 8.5
Joshua Bekenstein (6) ............ 5,363,142 45.3 40.3
Adam Kirsch (6) ................. 5,340,645 45.1 40.1
Carl Tooker (7) ................. 149,800 1.3 1.1
Mark Shulman (8) ................. 43,000 * *
Jerry Ivie (9) ................... 34,122 * *
Lasker Meyer(10) ................. 13,513 * *
Stephen Lovell(11) ............... 15,000 * *
James Marcum(12) ................. 20,000 * *
Peter Mulvihill(13) .............. -- -- --
All executive officers and
directors as a group (10 Persons)
(14) ......................... 6,814,260 57.5% 51.2%
</TABLE>

- -------------
* Less than 1%.

(1) Percentages are calculated without giving effect to the Underwriters'
over-allotment option. Certain of the Company's stockholders have granted
an option to the Underwriters, exercisable during the 30-day period after
the date of this Prospectus, to purchase up to an aggregate of shares of
Common Stock, solely to cover-allotments, if any, as follows.
See "Overallotment Option."

(2) Includes 4,171,064 shares of Common Stock held by Tyler Capital Fund,
L.P.; 854,632 shares of Common Stock held by Tyler Massachusetts, L.P.;
249,997 shares of Common Stock held by Tyler International, ; 15,906
shares of Common Stock held by BCIP Associates ("BCIP Associates"); and
312 shares of Common Stock held by BCIP Trust Associates, L.P. ("BCIP
Trust" and, collectively with BCIP Associates and the Tyler entities, the
"Bain Capital Funds"). The address of the Bain Capital Funds is c/o Bain
Venture Capital, Two Copley Place, Boston, Massachusetts 02116.

(3) Amounts shown represent shares held by the nominee of Acadia and shares
held by FWHY-Coinvestment I Partner L.P. ("FCP") and Oak Hill, both
affiliates of Acadia. The address of Acadia and FCP is 201 Main Street,
Fort Worth, Texas 76102. The address of Oak Hill is 65 East 55th Street,
New York, New York 10022.

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<PAGE>

(4) Court Square is a subsidiary of Citicorp, a Delaware corporation. Amount
and percentage shown as owned include 1,320,198 shares of non-voting
Class B Common Stock owned by Court Square. Each share of non- voting
Class B Common Stock is convertible, subject to certain restrictions,
into one share of Common Stock. The address of Court Square is 399 Park
Avenue, 6th Floor, New York, New York 10043.

(5) Amount shown for Mr. Fuchs includes (i) 470,000 shares held by The Fuchs
Family Limited Partnership for which Mr. Fuchs may be deemed to possess
beneficial ownership and (ii) 9,400 options which are exercisable within
60 days.

(6) Amounts shown include shares beneficially owned by the Bain Capital
Funds. Mr. Bekenstein and Mr. Kirsch may be deemed to share voting and
dispositive power as to all shares owned by the Bain Capital Funds.

(7) Includes 50,000 shares of Common Stock that may be acquired through
options exercisable within 60 days.

(8) Includes 43,000 shares of Common Stock that may be acquired through
options exercisable within 60 days.

(9) Includes 352 shares of Common Stock that may be acquired through options
exercisable within 60 days.

(10) Includes 1,763 shares of Common Stock that may be acquired through
options exercisable within 60 days.

(11) Includes 15,000 shares of Common Stock that may be acquired through
options exercisable within 60 days.

(12) Includes 20,000 shares of Common Stock that may be acquired through
options exercisable within 60 days.

(13) Mr. Mulvihill is a director and a managing director of the investment
adviser to Acadia. In addition, Mr. Mulvihill holds indirectly a limited
interest in Acadia and holds directly a limited interest in Oak Hill.
However, he does not hold or share voting or dispositive power as to
shares beneficially owned by Acadia or Oak Hill.

(14) Amount shown includes 139,515 shares of Common Stock that such persons or
group could acquire upon the exercise of options exercisable within 60
days.

OVER-ALLOTMENT OPTION

The Bain Capital Funds, Acadia and Court Square (the "Selling
Stockholders") have granted the Underwriters a 30-day option (the "Option") to
purchase up to shares of Common Stock. The following table sets forth
information as of June 25, 1996, with respect to the beneficial ownership of
Common Stock held by each of the Selling Stockholders before and after the
exercise of the Option (assuming the Underwriters elect to exercise the Option
in full).

<TABLE>
<CAPTION>
Beneficial Ownership Beneficial Ownership
Prior to Exercise After Exercise
-------------------- Number of ---------------------
Number of Shares Being Number of
Selling Stockholders Shares Percent Offered Shares Percent
- ------------------------------- -------- ------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Bain Capital Funds ............ 5,291,910
Acadia ........................ 3,515,466
Joshua Bekenstein (1) ......... 71,231
Adam Kirsch (1) ............... 48,734
9 other selling stockholders,
each of whom is selling less
than shares in the
Offering or beneficially own
less than 1% of the
outstanding Common Stock 265,164
prior to the Offering .......
</TABLE>

- -----------
(1) Excludes shares held by the Bain Capital Funds.
* Less than one percent.

56
<PAGE>

DESCRIPTION OF CERTAIN INDEBTEDNESS

Revolving Credit Agreements

The Company may draw up to $25.0 million under the Revolving Credit
Agreements. Of this amount, up to $15.0 million may be used to support letters
of credit. As of February 3, 1996, $8.4 million of the total commitment was
used to collateralize letters of credit resulting in available funds of $16.6
million. In addition, $10.0 million are available under the Seasonal Credit
Agreement during the Seasonal Period for working capital needs. The Revolving
Credit Agreements are available through February 3, 1998 and provide for a
commitment fee of 1/2 of 1% of the average daily unused portion of the
commitment amount paid on a quarterly basis. Interest is charged on
outstanding loans at a base rate plus a specified margin. The Revolving Credit
Agreements contain covenants which, among other things, restrict (i)
incurrence of additional debt, (ii) purchase of certain investments, (iii)
payment of dividends, (iv) formation of certain business combinations, (v)
disposition of certain assets, (vi) acquisition of subordinated debt, (vii)
use of proceeds received and (viii) certain transactions with related parties.
The Revolving Credit Agreements also require that SRI maintain a debt service
ratio above predetermined levels. The Revolving Credit Agreements are secured
by the distribution center located in Jacksonville, Texas, including equipment
located therein, and a pledge of SRPC's stock.

Long-term Indebtedness

Senior Discount Debentures. During 1993, the Company issued the Senior
Discount Debentures. The Senior Discount Debentures were issued at a discount
for aggregate net proceeds of approximately $75.6 million. Substantially all
of the net proceeds from the Senior Discount Debentures were used to make cash
payments to the holders of Common Stock equal to $5.85 per share. Cash
interest begins to accrue in August 1998 and is payable semi-annually on
February 15 and August 15 commencing February 15, 1999. The discount is being
charged to interest expense over the term to maturity using the effective
interest method which, together with the coupon interest, results in a 12.7%
effective interest rate. The Senior Discount Debentures contain restrictions
which, among other things, limit (i) the payment of dividends, (ii) the
repurchase of stock and subordinated debt, (iii) the acquisition of additional
debt or the creation of certain liens, (iv) disposition of certain assets and
(v) certain related party intercompany transactions. The Senior Discount
Debentures are secured by all of the issued and outstanding common stock of
SRI and are structurally subordinated to all of SRI's debt.

The Company has commenced the Tender Offer to purchase up to 100% of the
outstanding Senior Discount Debentures with the proceeds of the Offering. In
connection with the Tender Offer, the Company is seeking consents from the
holders of the Senior Discount Debentures to modify or remove certain of the
covenants governing such debentures to provide the Company with greater
operational flexibility.

Senior Notes. During 1993, the Company issued the Senior Notes. The Senior
Notes were issued in an aggregate principal amount of $150.0 million and bear
interest at 10% payable semi-annually on February 15 and August 15. SRI is
required to make a mandatory sinking fund payment on August 15, 1999 equal to
twenty-five percent of the original principal amount. The Company has
purchased $20.0 million of the Senior Notes which satisfied a portion of the
August 15, 1999 sinking fund requirement. The Senior Notes are generally
unsecured obligations and rank senior to all subordinated debt including the
Series B Senior Subordinated Notes.

Series B Senior Subordinated Notes. During 1993, the Company issued the
Series B Senior Subordinated Notes. The Series B Senior Subordinated Notes
were originally issued in an aggregate principal amount of $100.0 million and
bear interest at 11% payable semi-annually on February 15 and August 15. The
Company is required to make a mandatory sinking fund payment on August 15,
2002 equal to forty percent of the original principal amount. The Series B
Senior Subordinated Notes are subordinated to the obligations under the Senior
Notes.

Series D Senior Subordinated Notes. During 1995, the Company issued $18.3
million in an aggregate principal amount of Series D Senior Subordinated
Notes. The Series D Senior Subordinated Notes were issued at a discount of
$1.8 million and bear interest at 11% payable semi-annually on February 15 and
August 15 of each year. The original issue discount is being charged to
interest expense over the term to maturity using the effective interest
method. The combination of coupon interest payments and original issue
discount results in an effective interest rate of 13.0%. The Company is
required to make a mandatory sinking fund payment on September 15, 2002 equal
to forty percent of the original aggregate principal amount of the Series D
Senior Subordinated Notes.

57
<PAGE>

The Series D Senior Subordinated Notes rank pari passu with the existing
Series B Senior Subordinated Notes (collectively, the "Senior Subordinated
Notes").

The Senior Notes and the Senior Subordinated Notes contain restrictive
covenants which, among other things, (i) limit SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii)
limit its ability to incur additional debt or issue stock and (iii) limit
certain related party transactions.

SRPC Notes. On May 30, 1996, SRPC issued $30.0 million in aggregate
principal amount of SRPC Notes in order to finance the Uhlmans Acquisition.
The SRPC Notes have an expected maturity date of December 15, 2000 ("Expected
Maturity Date"). Principal is expected to be paid on the SRPC Notes in one
payment on the Expected Maturity Date. If principal is not paid in full on the
Expected Maturity Date it will be paid monthly thereafter on each Monthly
Payment Date (as defined therein), to the extent of available funds. Interest
on the Notes accrues at the rate per annum of 12.5% and is payable
semi-annually on June 15 and December 15 of each year.

Principal, interest and premium, if any, on the SRPC Notes is secured by,
and paid solely from distributions on, certificates issued to SRPC by the
Trust representing the Retained Interest. For a description of the Accounts
Receivable Program, see Note 2 to the Company's Consolidated Financial
Statements.

Bealls Subordinated Debentures. The increasing rate 3 Bealls Holding, Inc.
("Bealls Holding") subordinated debentures due 2002 (the "Bealls Holding
Subordinated Debentures") in aggregate principal amount of approximately $15.0
million bore interest at 10% through 1994, 11% in 1995 and currently bear
interest of 12% until maturity. Interest is payable semi-annually on June 30
and December 31. Original issue discount of $7.3 million is being charged to
interest expense over the term to maturity using the effective interest
method. The combination of coupon interest payments and original issue
discount results in an effective interest rate of 20.9%. The Bealls Holding
Subordinated Debentures may be prepaid, at the Company's option, at their face
value. The Company is required to redeem the Bealls Holding Subordinated
Debentures beginning no later than December 31, 1997, in no more than six
equal annual installments. The Bealls Holding Subordinated Debentures are
subordinated to all debt except the Senior Discount Debentures. SRI is the
primary obligor under these debentures.

Bealls Junior Subordinated Debentures. In connection with the acquisition
of Bealls, Bealls Holding issued the 7% Bealls Holding Junior Subordinated
Debentures Due 2003 ("Bealls Holding Junior Subordinated Debentures") at a
face value of approximately $12.5 million, net of discount of approximately
$8.4 million. Such discount is being charged to interest expense over the term
to maturity using the effective interest method. The Bealls Holding Junior
Subordinated Debentures are limited to an aggregate principal amount of
approximately $18.3 million. Interest is payable semi-annually on June 30 and
December 31. The combination of coupon interest payments and original issue
discount results in an effective interest rate of 39.4%. The principal amount
of Bealls Holding Junior Subordinated Debentures are subordinated to all debt
except the Senior Discount Debentures. SRI is the primary obligor under these
debentures.

58
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General Matters

The total amount of authorized capital stock of the Company consists of
75,000,000 shares of Common Stock, par value $0.01 per share, 3,000,000 shares
of Class B Common Stock, par value $0.01 per share, and 2,500 shares of
preferred stock, par value $1.00 per share (the "Preferred Stock"). Upon
completion of the Offering, shares of Common Stock will be issued and
outstanding, 1,468,750 shares of Class B Common Stock will be issued and
outstanding, and no shares of Preferred Stock will be outstanding. The
discussion herein describes the Company's capital stock, the Certificate of
Incorporation and Bylaws as anticipated to be in effect upon consummation of
the Offering. The following summary of certain provisions of the Company's
capital stock describes all material provisions of, but does not purport to be
complete and is subject to, and qualified in its entirety by, the Certificate
of Incorporation and the Bylaws of the Company that are included as exhibits
to the Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.

Common Stock

As of June 25, 1996, there were 11,613,247 shares of Common Stock
outstanding held by 99 holders of record. The issued and outstanding shares of
Common Stock are, and the shares of Common Stock being offered will be upon
payment therefor, validly issued, fully paid and nonassessable. Subject to the
prior rights of the holders of any Preferred Stock and restrictions contained
in the Indenture and the SRI Indentures, the holders of outstanding shares of
Common Stock are entitled to receive dividends out of assets legally available
therefor at such times and in such amounts as the Board may from time to time
determine. See "Dividend Policy."

Following consummation of the Offering, the shares of Common Stock will not
be redeemable or convertible, and the holders thereof will have no preemptive
or subscription rights to purchase any securities of the Company. Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata, along with the holders of Common
Stock, the assets of the Company which are legally available for distribution,
after payment of all debts and other liabilities and subject to the prior
rights of any holders of Preferred Stock then outstanding.

Application has been made for the approval for listing of the Common Stock
on the Nasdaq National Market under the symbol "STGE."

Class B Common Stock

Unless otherwise required by law, holders of the Class B Common Stock are
not entitled to vote on matters submitted to a vote of stockholders, including
the election of directors. Holders of Class B Common Stock may elect at any
time to convert any or all of such shares into Common Stock, on a share for
share basis, to the extent such holder is not prohibited from owning
additional voting securities by virtue of regulatory restrictions.

As of June 25, 1996, there were 1,468,750 shares of Class B Common Stock
outstanding held by 12 holders of record. The issued and outstanding shares of
Class B Common Stock are validly issued, fully paid and nonassessable. Subject
to the prior rights of the holders of any Preferred Stock and restrictions
contained in the Company's indebtedness, the holders of outstanding shares of
Class B Common Stock are entitled to receive dividends out of assets legally
available therefor at such times and in such amounts as the Board may from
time to time determine. See "Dividend Policy."

Following consummation of the Offering, the shares of Class B Common Stock
will not be redeemable or convertible other than into shares of Common Stock,
and the holders thereof will have no preemptive or subscription rights to
purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, the holders of Class B Common Stock are entitled to
receive pro rata, along with the holders of Common Stock, the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding.

Preferred Stock

The Board may, without further action by the Company's stockholders, from
time to time, direct the issuance of additional shares of Preferred Stock in
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding shares of Preferred Stock

59
<PAGE>

would reduce the amount of funds available for the payment of dividends on
shares of Common Stock. Holders of shares of Preferred Stock may be entitled
to receive a preference payment in the event of any liquidation, dissolution
or winding-up of the Company before any payment is made to the holders of
shares of Common Stock. Under certain circumstances, the issuance of shares of
Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a
large block of the Company's securities or the removal of incumbent
management. The Board, without stockholder approval, may issue shares of
Preferred Stock with voting and conversion rights which could adversely affect
the holders of shares of Common Stock. Upon consummation of the Offering,
there will be no shares of Preferred Stock outstanding, and the Company
currently has no present intention to issue any shares of Preferred Stock.

Certain Provisions of the Restated Certificate of Incorporation and By-laws

The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the By-laws provides that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors or by the chief
executive officer of the Company. Stockholders will not be permitted to call a
special meeting or to require the Board to call a special meeting.

The Restated Certificate of Incorporation contains a "fair price" provision
pursuant to which any Business Combination (as defined therein) involving an
interested stockholder and the Company or any subsidiary would require
approval by the affirmative vote of the holders of at least 66-2/3% of the
shares of voting stock of the Company. The fair price provision of the
Restated Certificate of Incorporation provides that 66-2/3% stockholder vote
is not required if the Business Combination is approved by 70% of the
continuing directors or if certain procedures and price requirements are
satisfied. Instead, the vote, if any, required by applicable Delaware law or
by any other provision of the Restated Certificate of Incorporation would be
necessary.

The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.

Section 203 of Delaware Law

Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly-held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66-2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a person who, together with
affiliates and

60
<PAGE>

associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.

Limitations on Liability and Indemnification of Officers and Directors

The Certificate of Incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
the Amended and Restated Certificate of Incorporation provides that the
Company shall indemnify directors and officers of the Company to the fullest
extent permitted by such law.

Transfer Agent and Registrar

The Transfer Agent and Registrar for the Common Stock will be
.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices of the Common Stock.

Upon the closing of the Offering there will be shares of Common Stock
outstanding. The shares of Common Stock sold in the Offering will be freely
tradeable without restriction or further registration under the Securities
Act, unless held by an "affiliate" of the Company as that term is defined in
Rule 144, which shares will be subject to the resale limitations of Rule 144.
Of the outstanding shares, 11,613,247 have not been registered under the
Securities Act and may not be sold unless they are registered or unless an
exemption from registration, such as the exemption provided by Rule 144, is
available.

In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction)
for at least two years, is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent of the
outstanding Common Stock or the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the date on which notice of
such sale is filed pursuant to Rule 144. Sales under Rule 144 are also subject
to certain provisions regarding the manner of sale, notice requirements and
the availability of current public information about the Company. A
stockholder (or stockholders whose shares are aggregated) who is not an
affiliate of the Company for at least 90 days prior to a proposed transaction
and who has beneficially owned "restricted securities" for at least three
years is entitled to sell such shares under Rule 144 without regard to the
limitations described above. Currently shares of Common Stock are qualified
for sale under this rule. Rule 144 is proposed to be amended, and the two and
three year holding periods specified above may be reduced to one and two
years, respectively.

Certain of the Company's existing stockholders, including the officers and
directors of the Company, have agreed that they will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
on behalf of the Underwriters, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date hereof. outstanding
shares (or % of the total outstanding Common Stock) of Common Stock (other
than those sold in the Offering) are subject to such agreement.

Registration Rights

The Company is party to a Registration Agreement (the "Registration
Agreement") with the Bain Capital Funds, Acadia and Court Square pursuant to
which such stockholders have the right to cause the Company to register shares
of Common Stock (the "registrable securities") under the Securities Act. Upon
the consummation of the Offering, outstanding shares of Common Stock will
constitute registrable securities and therefore will be eligible for
registration pursuant to the Registration Agreement. Under the terms of the
Registration Agreement, (i) the holders of at least a majority of the
registrable securities can require the Company, subject to certain
limitations, to file up to three "long-form" registration statements under the
Securities Act covering all or part of the registrable securities, and,
subject to certain limitations, to file an unlimited number of "short-form"
registration statements under the Securities Act covering all or part of the
registrable securities and (ii) Acadia can require the

61
<PAGE>

Company, subject to certain limitations, to file a "long-form" registration
statement on Form S-1 covering all or part of the registrable securities held
by Acadia (each, a "demand registration"). The Company is obligated to pay all
registration expenses (other than underwriting discounts and commissions and
subject to certain limitations) incurred in connection with the demand
registrations. In addition, the Registration Statement provides the Bain
Capital Funds, Acadia and Court Square with "piggyback" registration rights,
subject to certain limitations, whenever the Company files a registration
statement on a registration form that can be used to register registrable
securities.

62
<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the Underwriters named below (the
"Underwriters"), for whom DLJ, Bear, Stearns & Co. Inc. and CS First Boston
Corporation are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company an aggregate of shares of
Common Stock. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:

Number of
Underwriters Shares
- ------------ ---------
Donaldson, Lufkin & Jenrette Securities Corporation .........
Bear, Stearns & Co. Inc. ....................................
CS First Boston Corporation .................................
Total .....................................................
=======

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. If any of the shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares (other than shares covered by the over-allotment option described
below) must be purchased.

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

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share of Common Stock. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to any other Underwriter certain other dealers. After
the initial public offering, the public offering price, concession and
discount may be changed.

Certain selling stockholders have granted an option to the Underwriters,
exercisable for 30 days after the date of this Prospectus, to purchase up to
an aggregate of additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, net of
underwriting discounts and commissions. Such option may be exercised at any
time until 30 days after the date of this Prospectus. See "Principal
Stockholders" and "Overallotment Option." To the extent that the
Representatives exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.

The Company, its officers and directors, and certain employees of the
Company have agreed, subject to certain exceptions, not to directly or
indirectly sell, offer to sell, grant any option for the sale of or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, without the prior written
consent of DLJ, on behalf of the Underwriters, for a period of 180 days after
the date of this Prospectus. See "Shares Eligible for Future Sale."

Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price-earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the

63
<PAGE>

Company, certain financial information of the Company, the history of, and the
prospects for, the Company and the industry in which it competes, and
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present
state of the Company's development, and the above factors in relation to
market values and various valuation measures of other companies engaged in
activities similar to the Company. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to the Offering at or above the initial
public offering price.

Application has been made for the approval for listing of the Common Stock
on the Nasdaq National Market under the symbol "STGE".

The Underwriters do not intend to confirm sales of the Common Stock offered
hereby to any accounts over which they exercise discretionary authority.

DLJ will act as dealer manager in connection with the Tender Offer and the
solicitation of consents to certain amendments to the indentures governing
SRI's indebtedness, and expects to receive customary fees in connection
therewith. DLJ makes a market in the Senior Discount Debentures and, in such
capacity, has a position in such Debentures from time to time. To the extent
DLJ owns Debentures upon expiration of the Tender Offer, it is expected that
DLJ would tender such Debentures into the Tender Offer.

LEGAL MATTERS

The validity of the Common Stock being offered hereby and certain other
legal matters relating to the Offering will be passed upon for the Company by
Kirkland & Ellis (a partnership which includes professional corporations), New
York, New York. Mr. Karl E. Lutz, whose professional corporation is a partner
of Kirkland & Ellis, as of the date hereof holds 29,372 shares of Common Stock
and 8,116 shares of Class B Common Stock. Certain legal matters will be passed
upon for the Underwriters by Latham & Watkins, Chicago, Illinois.

EXPERTS

The consolidated financial statements of the Company as of January 28, 1995
and February 3, 1996 and for each of the three years in the period ended
February 3, 1996 included in this Prospectus and the Registration Statement of
which it is a part, have been so included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting. The financial statements of Uhlmans as
of January 31, 1995 and February 3, 1996 and for each of the three years in
the period ended February 3, 1996 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of said firm
as experts in auditing and accounting.

ADDITIONAL INFORMATION

The Company has filed the Registration Statement on Form S-1 with respect
to the Common Stock being offered hereby with the Commission under the
Securities Act. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus
concerning the provisions of documents filed with the Registration Statement
as exhibits are necessarily summaries of such documents, and each such
statement is qualified in its entirety by reference to the copy of the
applicable document filed as an exhibit to the Registration Statement. The
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; and at its New York Regional Office, 75
Park Place, 14th Floor, New York, New York 10007. Copies of such material can
be obtained from the public reference section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. For further
information pertaining to the Company and the Common Stock being offered
hereby, reference is made to the Registration Statement, including the
exhibits thereto and the financial statements, notes and schedules filed as a
part thereof.

64
<PAGE>

INDEX TO FINANCIAL STATEMENTS

Page
STAGE STORES, INC. Number
--------
<S> <C>
Unaudited Financial Statements

Consolidated Condensed Balance Sheet at February 3, 1996 and May 4, 1996 .............................................. F-2
Consolidated Condensed Statement of Income for the three months ended April 29, 1995 and May 4, 1996 ................. F-3
Consolidated Condensed Statement of Cash Flows for the three months ended April 29, 1995 and May 4, 1995 .............. F-4
Consolidated Statement of Stockholders' Deficit for the three months ended May 4, 1996 ................................ F-5
Notes to Unaudited Consolidated Condensed Financial Statements ........................................................ F-6

Audited Financial Statements

Report of Independent Accountants .................................................................................... F-7
Consolidated Balance Sheet at January 28, 1995 and February 3, 1996 .................................................. F-8
Consolidated Statement of Operations for the fiscal years 1993, 1994 and 1995 ......................................... F-9
Consolidated Statement of Cash Flows for the fiscal years 1993, 1994 and 1995 ......................................... F-10
Consolidated Statement of Stockholders' Deficit for the fiscal years 1993, 1994 and 1995 .............................. F-12
Notes to Consolidated Financial Statements ............................................................................ F-13

UHLMANS INC.

Unaudited Financial Statements

Balance Sheets at February 3, 1996 and May 4, 1996 ................................................................... F-25
Statements of Operations for the period from February 1, 1995 through April 29, 1995 and for the
period from February 4, 1996 through May 4, 1996 .................................................................... F-26
Statements of Cash Flows for the period from February 1, 1995 through April 29, 1995 and for the
period from February 4, 1996 through May 4, 1996 .................................................................... F-27
Notes to Financial Statements (Unaudited) ............................................................................ F-28

Audited Financial Statements

Report of Independent Auditors ....................................................................................... F-29
Balance Sheets at January 31, 1995 and February 3, 1996 ............................................................... F-30
Statements of Income for the years ended January 31, 1994 and 1995 and for the period from February
1, 1995 through February 3, 1996 ................................................................................... F-31
Statements of Stockholders' Equity for the years ended January 31, 1994 and 1995 and for the period
from February 1, 1995 through February 3, 1996 ..................................................................... F-32
Statements of Cash Flows for the years ended January 31, 1994 and 1995 and for the period from Feb-
ruary 1, 1995 through February 3, 1996 ............................................................................. F-33
Notes to Financial Statements ......................................................................................... F-34
</TABLE>

F-1
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Balance Sheet
(in thousands, except par value and number of shares)

<TABLE>
<CAPTION>
February 3, 1996 May 4, 1996
---------------- -----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents ............................................................ $ 20,273 $ 10,412
Accounts receivable .................................................................. 65,740 50,587
Merchandise inventories .............................................................. 150,032 166,303
Prepaid expenses and other current assets ............................................ 24,457 23,452
-------- --------
Total current assets .............................................................. 260,502 250,754

Property, equipment and leasehold improvements, net .................................. 93,118 96,901
Goodwill, net ........................................................................ 30,876 30,606
Other assets ......................................................................... 27,837 28,351
-------- --------
$412,333 $406,612
======== ========

Liabilities and Stockholders' Deficit
Accounts payable ..................................................................... $ 41,494 $ 41,153
Accrued interest ..................................................................... 12,327 6,580
Accrued expenses and other current liabilities ....................................... 33,197 27,272
Accrued taxes, other than income taxes ............................................... 3,376 4,083
-------- --------
Total current liabilities .......................................................... 90,394 79,088

Long-term debt ....................................................................... 335,839 339,467
Related party debt ................................................................... 44,200 44,200
Other long-term liabilities .......................................................... 14,214 13,495
-------- --------
Total liabilities .................................................................. 484,647 476,250
-------- --------

Preferred stock, par value $1.00, non-voting, 2,500 shares authorized, no shares
issued or outstanding .............................................................. -- --
Common stock, par value $0.01, 15,000,000 shares authorized, 11,470,902 and 11,600,702
shares issued and outstanding, respectively ........................................ 115 116
Class B common stock, par value $0.01, non-voting, 1,500,000 shares authorized,
1,468,750 shares issued and outstanding ............................................ 15 15
Additional paid-in capital ........................................................... 3,793 3,816
Accumulated deficit .................................................................. (76,237) (73,585)
-------- --------
Stockholders' deficit .............................................................. (72,314) (69,638)
-------- --------
Commitments and contingencies ........................................................ -- --
-------- --------
$412,333 $406,612
======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-2
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Income
(in thousands, except earnings per share)
(unaudited)

<TABLE>
<CAPTION>
For the three months ended,
-----------------------------
April 29, 1995 May 4, 1996
-------------- ------------
<S> <C> <C>
Net sales ........................................ 42,353 $ 163,177
Cost of sales and related buying, occupancy and
distribution expenses .......................... (96,070) (111,096)
--------- ---------
Gross profit ..................................... 46,283 52,081
Selling, general and administrative expenses ..... (33,816) (38,878)
Service charge income ............................ 2,683 2,913
Store opening and closure costs .................. (315) (71)
--------- ---------
Operating income ................................. 14,835 16,045
--------- ---------
Interest income .................................. 160 126
--------- ---------

Interest expense:
Related party ................................... (1,037) (1,117)
Other ........................................... (9,235) (10,128)
Amortization of debt issue costs ................ (452) (469)
--------- ---------
(10,724) (11,714)
--------- ---------

Income before income tax ......................... 4,271 4,457
Income tax expense ............................... (1,833) (1,805)
--------- ---------
Net income ....................................... $ 2,438 $ 2,652
========= =========

Earnings per common share data:

Earnings per common share ........................ $ 0.18 $ 0.19
========= =========
Weighted average common shares outstanding ....... 13,399 13,618
========= =========
</TABLE>

The accompanying notes are an integral part of this statement.

F-3
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Cash Flows
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
For the three months ended,
------------------------------
April 29, 1995 May 4, 1996
-------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income . ...................................................... $ 2,438 $ 2,652
------- --------
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ..................................... 2,700 3,149
Deferred income taxes ............................................. (1,099) (958)
Accretion of discount ............................................. 3,300 3,768
Amortization of debt issue costs .................................. 452 469
Changes in operating assets and liabilities:
Decrease in accounts receivable .................................. 11,523 11,453
Increase in merchandise inventories .............................. (27,582) (16,271)
(Increase) decrease in other assets .............................. (872) 404
Increase in accounts receivable sold ............................. 10,300 3,700
Decrease in accounts payable and accrued
liabilities ....................................................... (7,399) (11,581)
------- --------
Total adjustments ............................................... (8,677) (5,867)
------- --------
Net cash used in operating activities ............................ (6,239) (3,215)
------- --------

Cash Flows from Investing Activities:
Additions to property, equipment and leasehold
improvements ...................................................... (12,495) (6,449)
------- --------
Net cash used in investing activities ............................. (12,495) (6,449)
------- --------

Cash Flows from Financing Activities:
Proceeds from:
Common stock ...................................................... 61 34
Payments on:
Long-term debt .................................................... (115) (125)
Redemption of common stock ........................................ -- (14)
Additions to debt issue costs ..................................... (223) (92)
------- --------
Net cash used in financing activities ............................ (277) (197)
------- --------
Net decrease in cash and cash equivalents ........................ (19,011) (9,861)
Cash and cash equivalents:
Beginning of period ............................................... 28,593 20,273
------- --------
End of period ................................................... $ 9,582 $ 10,412
======= ========

Supplemental Disclosure of Cash Flow Information:
Interest paid .................................................... $12,205 $ 13,207
======= ========
Income taxes paid ............................................... $ 1,800 $ 5,883
======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-4
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Condensed Statement of Stockholders' Deficit
for the three months ended May 4, 1996
(in thousands, except numbers of shares)
(unaudited)

<TABLE>
<CAPTION>
Common Stock
------------------------------------------
Class B
-------------------
Shares Shares Additional Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ----- ---------- ----- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 3, 1996 11,470,902 $115 1,468,750 $15 $3,793 $(76,237) $(72,314)
Net income ............... -- -- -- -- -- 2,652 2,652
Vested compensatory stock
options ................ -- -- -- -- 4 -- 4
Issuance of stock ......... 132,510 1 -- -- 33 -- 34
Retirement of stock ...... (2,710) -- -- -- (14) -- (14)
---------- ---- --------- --- ------ -------- --------
Balance, May 4, 1996 ..... 11,600,702 $116 1,468,750 $15 $3,816 $(73,585) $(69,638)
========== ==== ========= === ====== ======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Unaudited Consolidated Condensed Financial Statements

1. The accompanying unaudited consolidated condensed financial statements
of Stage Stores, Inc. (formerly Apparel Retailers, Inc.), have been prepared
in accordance with Rule 10-01 of Regulation S-X and do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Those adjustments, which include only
normal recurring adjustments, that are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods have
been made. The results of operations for such interim periods are not
necessarily indicative of results of operations for a full year. The unaudited
consolidated condensed financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the year
ended February 3, 1996 filed with Stage Stores, Inc.'s ("Stage Stores") Annual
Report on Form 10-K. Certain reclassifications have been made to prior year
amounts to conform with the current year presentation. The fiscal years
discussed herein end on the Saturday nearest to January 31 in the following
calendar year. For example, references to "1996" mean the fiscal year ended
February 1, 1997.

Stage Stores conducts its business exclusively through its wholly-owned
subsidiary Specialty Retailers, Inc. ("SRI"), which operated 268 family
apparel stores in the central United States as of May 4, 1996. Stage Stores
has no operations of its own, with its primary asset being the common stock of
SRI. Stage Stores and SRI are collectively referred to herein as the
"Company".

2. Under the accounts receivable securitization program implemented in 1993
(the "Accounts Receivable Program"), an indirect wholly-owned subsidiary of
the Company, SRI Receivables Purchase Co., Inc. ("SRPC") purchases the
accounts receivable generated under the Company's private label credit card
program. Such accounts receivable are in turn transferred to a master trust
(the "Trust") which has issued certain certificates representing undivided
interests in the Trust. SRPC owns an undivided interest in the accounts
receivable not supporting the certificates issued by the Trust ("Retained
Interest"). SRPC is a separate corporate entity from the Company and SRPC's
creditors have a claim on its assets prior to those assets becoming available
to any creditor of the Company.

3. On June 3, 1996, Palais Royal, Inc., an indirect, wholly-owned
subsidiary of Stage Stores, completed its acquisition of Uhlmans Inc.
("Uhlmans") for $28.7 million, including the repayment of certain debt of
Uhlmans. Uhlmans, which operates 34 family apparel stores located in Ohio,
Michigan and Indiana, had sales of $59.7 million and net income of $0.6
million for the year ended February 3, 1996. The Company plans to operate the
majority of the acquired locations under the "Stage" banner following a brief
conversion period. The Company filed a Current Report on Form 8-K on May 9,
1996 related to this transaction.

The Company financed its acquisition of Uhlmans through the issuance of
$30.0 million in aggregate principal amount of 12.5% Trust Certificate-Backed
Notes Due 2000 (the "SRPC Notes"). Interest on the SRPC Notes is payable
semi-annually on June 15 and December 15 of each year, commencing December 16,
1996 from amounts otherwise received by SRPC from its Retained Interest.
Principal repayments are anticipated to commence on December 1, 1999.

4. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletins and Staff policy, common stock options issued during the twelve
months prior to the proposed initial public offering have been included in the
calculation of earnings per common share as if such options were outstanding
during the three months ended May 4, 1996.

5. During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of ("SFAS 121"),
and Statement of Financial Accounting Standard No. 123, Accounting for Stock
Based Compensation ("SFAS 123"). Neither the adoption of SFAS 121 or SFAS 123
had a material effect on the Company's financial position or the results of
operations. With the adoption of SFAS 123, the Company continues to measure
compensation plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees, and will provide pro forma
disclosures of net income and earnings per share as if the market value based
method prescribed by SFAS 123 had been applied in measuring compensation
expense in its annual financial statements.

F-6
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Stage Stores, Inc.

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Stage Stores, Inc. (formerly Apparel Retailers, Inc.) and its
subsidiaries at January 28, 1995 and February 3, 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended February 3, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Houston, Texas
March 15, 1996

F-7
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Balance Sheet
(in thousands, except par value and number of shares)

<TABLE>
<CAPTION>
January 28,1995 February 3, 1996
--------------- ----------------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................. $ 28,593 $ 20,273
Accounts receivable ................................................... 70,356 65,740
Merchandise inventories ............................................... 118,039 150,032
Restricted investments ................................................ 338 438
Prepaid expenses and other current assets ............................. 17,824 24,019
-------- --------
Total current assets ................................................ 235,150 260,502

Property, equipment and leasehold improvements, net ................... 75,602 93,118
Goodwill, net ......................................................... 31,865 30,876
Other assets .......................................................... 27,113 27,837
-------- --------
$369,730 $412,333
======== ========

Liabilities and Stockholders' Deficit
Accounts payable ..................................................... $ 38,332 $ 41,494
Accrued interest ...................................................... 11,372 12,327
Accrued employee compensation costs ................................... 8,907 7,892
Accrued expenses and other current liabilities ........................ 25,668 25,305
Accrued taxes, other than income taxes ................................ 2,642 3,376
-------- --------
Total current liabilities ........................................... 86,921 90,394

Long-term debt ........................................................ 310,575 335,839
Related party debt .................................................... 39,200 44,200
Deferred income taxes ................................................. 562 --
Other long-term liabilities ........................................... 13,665 14,214
-------- --------
Total liabilities ................................................... 450,923 484,647
-------- --------
Preferred stock, par value $1.00, non-voting, 2,500
shares authorized, no shares issued or outstanding ................... -- --
Common stock, par value $0.01, 15,000,000 shares
authorized, 11,381,141 and 11,470,902 shares
issued and outstanding, respectively ................................. 113 115
Class B common stock, par value $0.01, non-voting,
1,500,000 shares authorized, 1,468,750 shares
issued and outstanding ............................................... 15 15
Additional paid-in capital ............................................ 3,565 3,793
Accumulated deficit ................................................... (84,886) (76,237)
-------- --------
Stockholders' deficit ............................................... (81,193) (72,314)
-------- --------
Commitments and contingencies ......................................... -- --
-------- --------
$369,730 $412,333
======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-8
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Operations
(in thousands, except earnings per share)

<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1993 1994 1995
--------- --------- ----------
<S> <C> <C> <C>
Net sales ............................................. $ 557,422 $ 581,463 $ 682,624
Cost of sales and related buying, occupancy
and distribution expenses ........................... (384,843) (398,659) (468,347)
--------- --------- ---------
Gross profit .......................................... 172,579 182,804 214,277
Selling, general and
administrative expenses ............................. (135,011) (134,715) (159,625)
Service charge income ................................. 20,003 8,515 10,523
Store opening and closure costs ....................... (199) (5,647) (3,689)
--------- --------- ---------
Operating income ...................................... 57,372 50,957 61,486
--------- --------- ---------
Interest income ....................................... 1,230 1,684 781
--------- --------- ---------
Interest expense:
Related party ....................................... (6,038) (2,902) (4,355)
Other ............................................... (29,985) (37,118) (38,555)
Amortization of debt issue costs .................... (1,584) (1,674) (1,860)
--------- --------- ---------
(37,607) (41,694) (44,770)
--------- --------- ---------
Income before income tax and
extraordinary item .................................. 20,995 10,947 17,497
Income tax expense .................................... (7,569) (4,317) (6,767)
--------- --------- ---------
Income before extraordinary item ...................... 13,426 6,630 10,730
Extraordinary item--early
extinguishment of debt .............................. (16,208) (308) --
--------- --------- ---------
Net income (loss) ..................................... $ (2,782) $ 6,322 $ 10,730
========= ========= =========
Earnings (loss) per common share data:
Income before extraordinary item ...................... $ 13,426 $ 6,630 $ 10,730
Dividends and accretion on mandatorily
redeemable preferred stock .......................... (2,297) -- --
--------- --------- ---------
Earnings before extraordinary item
applicable to common stock .......................... $ 11,129 $ 6,630 $ 10,730
========= ========= =========
Earnings per common share before
extraordinary item ................................. $ 0.81 $ 0.49 $ 0.78
Extraordinary item--early
extinguishment of debt .............................. (1.18) (0.02) --
--------- --------- ---------
Earnings (loss) per common share after
extraordinary item ................................. $ (0.37) $ 0.47 $ 0.78
========= ========= =========
Weighted average common shares
outstanding ......................................... 13,663 13,479 13,680
========= ========= =========
</TABLE>

The accompanying notes are an integral part of this statement.

F-9
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
Fiscal Year
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) .................................................. $ (2,782) $ 6,322 $ 10,730
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ......................................... 9,259 9,997 12,816
Deferred income taxes .............................................. (2,783) (3,608) (4,065)
Accretion of discount .............................................. 5,796 12,286 13,940
Amortization of debt issue costs ................................... 1,584 1,674 1,860
Issuance of long-term debt in lieu of interest payment ............. 1,214 282 147
Loss on early extinguishment of debt ............................... 25,032 474 --
Changes in operating assets and liabilities:
Increase in accounts receivable .................................. (18,822) (5,378) (20,206)
Increase in merchandise inventories .............................. (10,862) (14,077) (31,650)
Increase in other assets ......................................... (5,907) (2,599) (4,112)
Increase (decrease) in accounts receivable sold .................. 147,100 (7,100) 25,000
Increase in accounts payable and accrued liabilities ............. 6,388 11,532 1,794
-------- -------- --------
Total adjustments .............................................. 157,999 3,483 (4,476)
-------- -------- --------
Net cash provided by operating activities ........................ 155,217 9,805 6,254
-------- -------- --------
Cash Flows from Investing Activities:
Decrease (increase) in restricted investments ...................... (2,150) 10,812 (100)
Acquisitions, net of cash acquired ................................. -- (20,840) (1,167)
Payments to former Bealls and Palais Royal shareholders ............ (252) -- --
Additions to property, equipment and leasehold improvements ........ (8,503) (19,706) (28,638)
-------- -------- --------
Net cash used in investing activities ............................ (10,905) (29,734) (29,905)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from:
Short-term debt ................................................... 19,135 -- --
Long-term debt .................................................... 352,041 -- 16,458
Common stock ...................................................... 325 97 68
Payments on:
Working capital facility .......................................... (1,000) -- --
Short-term debt ................................................... (24,992) -- --
Long-term debt .................................................... (337,254) (10,442) (266)
Redemption of redeemable preferred stock ........................... (19,797) -- --
Redemption of common stock ......................................... (33) -- (122)
Additions to debt issue costs ...................................... (14,035) (448) (807)
Dividends paid ..................................................... (74,804) -- --
-------- -------- --------
Net cash provided by (used in) financing activities ............... (100,414) (10,793) 15,331
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .............. 43,898 (30,722) (8,320)
Cash and cash equivalents:
Beginning of year .................................................. 15,417 59,315 28,593
-------- -------- --------
End of year ....................................................... $ 59,315 $ 28,593 $ 20,273
======== ======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-10
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Cash Flows (Continued)
(in thousands)

<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1993 1994 1995
------ ------- --------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid ......................................................... $30,142 $ 28,814 $27,845
======= ======== =======
Income taxes paid .................................................... $ 3,857 $ 5,198 $ 5,939
======= ======== =======
Supplemental schedule of noncash investing and financing activities:

The Company purchased a significant portion of the assets of Beall-
Ladymon, Inc. for $20,840 in cash during 1994. In addition, the Company
purchased Mammouth, Inc. and Szolds, Inc. ("Szolds") for $1,067 and $493,
respectively, during 1995. Pursuant to the Szolds purchase agreement, $393
was paid at closing to Szolds during February 1996. In conjunction with
these acquisitions, liabilities were assumed as follows:

Fair value allocated to assets acquired ................................... $ -- $ 24,043 $ 1,702
Cash paid for assets acquired, including acquisition expenses ............. -- (20,840) (1,167)
Purchase price payable at closing ......................................... -- -- (393)
------ -------- -------
Liabilities assumed ....................................................... $ -- $ 3,203 $ 142
====== ======== =======
</TABLE>

The accompanying notes are an integral part of this statement.

F-11
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Statement of Stockholders' Deficit
(in thousands, except numbers of shares)

<TABLE>
<CAPTION>
Common Stock
--------------------------------------------
Class B
-------------------
Additional
Shares Shares Paid-in Accumulated
Outstanding Amount Outstanding Amount Capital Deficit Total
----------- ------ ----------- ------ -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 30, 1993 ..... 10,559,167 $106 1,468,750 $15 $ 899 $(10,625) $ (9,605)

Net loss ...................... -- -- -- -- -- (2,782) (2,782)
Dividends on preferred stock -- -- -- -- -- (1,596) (1,596)
Dividends on common stock ..... -- -- -- -- -- (74,804) (74,804)
Accretion on preferred stock -- -- -- -- -- (701) (701)
Tax benefits from stock
option activity ............. -- -- -- -- 2,037 -- 2,037
Adjustment for minimum
pension liability .......... -- -- -- -- -- (568) (568)
Issuance of stock ............ 783,998 7 -- -- 318 -- 325
Retirement of stock ........... (10,024) -- -- -- (33) -- (33)
--------- ---- --------- --- ------ ------- -------
Balance, January 29, 1994 ..... 11,333,141 113 1,468,750 15 3,221 (91,076) (87,727)

Net income .................... -- -- -- -- -- 6,322 6,322
Vested compensatory stock
options ..................... -- -- -- -- 247 -- 247
Adjustment for minimum
pension liability .......... -- -- -- -- -- (132) (132)
Issuance of stock ............ 48,000 -- -- -- 97 -- 97
---------- ---- ---------- --- ------ ------- -------
Balance, January 28, 1995 ..... 11,381,141 113 1,468,750 15 3,565 (84,886) (81,193)

Net income .................... -- -- -- -- -- 10,730 10,730
Vested compensatory stock
options ..................... -- -- -- -- 284 -- 284
Adjustment for minimum
pension liability .......... -- -- -- -- -- (2,081) (2,081)
Issuance of stock ............ 121,621 2 -- -- 66 -- 68
Retirement of stock ........... (31,860) -- -- -- (122) -- (122)
---------- ---- --------- --- ------ -------- --------
Balance, February 3, 1996 ..... 11,470,902 $115 1,468,750 $15 $3,793 $(76,237) $(72,314)
========== ==== ========= === ====== ======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-12
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements

NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business: Stage Stores, Inc. (formerly Apparel Retailers,
Inc.) was incorporated under the laws of Delaware on June 17, 1993 at the
direction of the stockholders of Specialty Retailers, Inc. as a part of an
overall refinancing and distribution plan (see Note 5). As a part of this
plan, the stockholders of Specialty Retailers, Inc. exchanged all of their
common stock for Stage Stores, Inc. common stock with identical terms and
conditions. Stage Stores, Inc., Specialty Retailers, Inc. and their
subsidiaries are collectively referred to as the "Company". When the
distinction is necessary, "Stage Stores" refers to Stage Stores, Inc. and
"SRI" refers to Specialty Retailers, Inc. SRI operates family apparel stores
primarily under the names "Bealls", "Palais Royal" and "Stage" offering
branded fashion apparel and accessories for women, men and children. The
Company currently operates 268 stores in thirteen states located throughout
the central United States.

Principles of Consolidation: The consolidated financial statements include
the accounts of Stage Stores and its wholly-owned subsidiaries subsequent to
June 17, 1993. Prior to June 17, 1993, the consolidated financial statements
include the accounts of SRI and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.

On October 31, 1994, Palais Royal, Inc., a wholly-owned subsidiary of the
Company, purchased a significant portion of the assets of the Beall-Ladymon
Corporation ("Beall-Ladymon") for $20.8 million in cash. The assets acquired
consisted primarily of customer accounts receivable and fixed assets. In
addition, the Company assumed leases for forty-five store locations which the
Company opened as Stage stores during the first quarter of 1995. Beall-Ladymon
was a regional apparel retailer which operated stores primarily in Louisiana,
Arkansas and Mississippi.

The following unaudited pro forma information gives effect to the
Beall-Ladymon acquisition as if it had occurred at the beginning of the
periods presented and includes operating activity of Beall-Ladymon prior to
the beginning of the closure period (in thousands, except per common share
data):

Fiscal Year
-------------------
1993 1994
-------- --------
(unaudited)
Net sales ........................................ $609,857 $613,994
======== ========
Income before extraordinary item ................. $ 13,359 $ 4,353
======== ========
Net income (loss) ................................ $ (2,849) $ 4,045
======== ========
Earnings (loss) per common share ................. $ (0.40) $ 0.31
======= ========

The above amounts are based on certain estimates and assumptions which the
Company believes are reasonable. The pro forma results do not purport to be
indicative of the results which would have occurred if the acquisition had
actually taken place at the beginning of the periods presented, nor are they
necessarily indicative of the results of any future periods.

The Beall-Ladymon acquisition was accounted for under the purchase method
of accounting. Accordingly, the total acquisition cost was allocated to the
assets acquired and liabilities assumed based upon their estimated fair
values. The excess of the purchase price over the estimated fair value of such
assets and liabilities was recognized as goodwill and is being amortized on a
straight-line basis over fifteen years.

Fiscal Year: The fiscal years discussed herein end on the Saturday nearest
to January 31 in the following calendar year. For example, references to
"1995" mean the fiscal year ended February 3, 1996. All fiscal years consist
of fifty-two weeks except for 1995 which consists of fifty-three weeks.

F-13
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.

Merchandise Inventories: The Company states its merchandise inventories at
the lower of cost or market, cost being determined using the retail last-in,
first-out ("LIFO") method. Market is estimated on a pool-by-pool basis.

The Company believes that the LIFO method, which charges the most recent
merchandise costs to the results of current operations, provides a better
matching of current costs with current revenues in the determination of
operating results. Some companies use the retail first-in, first-out ("FIFO")
method in valuing their inventories. If the retail FIFO method had been used,
inventories at January 28, 1995 and February 3, 1996 would have been higher by
$0.4 million and lower by $3.5 million, respectively.

Property, Equipment and Leasehold Improvements: Property, equipment and
leasehold improvements are stated at cost and depreciated over their estimated
useful lives using the straight line method. The estimated useful lives of
leasehold improvements do not exceed the term, including renewal options, of
the related lease. The estimated useful lives in years are as follows:

Buildings ........................................ 20-25
Store and office fixtures and equipment........... 7-12
Warehouse equipment ............................. 5-15
Favorable leases and leasehold improvements....... 15-50

Income Taxes: The provision for income taxes is computed based on the
pretax income included in the consolidated statement of operations. The asset
and liability approach is used to recognize deferred tax liabilities and
assets for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities.

Earnings (Loss) Per Common Share: Earnings or loss per common share is
computed based upon net income or loss adjusted for dividends and accretion on
preferred stock. Common stock options outstanding are treated as common stock
equivalents in the computation of earnings or loss per common share using the
treasury stock method. The fair value of the Company's common stock is
determined in good faith by the Board of Directors based upon the historical
and projected financial performance of the Company. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletins and Staff policy, common stock
options issued during the twelve months prior to the proposed initial public
offering have been included in the calculation of earnings (loss) per common
share as if such options were outstanding for all periods presented.

Debt Issue Costs: Debt issue costs are accounted for as a deferred charge
and amortized on a straight-line basis over the term of the related issue.

Goodwill and Other Intangibles: The Company amortizes goodwill and
intangible assets on a straight- line basis over the estimated future periods
benefited, not to exceed forty years. Amortization periods for goodwill and
other intangibles associated with acquisitions are currently five to forty
years. Each year, the Company evaluates the remaining useful life associated
with goodwill based upon, among other things, historical and expected
long-term results of operations. Accumulated amortization of goodwill was $3.7
million and $4.7 million at January 28, 1995 and February 3, 1996,
respectively.

Store Pre-Opening Expenses: Pre-opening expenses of new stores are
deferred and charged to operations in the year the store opens.

F-14
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

Advertising Expenses: Advertising costs are charged to operations when the
related advertising first takes place. Advertising costs were $22.3 million,
$22.3 million, and $25.9 million for 1993, 1994 and 1995, respectively.
Prepaid advertising costs were $0.6 million and $0.5 million at January 28,
1995 and February 3, 1996, respectively.

Statement of Cash Flows: The Company considers highly liquid investments
with initial maturities of less than three months to be cash equivalents in
its statement of cash flows.

Financial Instruments: The Company records all financial instruments at
cost. The fair values of accounts receivable and accounts payable approximate
cost.

Impairment of Assets: The Company has not elected early adoption of
Statement of Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." SFAS 121 becomes effective beginning with the Company's first
quarter of 1996. The Company does not believe that the adoption of SFAS 121
will have a material effect on the Company's financial position or results of
operations.

Stock Based Compensation: The Company has not elected early adoption of
Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." SFAS 123 becomes effective beginning with the
Company's first quarter of 1996 and will not have a material effect on the
Company's financial position or results of operations. Upon adoption of SFAS
123, the Company will continue to measure compensation plans using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and will provide pro forma disclosures of net income and
earnings per share as if the fair value-based method prescribed by SFAS 123
had been applied in measuring compensation expense.

Reclassifications: The accompanying consolidated financial statements
include reclassifications from financial statements issued in previous years.

NOTE 2 - ACCOUNTS RECEIVABLE

Accounts receivable balances were as follows (in thousands):

January 28, 1995 February 3, 1996
---------------- ----------------
Gross customer accounts receivable...... $ 210,941 $ 228,354
Accounts receivable sold ............... (140,000) (165,000)
Other receivables ...................... 2,647 5,146
--------- ---------
73,588 68,500
Less--allowance for doubtful accounts... (3,232) (2,760)
--------- ---------
$ 70,356 $ 65,740
========= =========

During 1993, the Company implemented an accounts receivable securitization
program (the "Accounts Receivable Program") which provides a source of funds
from the sale of accounts receivable to a master trust (the "Trust"). Pursuant
to the Accounts Receivable Program, the Company sells all of the accounts
receivable generated by the holders of the Company's private label credit card
accounts to its wholly-owned subsidiary, SRI Receivables Purchase Co., Inc.
("SRPC"), on a daily basis. SRPC is a separate limited-purpose subsidiary that
is operated in a fashion intended to ensure that its assets and liabilities
are distinct from those of the Company and its other affiliates as SRPC's
creditors have a claim on its assets prior to becoming available to any
creditor of the Company. SRPC sells, on a daily basis, the accounts receivable
purchased from the Company to the Trust in exchange for cash or a certificate
representing an undivided interest in the Trust. The Trust currently has
$165.0 million of term certificates and a $40.0 million revolving certificate
outstanding which represent undivided interests in the Trust. The holder of
the revolving certificate has agreed to purchase interests in the Trust equal
to the amount of accounts receivable

F-15
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

in the Trust above the level required to support the term certificates and the
transferor's retained interest (currently $204.1 million), up to a maximum of
$40.0 million. If receivable balances in the Trust fall below the level
required to support the term certificates and revolving certificates, certain
principal collections may be retained in the Trust until such time as the
receivable balances exceed the certificates then outstanding and the required
transferor's interest. The Company owns an undivided interest in the accounts
receivable in the Trust not represented by the term or revolving certificates
and continues to service all of the accounts receivable in the Trust. The
Trust may issue additional series of certificates from time to time. Terms of
any future series will be determined at the time of issuance. The outstanding
balances of the term certificates totaled $140.0 million and $165.0 at January
28, 1995 and February 3, 1996, respectively. There was no portion of the
revolving certificate outstanding at January 28, 1995 and February 3, 1996.

Total accounts receivable sold to the Trust during 1993, 1994 and 1995 were
$285.1 million, $278.6 million and $306.8 million, respectively. The cash
flows generated from the accounts receivable in the Trust are dedicated to (i)
the purchase of new accounts receivable generated by the Company, (ii) payment
of a return on the certificates and (iii) the payment of a servicing fee to
SRI. Any remaining cash flows are remitted to the Company. The term
certificates entitle the holders to receive a return, based upon the London
Interbank Offered Rate ("LIBOR"), plus a specified margin paid on a quarterly
basis. Principal payments commence in December 31, 1999 but can be accelerated
upon occurrence of certain events. The revolving certificate entitles the
holder to receive a return based upon a floating LIBOR rate, plus a specified
margin, or prime rate, at the option of the Company paid on a monthly basis.
The Company is currently protected against increases above 12% under an
agreement entered into with a bank. The Company is exposed to loss in the
event of non-performance by the bank. However, the Company does not anticipate
non-performance by the bank. At February 3, 1996, the average rate of return
on the term certificates was 6.8%. The purchase commitment for the Revolving
certificate is five years, subject to renewal at the option of the parties.
The revolving certificate holders are entitled to repayment in the event the
accounts receivable decrease below that required to support such certificates.

Subsequent to the implementation of the Accounts Receivable Program in
1993, the Company's financial statements do not reflect accounts receivable,
finance charge income, bad debt expense or servicing costs attributable to the
Trust accounts receivable supporting the outstanding term or revolving
certificates. The Company recognized an initial gain of $2.7 million on the
sale of accounts receivable during 1993 which was reflected as a reduction of
selling, general and administrative expenses. Subsequent gains on the sale of
accounts receivable were not material.

The provision for doubtful accounts was $6.6 million, $2.6 million and $3.8
million for 1993, 1994 and 1995, respectively. The provision for doubtful
accounts does not reflect the Company's recourse obligations under the
Accounts Receivable Program which have been included in the calculation of the
gain on the sale of accounts receivable.

NOTE 3 - PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment and leasehold improvements were as follows (in
thousands):

January 28,1995 February 3, 1996
--------------- ----------------
Land .............................. $ 3,074 $ 3,074
Buildings ......................... 16,313 16,313
Fixtures and equipment ............ 72,624 88,794
Leasehold improvements ............ 37,542 49,290
-------- --------
129,553 157,471
Less--accumulated depreciation .... (53,951) (64,353)
-------- --------
$ 75,602 $ 93,118
======== ========

Depreciation expense was $8.3 million, $8.5 million and $10.8 million for
1993, 1994 and 1995, respectively.

F-16
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

NOTE 4 - STORE CLOSURES

During 1994, the Company approved a store closure plan (the "Store Closure
Plan") which provided for the closure of forty Fashion Bar stores. These
stores were primarily located in major regional malls within the Denver area.
Management determined that the merchandising strategy and market positions of
such stores were not compatible with the Company's overall merchandising
philosophies or growth strategy. The Company accrued $5.2 million for the
expected costs associated with the Store Closure Plan which include: occupancy
($4.2 million); severance ($0.4 million); write-off of fixed assets and other
intangibles ($0.9 million); other expenses ($0.8 million) and the write-off of
negative goodwill ($1.1 million) allocated to the stores to be closed. The
Company substantially completed the Store Closure Plan during 1995. At January
28, 1995 and February 3, 1996, the balance of the Store Closure Plan accrual
was $4.8 million and $1.0 million, respectively, primarily reflecting the
lease costs associated with closed stores. During 1995, the Company charged
$3.8 million to the accrual.

Net sales and operating income attributable to the stores closed were
as follows (in thousands):

Fiscal Year
-------------------------
1993 1994 1995
------ ------ -----
Net sales ................................... $25,442 $23,174 $605
======= ======= ====
Operating income (loss) ..................... $ (213) $ 618 $ 32
======= ======= ====

At the date of the acquisition of Bealls, the Company undertook a
centralization and consolidation program which included the expected closure
of twenty-six store locations (the "Store Closure Program") and certain
operating facilities, as well as the consolidation of certain duplicate
administrative and distribution functions. At January 30, 1993, twenty-one
stores remained in the Store Closure Program, sixteen of which had been
closed. During 1993, based on the Company's ongoing assessment of scheduled
store closures, the remaining five open stores were removed from the Store
Closure Program. As a result of the removal of these five stores from the
Store Closure Program, the Company reduced its consolidation and
centralization accrual by $2.3 million. Of this amount, $1.1 million, before
applicable taxes, was credited to goodwill and the remaining $1.2 million
credited to long-term liabilities to reflect the ongoing adverse lease
commitments associated with the removed stores. At January 28, 1995 and
February 3, 1996, the balance of the consolidation and centralization accrual
was $4.7 million and $4.1 million, respectively, primarily reflecting the
lease costs associated with closed stores. During 1993, 1994 and 1995, the
Company charged $0.8 million, $0.7 million and $0.6 million, respectively, to
the accrual.

NOTE 5 - LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
January 28, 1995 February 3,1996
---------------- ---------------
<S> <C> <C>
Held by third parties:
SRI Senior Notes ........................................... $ 90,800 $ 85,800
SRI Senior Subordinated Notes, net of discount ............. 100,000 116,530
Revolving Credit Agreement ................................. -- --
Bealls Holding Subordinated Notes, net of discount ......... 10,686 11,319
FB Holdings Subordinated Notes, net of discount ............ 3,939 4,125
Bealls Holding Junior Subordinated Debentures, net of
discount .................................................. 6,095 6,221
Port Arthur IDRB ........................................... 2,117 2,002
Stage Stores Senior Discount Debentures, net of discount ... 96,748 109,817
Other long term debt ....................................... 451 301
-------- --------
310,836 336,115
Less--current maturities ................................... (261) (276)
-------- --------
$310,575 $335,839
======== ========
Held by related party:
SRI Senior Notes ........................................... $ 39,200 $ 44,200
======== ========
</TABLE>

F-17
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

During 1993, the Company completed its refinancing (the "Refinancing")
which included (i) the replacement of SRI's existing accounts receivable
facility with the Accounts Receivable Program and (ii) the issuance of SRI 10%
Senior Notes Due 2000 (the "SRI Senior Notes") and SRI 11% Series B Senior
Subordinated Notes Due 2003 (the "SRI Series B Senior Subordinated Notes").
The proceeds from the Refinancing were used primarily to replace certain
previously outstanding debt. As a result of the Refinancing, the Company
recorded an extraordinary charge of $16.2 million net of applicable income
taxes of $8.8 million during 1993.

Concurrent with the Refinancing, the Company completed its distribution
plan which included the issuance of $149.1 million principal amount of 12 3/4%
Senior Discount Debentures Due 2005 (the "Stage Stores Senior Discount
Debentures"); the proceeds of which were used primarily to make a distribution
to the shareholders of Stage Stores.

The SRI Senior Notes were originally issued with a principal amount of
$150.0 million and bear interest at 10% payable semi-annually on February 15
and August 15. The Company is required to make a mandatory sinking fund
payment on August 15, 1999 equal to twenty five percent of the original
principal amount. The Company has purchased $20.0 million of the SRI Senior
Notes which satisfied a portion of the August 15, 1999 sinking fund
requirement. The SRI Senior Notes are general unsecured obligations and rank
senior to all subordinated debt of the Company including the SRI Senior
Subordinated Notes.

The SRI Series B Senior Subordinated Notes were originally issued with a
principal amount of $100.0 million and bear interest at 11% payable
semi-annually on February 15 and August 15. SRI is required to make a
mandatory sinking fund payment on August 15, 2002 equal to forty percent of
the original principal amount. The SRI Series B Senior Subordinated Notes are
subordinated to the obligations under the SRI Senior Notes.

During 1995, SRI issued $18.3 million in aggregate principal amount of SRI
11% Series D Senior Subordinated Notes Due 2003 (the "SRI Series D Senior
Subordinated Notes"). The SRI Series D Senior Subordinated Notes were issued
at a discount of $1.8 million and bear interest at 11% payable semi-annually
on February 15 and August 15 of each year. The original issue discount is
being charged to interest expense over the term to maturity using the
effective interest method. The combination of coupon interest payments and
original issue discount results in an effective interest rate of 13.0%. SRI is
required to make a mandatory sinking fund payment on September 15, 2002 equal
to forty percent of the original aggregate principal amount of the SRI Series
D Senior Subordinated Notes. The SRI Series D Senior Subordinated Notes rank
pari passu with the existing SRI Series B Senior Subordinated Notes
(collectively, the "SRI Senior Subordinated Notes").

The SRI Senior Notes and SRI Senior Subordinated Notes contain restrictive
covenants which, among other things (i) limit SRI's ability to sell certain
assets, pay dividends, retire its common stock or retire certain debt, (ii)
limit its ability to incur additional debt or issue stock and (iii) limit
certain related party transactions.

SRI has a revolving credit agreement with a bank (the "Credit Agreement")
under which it may draw up to $25.0 million. Of this amount, up to $15.0
million may be used to support letters of credit. As of February 3, 1996, $8.4
million of the total commitment was used to collateralize letters of credit
resulting in available funds of $16.6 million. The Company also has a separate
agreement with the bank under which it may borrow an additional $10.0 million
for seasonal working capital needs (the "Seasonal Credit Agreement" and
together with the Credit Agreement, the "Revolving Credit Agreement"). Funds
are available under the Seasonal Credit Agreement from August 15 through
January 15 of each calendar year (the "Seasonal Period"). The Revolving Credit
Agreement is available through February 3, 1998 and provides for a commitment
fee of 1/2 of 1% of the average daily unused portion of the commitment amount
paid on a quarterly basis. Interest is charged on outstanding loans at a base
rate plus a specified margin. The base rate is the higher of the bank's prime
rate or 1/2 of 1% above the Federal Funds Effective Rate. The specified margin
range is 1.25% to 2.75% based on calculated debt service ratios as defined in
the agreement. During 1995, the availability under the Credit Agreement was
never less than $4.5 million. During the Seasonal Period, the availability
under the Revolving Credit Agreement was never less than $11.5 million. The
Revolving Credit Agreement contains covenants which, among other things,
restricts the (i) incurrence of additional

F-18
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

debt, (ii) purchase of certain investments, (iii) payment of dividends, (iv)
formation of certain business combinations, (v) disposition of certain assets,
(vi) acquisition of subordinated debt, (vii) use of proceeds received under
the agreement, (viii) aggregate amount of capital expenditures (including any
expenditures made in connection with any permitted acquisitions) to $31.0
million during 1995 and (iv) certain transactions with related parties. The
Revolving Credit Agreement also requires that SRI maintain a debt service
ratio above a predetermined level. The Revolving Credit Agreement is secured
by SRI's distribution center located in Jacksonville, Texas, including
equipment located therein, a pledge of SRPC stock and a pledge of the
Company's trademarks. The net book value of the distribution center was
approximately $10.7 million at February 3, 1996.

The increasing rate Bealls Holding, Inc. ("Bealls Holding") Subordinated
Debentures Due 2002 (the "Bealls Holding Subordinated Debentures") in
aggregate principal amount of approximately $15.0 million bear interest at 10%
through 1994, 11% in 1995 and 12% thereafter until maturity. Interest is
payable semi-annually on June 30 and December 31. Original issue discount of
$7.3 million is being charged to interest expense over the term to maturity
using the effective interest method. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
20.9%. The Bealls Holding Subordinated Debentures may be prepaid, at the
Company's option, at their face value. The Company is required to redeem the
Bealls Holding Subordinated Debentures beginning no later than December 31,
1997, in no more than six equal annual installments. The Bealls Holding
Subordinated Debentures are subordinated to all debt except the Stage Stores
Senior Discount Debentures. SRI is the primary obligor under these debentures.

In connection with the acquisition of Fashion Bar, FB Holdings, Inc. ("FB
Holdings") issued approximately $3.6 million aggregate principal amount of 7%
FB Holdings Subordinated Notes Due 2000 ("FB Holdings Subordinated Notes") to
former stockholders of Fashion Bar. The FB Holdings Subordinated Notes were
recorded at their estimated fair value at issuance date of $3.1 million. The
difference between the estimated fair value and principal amount of $0.5
million is being charged to interest expense over the term to maturity using
the effective interest method. The FB Holdings Subordinated Notes are due in
two equal installments on June 30, 1999 and 2000. The FB Holdings Subordinated
Notes may be prepaid at any time in whole or in part at SRI's option. The FB
Holdings Subordinated Notes bear interest at 7% per annum, payable quarterly.
The combination of coupon interest payments and original issue discount
results in an effective interest rate of 9.0%. Prior to and including June
1995, SRI paid interest in the form of additional FB Holdings Subordinated
Notes; thereafter, interest is being paid in cash. The principal amount of FB
Holdings Subordinated Notes at February 3, 1996 was $4.4 million. The FB
Holdings Subordinated Notes are subordinated to all debt except the Stage
Stores Senior Discount Debentures. SRI is the primary obligor under these
debentures.

In connection with the acquisition of Bealls, Bealls Holding issued the 7%
Bealls Holding Junior Subordinated Debentures Due 2003 ("Bealls Holding Junior
Subordinated Debentures") at a face value of approximately $12.5 million, net
of discount of approximately $8.4 million. Such discount is being charged to
interest expense over the term to maturity using the effective interest
method. The Bealls Holding Junior Subordinated Debentures are limited to an
aggregate principal amount of approximately $18.3 million. Interest is payable
semi-annually on June 30 and December 31. The combination of coupon interest
payments and original issue discount results in an effective interest rate of
39.4%. The principal amount of Bealls Holding Junior Subordinated Debentures
outstanding at February 3, 1996 was $14.3 million. The Bealls Holding Junior
Subordinated Debentures are subordinated to all debt except the Stage Stores
Senior Discount Debentures. SRI is the primary obligor under these debentures.

The Port Arthur Industrial Development Revenue Bond (the "Port Arthur
IDRB") bears interest at 75% of the prime rate payable monthly. The interest
rate applicable to the Port Arthur IDRB at February 3, 1996 was 6.6%. The Port
Arthur IDRB is collateralized by a building with a net book value of
approximately $1.7 million. Under a separate agreement, SRI is required to
make scheduled annual sinking fund payments ranging from $0.1 million to $0.2
million.

The Stage Stores Senior Discount Debentures were issued with a principal
amount of approximately $149.1 million. The debentures were sold at a discount
of approximately $69.1 million. Substantially all of the net proceeds

F-19
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

from the Stage Stores Senior Discount Debentures were used to make cash
payments to the holders of Stage Stores common stock equal to $5.85 per share.
Interest begins to accrue in August 1998 and is payable semi-annually on
February 15 and August 15 commencing February 15, 1999. The discount is being
charged to interest expense over the term to maturity using the effective
interest method which, together with the coupon interest, results in a 12.74%
effective interest rate. The Stage Stores Senior Discount Debentures contain
restrictions which, among other things, limits (i) the payment of dividends,
(ii) the repurchase of stock and subordinated debt, (iii) the acquisition of
additional debt or the creation of certain liens, (iv) disposition of certain
assets and (v) certain related party and intercompany transactions. The Stage
Stores Senior Discount Debentures are secured by all of the issued and
outstanding common stock of SRI and is subordinated to all debt.

Aggregate maturities of long-term debt for the next five years are:
1996--$0.3 million; 1997--$2.1 million; 1998--$2.1 million; 1999--$21.7
million and 2000--$116.6 million.

Management estimates the fair value of its long-term debt to be $325.7
million and $352.3 million at January 28, 1995 and February 3, 1996,
respectively. In developing its estimates, management considered quoted market
prices for each instrument, if available, current market interest rates in
relation to the coupon interest rates of each instrument, the relative
subordination of each instrument and the relative liquidity of the instrument
as indicated by the presence or lack of an active market.

NOTE 6 - MANDATORILY REDEEMABLE PREFERRED STOCK

In connection with the Refinancing in 1993 (see Note 5), the Company
redeemed all of the outstanding shares of its 15% cumulative senior redeemable
preferred stock and 14% cumulative junior redeemable preferred stock (8,080
and 2,000 shares, respectively) at the aggregate of their liquidation value
plus accrued and unpaid dividends amounting to $16.0 million and $3.8 million,
respectively.

NOTE 7 - STOCK OPTION PLAN

During 1993, the Company adopted the Third Amended and Restated Stock
Option Plan (the "Stock Option Plan") which was designed to provide incentives
to present and future key employees and advisors to the Company (the
"Participants") as selected by the compensation committee of the Board of
Directors (the "Board"). Options to purchase shares of the Company's common
stock may be granted to any Participant at any time, at such price and on such
terms as established by the Board. Options granted under the Stock Option Plan
may be either non- qualified or incentive stock options ("ISOs") within the
meaning of Section 422A of the Internal Revenue Code or in a form consistent
with the Stock Option Plan as the Board may determine. All outstanding options
are non- qualified.

The number of shares of common stock which may be granted under the Stock
Option Plan shall not exceed 2,000,000 shares. All Options issued as ISOs
under the Stock Option Plan are required to (i) have an exercise price not
less than 100% of the fair value of the common stock at the date of grant,
(ii) not be exercisable more than 10 years after grant date, (iii) be
nontransferable and (iv) be exercisable only during the holder's employment by
the Company or a period not exceeding three months following termination
thereof. Options which are not ISOs may provide that the holder receive cash
equal to the excess of the fair market value per share of common stock at the
exercise date over the exercise price per share, in lieu of issuance of common
stock upon exercise of the option. Upon termination of the Participant's
employment with the Company, the Company may, at its option, repurchase any
vested common stock obtained under the Stock Option Plan at the fair market
value of the common stock. Any unvested common stock obtained under the Stock
Option Plan may be repurchased at the Company's option, at the original
issuance cost of the common stock. The Stock Option Plan also provides that
the Company may sell to any Participant shares of common stock or preferred
stock consistent with the Plan and at the discretion of the Board.

During 1993, all of SRI's options with an exercise price of $0.10 were
exercised. Additionally, the Board granted active Participants who exercised
such options one Stage Stores option with an exercise price of $2.15

F-20
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

for every ten SRI options exercised. All of SRI's options with an exercise
price of $5.00 remained outstanding and were exchanged for Stage Stores
options with an exercise price of $0.10 and the right to receive a
distribution of $0.95 per option which will be paid as the options vest. This
distribution is being recognized as compensation expense over the vesting
period.

The range of prices for options exercised during 1995 was $0.10 to $2.15
per share. The range of prices for options outstanding at the end of 1995 was
$0.10 to $5.00 per share.

A summary of the activity in the Stock Option Plan follows:

<TABLE>
<CAPTION>
Fiscal Year
----------------------------------
1993 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
Options outstanding at beginning of year ...... 863,625 571,082 743,012
Granted ...................................... 457,227 197,050 431,880
Surrendered .................................. (13,045) (7,849)
Exercised ................................... (736,725) (2,880) (105,551)
-------- ------- ---------
Options outstanding at end of year ............ 571,082 743,012 1,061,492
======== ======= =========
Options vested at end of year ................. -- 130,570 254,790
======== ======= =========
Options exercisable at end of year ............ -- 130,570 254,790
======== ======= =========
</TABLE>

NOTE 8 - EMPLOYEE BENEFIT PLANS

Pension benefits for employees are provided under the SRI Retirement Plan
(the "Plan"), a qualified benefit plan. Benefits are administered through a
Trust arrangement which provides monthly payments or lump sum distributions.
The Plan covers substantially all employees who have completed one year of
service with one thousand hours of service. Benefits under the plan are based
upon a percentage of the participant's earnings during each year of credited
service.

The following sets forth the funded status of the Plan and the amounts
recognized in the consolidated financial statements (in thousands):

<TABLE>
<CAPTION>
January 28,1995 February 3,1996
--------------- ---------------
<S> <C> <C>
Actuarial present value of benefits:
Vested benefit obligations ................................... $(18,590) $(24,680)
======== ========
Accumulated benefit obligations .............................. $(19,630) $(25,790)
======== ========
Projected benefit obligations ................................. $(24,530) $(32,240)
Market value of Plan assets, primarily fixed income and
equity securities ............................................ 16,320 20,000
-------- --------
Pension obligations in excess of assets ....................... (8,210) (12,240)
Unrecognized prior service income ............................. (34) (28)
Unrecognized net loss ......................................... 6,078 10,948
Adjustment required to recognize minimum liability ............ (1,144) (4,470)
-------- --------
Accrued pension cost ......................................... $ (3,310) $ (5,790)
======== ========
Assumptions utilized in determining projected obligations
and funding amounts:
Discount rate ................................................. 8.75% 7.00%
Rate of increase in compensation levels ....................... 4.00% 4.00%
Expected long-term rate of return on Plan assets .............. 9.00% 9.00%

</TABLE>

The Company's funding policy for the Plan is to contribute the minimum
amount required by applicable regulations. During 1993, 1994 and 1995, in
accordance with Statement of Financial Accounting Standards No.

F-21
<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

87, the Company recorded adjustments of $1.1 million, $0.2 million and $3.2
million to recognize the excess of the accumulated benefit obligation over the
market value of the Plan assets, respectively. Accordingly, the Company
recorded a charge to retained earnings of $0.6 million, $0.1 million and $2.1
million, net of applicable tax and unrecognized prior service cost, for 1993,
1994 and 1995, respectively.

The components of pension cost for the Plan were as follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Service cost ............................................ $ 743 $ 887 $ 771
Interest cost ........................................... 1,861 1,995 2,139
Actual loss (return) on Plan assets ..................... (1,955) 940 (3,377)
Net amortization and deferral ........................... 409 (2,174) 2,292
------- ------- -------
$ 1,058 $ 1,648 $ 1,825
======= ======= =======
</TABLE>

Prior to its acquisition, Beall Brothers, Inc. sponsored an unfunded,
nonqualified Benefit Restoration Plan which provided certain key executives
defined pension benefits in excess of limits imposed by federal tax law. In
February 1989, this plan was terminated. The recorded liability for this plan
was $1.3 million at February 3, 1996.

NOTE 9 - OPERATING LEASES

The Company leases stores, service center facilities, the corporate
headquarters and equipment under operating leases. A number of store leases
provide for escalating minimum rent. Rental expense is recognized on a
straight-line basis over the life of such leases. The majority of the
Company's store leases provide for contingent rentals, generally based upon a
percentage of gross sales. The Company has renewal options for most of its
store leases; such leases generally require that the Company pay for
utilities, taxes and maintenance expense. A summary of rental expense
associated with operating leases follows (in thousands):

<TABLE>
<CAPTION>
Fiscal Year
----------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Minimum rentals ......................................... $22,319 $22,979 $26,943
Contingent rentals ...................................... 2,818 2,874 2,618
Equipment rentals ....................................... 1,273 784 593
------- ------- -------
$26,410 $26,637 $30,154
======= ======= =======
</TABLE>

Minimum rental commitments on long-term operating leases at February 3,
1996, net of sub-leases, are as follows (in thousands):

<TABLE>
<CAPTION>
<S> <C>
Fiscal Year:
1996 .................................................................... $ 28,307
1997 .................................................................... 27,028
1998 .................................................................... 25,146
1999 .................................................................... 23,527
2000 .................................................................... 20,233
Thereafter .............................................................. 84,999
--------
$209,240
========
</TABLE>

The Company's corporate headquarters and six Palais Royal stores are leased
from a partnership in which a Company director is a general partner. The lease
relating to the corporate headquarters is for a term of fifty years expiring
in 2032 and includes an established minimum annual rate adjusted every three
years for changes in the Consumer Price Index. Three of the Palais Royal store
leases are for terms of twenty years expiring between 1999 and 2000. The
remaining three store leases are for terms of twenty-five years expiring
between 2005 and 2010.

F-22
<PAGE>

State Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

All of the store leases provide options to extend the term of the lease and
for contingent rentals based on a percentage of gross sales. The Company
recognized rental expense of $1.9 million, $2.0 million and $2.1 during 1993,
1994 and 1995, respectively, for all such leases. Future minimum lease
payments total $44.7 million, $9.6 million of which is payable over the next
five fiscal years for all such leases. The Company believes that the terms of
all such leases are comparable to leases with unaffiliated third parties
covering similar properties.

NOTE 10 - RELATED PARTY TRANSACTIONS

The Company's corporate headquarters and six Palais Royal stores are leased
from a partnership in which a Company officer is a general partner (see Note
9).

An affiliate of a principal shareholder of the Company received fees for
professional services rendered and expense reimbursements in the amounts of
$1.5 million, $0.6 million and $0.8 million for 1993, 1994 and 1995,
respectively.

During 1993, the Company entered into an employment agreement with the
President and Chief Executive Officer of the Company. As part of this
agreement, the Company agreed to purchase his former residence for subsequent
resale for $1.2 million and loaned $0.3 million to him. Such loan is due
October 2, 1996, subject to extension, and bears a market rate of interest.

NOTE 11 - INCOME TAXES

All Company operations are domestic. Income tax expense charged to
continuing operations consisted of the following (in thousands):

Fiscal Year
------------------------
1993 1994 1995
------ ------ ------
Federal income tax expense (benefit):
Current ............................ 9,989 $7,154 $9,772
Deferred ........................... (2,362) (3,794) (3,630)
------ ------ ------
7,627 3,360 6,142
------ ------ ------
State income tax expense (benefit):
Current ............................ 1,250 771 1,060
Deferred ........................... (1,308) 186 (435)
------ ------ ------
(58) 957 625
------ ------ ------
$7,569 $4,317 $6,767
====== ====== ======

A reconciliation between the federal income tax expense charged to
continuing operations computed at statutory tax rates and the actual income
tax expense recorded follows (in thousands):

Fiscal Year
-------------------------
1993 1994 1995
------ ------ ------
Federal income tax expense at the statutory rate.. $6,124 $7,348 $3,831
State income taxes, net .......................... 125 797 406
Permanent differences, net ....................... 58 (311) 290
Other, net ....................................... 38 -- (53)
------ ------ ------
$7,569 $4,317 $6,767
====== ====== ======

The 1993 income tax benefit relating to the extraordinary item of $8.8
million (see Note 5) is comprised of current federal tax benefit ($7.4
million), deferred federal tax benefit ($1.3 million) and state tax benefit
($0.1 million). The 1994 income tax benefit relating to the extraordinary item
associated with the retirement of the SRI Senior Notes (see Note 5) is
comprised of $0.2 million current federal tax benefit.

F-23
<PAGE>
State Stores, Inc.
(formerly Apparel Retailers, Inc.)
Notes to Consolidated Financial Statements (Continued)

Deferred tax liabilities (assets) consist of the following (in thousands):

January 28, February 3,
1995 1996
-------- --------
Gross deferred tax liabilities:
Depreciation and amortization ............ $ 8,303 $ 7,485
Inventory reserves ....................... 3,175 1,406
Gain on sale of accounts receivable ...... 822 800
Other .................................... 1,310 1,435
-------- --------
13,610 11,126
-------- --------
Gross deferred tax assets:
Allowance for doubtful accounts .......... (3,174) (3,302)
Accrued consolidation costs .............. (1,968) (1,478)
Net operating loss carryforwards ......... -- (82)
Original issue discount .................. (5,640) (10,042)
Accrued expenses ......................... (1,518) (990)
Prepaid expenses ......................... -- --
Pensions ................................. (1,404) (2,686)
Escalating leases ........................ (962) (962)
Charitable contribution carryforward ..... (620) (113)
Accrued payroll costs .................... (1,196) (884)
Accrued store closure costs .............. (2,085) (558)
Other .................................... (975) (780)
-------- --------
(19,542) (21,877)
-------- --------
Deferred tax assets valuation
allowance ................................. -- --
-------- --------
$ (5,932) $(10,751)
======== ========

The utilization of any carryforwards which originated prior to the
Company's acquisition of Bealls or Fashion Bar are recorded as an adjustment
to goodwill or other intangibles associated with the respective acquisition.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Litigation: The Company is subject to claims and litigation arising in the
normal course of its business. The Company does not believe that any of these
proceedings will have a material adverse effect on its financial position, its
results of operations or its cash flows.

Letters of Credit: The Company issues letters of credit to support certain
merchandise purchases which are required to be collateralized. The Company had
outstanding letters of credit totaling $8.4 million at February 3, 1996, all
of which were collateralized by the Revolving Credit Agreement (see Note 5).
These letters of credit expire within twelve months of issuance.

Concentration of Credit Risk: Financial instruments which potentially
subject the Company to concentrations of credit risk are primarily cash,
short-term investments and accounts receivable. The Company's cash management
and investment policies restrict investments to low risk, highly-liquid
securities and the Company performs periodic evaluations of the relative
credit standing of the financial institutions with which it deals. The credit
risk associated with the Company's accounts receivable is limited by the large
number of customers in the Company's customer base. Substantially all of the
Company's customers reside in the central United States.

F-24
<PAGE>

UHLMANS INC.

BALANCE SHEETS
(Unaudited)

<TABLE>
<CAPTION>
February 3, May 4,
1996 1996
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash ............................................................... $ 924,550 $ 1,053,553
Trade accounts receivable, net ..................................... 6,617,576 5,519,214
Merchandise inventories ............................................ 10,921,994 13,153,610
Prepaid expenses ................................................... 138,978 250,871
------------ ------------
Total current assets ........................................... 18,603,098 19,977,248

Other assets ......................................................... 227,697 188,567
Leasehold improvements and equipment:
Leasehold improvements ............................................. 7,299,310 7,009,412
Furniture and fixtures ............................................. 4,229,136 4,344,279
Transportation equipment ........................................... 53,431 68,148
------------ ------------
11,581,877 11,421,839
Less allowances for depreciation and amortization .................. 7,190,789 7,438,884
------------ ------------
4,391,088 3,982,955
------------ ------------
$ 23,221,883 $ 24,148,770
============ ============
Liabilities And Stockholders' Equity
Current liabilities:
Trade accounts payable ............................................. $ 3,288,528 $ 3,856,710
Accrued expenses ................................................... 421,904 331,816
Compensation and payroll taxes ..................................... 658,316 606,710
State and local taxes .............................................. 309,630 460,792
Interest ........................................................... 51,149 101,325
Current maturities of long-term liabilities ........................ 876,292 856,971
------------ ------------
Total current liabilities ...................................... 5,605,819 6,214,324

Long-term liabilities, less current maturities:
Notes payable including notes payable to stockholders
and former stockholders ......................................... 13,877,904 14,868,909
Obligations under deferred compensation arrangements ............... 234,748 196,636
Pension ............................................................ 110,089 147,875
------------ ------------
14,222,741 15,213,420
Deferred credit ...................................................... 5,133 --
Stockholders' equity:
Common stock, no par value:
Authorized--150,000 shares
Outstanding--8,271 shares after deducting 86,069
treasury shares, at stated value ............................... 82,710 82,710
Retained earnings .................................................. 3,305,480 2,691,833
Reduction for minimum pension liability ............................ -- (53,517)
------------ ------------
3,388,190 2,721,026
$ 23,221,883 $ 24,148,770
============ ============
</TABLE>

See accompanying notes.

F-25
<PAGE>

UHLMANS INC.

STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
Period from Period from
February 1, February 4,
1995 through 1996 through
April 29, May 4,
1995 1996
------------ -------------
<S> <C> <C>
Net merchandise sales ............................................................ $ 12,068,499 $12,146,694
Cost of sales and related buying, occupancy, and
distribution expenses .......................................................... (10,002,967) (9,855,730)
------------ -----------
Gross profit ..................................................................... 2,065,532 2,290,964
Selling, general and administrative expenses ..................................... (2,982,742) (2,751,640)
Service charge income ............................................................ 222,124 204,128
------------ -----------
Operating loss ................................................................... (695,086) (256,548)

Interest expense ................................................................. (330,000) (357,062)
------------ -----------
Net loss ......................................................................... $ (1,025,086) $ (613,610)
============ ===========
</TABLE>

See accompanying notes.

F-26
<PAGE>

UHLMANS INC.

STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
Period from Period from
February 1, February 4,
1995 through 1996 through
April 29, May 4,
1995 1996
------------ -------------

<S> <C> <C>
Operating activities
Net loss ........................................................................ $(1,025,086) $ (613,610)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation .................................................................. 218,145 221,955
Provision for bad debts ....................................................... 49,500 49,500
Changes in operating assets and liabilities:
Trade accounts receivable .................................................... 791,681 547,214
Merchandise inventories ...................................................... (2,308,468) (1,858,144)
Prepaid expenses and other assets ............................................ (54,568) (50,208)
Trade accounts payable and accrued expenses .................................. 1,521,671 917,315
Obligations under deferred compensation
arrangements ............................................................... -- 10,000
------------ ------------
Net cash used in operating activities ...................................... (807,125) (775,978)

Net cash used in investing activities--purchase of
leasehold improvements and equipment ........................................... (277,448) (50,667)

Financing activities
Payments on notes payable ....................................................... (9,661) (67,625)
Net borrowings on revolving line of credit ...................................... 1,000,000 1,100,000
------------ ------------
Net cash provided by financing activities .................................... 990,339 1,032,375
------------ ------------
Increase (decrease) in cash ..................................................... (94,234) 205,730
Cash at beginning of period ..................................................... 924,550 847,823
------------ ------------
Cash at end of period ........................................................... $ 830,316 $ 1,053,553
============ ============
</TABLE>

See accompanying notes.

F-27
<PAGE>

UHLMANS INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)
May 4, 1996

(1) BASIS OF PRESENTATION

The accompanying unaudited financial statements of Uhlmans Inc. (the
Company) have been prepared in accordance with Rule 10-01 of Regulation S-X
and do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. Those
adjustments, which include only normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of the results of the
interim periods have been made. The results of operations for such interim
periods are not necessarily indicative of results of operations for a full
year. The unaudited financial statements should be read in conjunction with
the audited financial statements and notes thereto for the year ended February
3, 1996 included elsewhere in this prospectus.

(2) SALE OF COMPANY

On June 3, 1996, a wholly-owned subsidiary of Stage Stores, Inc. acquired
all of the outstanding shares of the Company's common stock for approximately
$12.0 million. In connection with the acquisition, Stage Stores, Inc. repaid
all of the Company's outstanding indebtedness.

F-28
<PAGE>

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Uhlmans Inc.

We have audited the accompanying balance sheets of Uhlmans Inc. as of February
3, 1996 and January 31, 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended February 3, 1996. 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 Uhlmans Inc. at February 3,
1996 and January 31, 1995, and the results of its operations and its cash
flows for each of the three years in the period ended February 3, 1996 in
conformity with generally accepted accounting principles.

In fiscal 1996, as described in Note 6 to the financial statements, the
Company adopted the provisions of FASB Statement No. 106, "Employer's
Accounting for Retirement Benefits Other Than Pensions."

Ernst & Young LLP

Toledo, Ohio
March 22, 1996

F-29
<PAGE>

UHLMANS INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
January 31, February 3,
1995 1996
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash ............................................................................... $ 924,550 $ 847,823
Trade accounts receivable, less $100,000 allowance for doubtful accounts ......... 6,617,576 6,115,928
Merchandise inventories .......................................................... 10,921,994 11,295,466
Prepaid expenses ................................................................. 138,978 171,978
------------ ------------
Total current assets ......................................................... 18,603,098 18,431,195
Other assets ....................................................................... 227,697 217,252
Leasehold improvements and equipment:
Leasehold improvements ........................................................... 7,299,310 6,969,300
Furniture and fixtures ........................................................... 4,229,136 4,333,724
Transportation equipment ......................................................... 53,431 68,148
------------ ------------
11,581,877 11,371,172
Less allowances for depreciation and amortization .................................. 7,190,789 7,216,929
------------ ------------
4,391,088 4,154,243
------------ ------------
$ 23,221,883 $ 22,802,690
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable ........................................................... $ 3,288,528 $ 2,939,965
Accrued expenses ................................................................. 421,904 453,496
Compensation and payroll taxes ................................................... 658,316 654,994
State and local taxes ............................................................ 309,630 321,406
Interest ......................................................................... 51,149 70,177
Current maturities of long-term liabilities ...................................... 876,292 924,595
------------ ------------
Total current liabilities .................................................... 5,605,819 5,364,633
Long-term liabilities, less current maturities:
Notes payable including notes payable to stockholders and
former stockholders (Note 2) ................................................... 13,877,904 13,768,910
Obligations under deferred compensation arrangements ............................. 234,748 186,636
Pension .......................................................................... 110,089 147,875
------------ ------------
14,222,741 14,103,421
Deferred credit .................................................................... 5,133 --
Commitments and Contingencies ...................................................... -- --

Stockholders' equity (Note 3):
Common stock, no par value:
Authorized--150,000 shares
Outstanding--8,271 shares after deducting 86,069 treasury
shares, at stated value ...................................................... 82,710 82,710
Retained earnings ................................................................ 3,305,480 3,305,443
Reduction for minimum pension liability .......................................... -- (53,517)
------------ ------------
3,388,190 3,334,636
------------ ------------
$ 23,221,883 $ 22,802,690
============ ============
</TABLE>

See accompanying notes.

F-30
<PAGE>

UHLMANS INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
----------- ----------- -------------
<S> <C> <C> <C>
Net merchandise sales ....................................................... $ 57,101,769 $ 60,212,662 $ 59,749,342
Cost of sales and related buying, occupancy, and distribution
expenses .................................................................. (43,545,216) (46,559,601) (46,129,222)
------------ ------------ ------------
Gross profit ................................................................ 13,556,553 13,653,061 13,620,120
Selling, general and administrative expenses ................................ (12,096,093) (11,883,614) (12,231,712)
Service charge income ....................................................... 801,584 874,029 850,852
------------ ------------ ------------
Operating income ............................................................ 2,262,044 2,643,476 2,239,260
Interest expense ............................................................ (1,168,260) (1,431,055) (1,636,673)
------------ ------------ ------------
Net income ................................................................ $ 1,093,784 $ 1,212,421 $ 602,587
============ ============ ============
</TABLE>

See accompanying notes.

F-31
<PAGE>

UHLMANS INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Reduction
Common Stock for
----------------------- Minimum
Stated Retained Pension
Shares Value Earnings Liability Total
-------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balances at February 1, 1993..... 27,016 $ 270,160 $ 5,599,966 $ 5,870,126
Net income ..................... 1,093,784 1,093,784
Cash distributions to
stockholders ................. (360,394) (360,394)
Purchase of common stock for
treasury (Note 3) ............ (18,745) (187,450) (3,726,256) (3,913,706)
------- --------- ---------- ------- ----------
Balances at February 1, 1994..... 8,271 82,710 2,607,100 2,689,810
Net income ..................... 1,212,421 1,212,421
Cash distributions to
stockholders ................. (514,041) (514,041)
------- --------- ----------- ------- ----------
Balances at January 31, 1995..... 8,271 82,710 3,305,480 3,388,190
Net income ..................... 602,587 602,587
Cash distributions to
stockholders ................. (602,624) (602,624)
Reduction for minimum pension
liability (Note 5)............. $(53,517) (53,517)
------- ---------- ----------- -------- ------------
Balances at February 3, 1996..... 8,271 $ 82,710 $ 3,305,443 $(53,517) $ 3,334,636
======= ========== =========== ======== ============
</TABLE>

See accompanying notes.

F-32
<PAGE>

UHLMANS INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income ................................................ $ 1,093,784 $ 1,212,421 $ 602,587
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................ 876,037 844,625 896,177
Provision for bad debts ................................. 143,996 135,647 131,678
Amortization of deferred credit ......................... (13,000) (13,000) (5,133)
Changes in operating assets and liabilities:
Trade accounts receivable .............................. (462,008) 75,559 369,722
Merchandise inventories ................................ (503,840) (717,111) (373,768)
Prepaid expenses and other assets ...................... (30,822) 43,116 51,881
Trade accounts payable and accrued expenses ............ 529,784 669,810 (258,588)
Pension obligations .................................... (51,320) 34,602 (108,138)
Obligations under deferred compensation
arrangements ........................................ 4,629 (30,659) (48,112)
Cash value of life insurance ........................... 65,413 (10,557) (12,386)
Net cash provided by operating activities ............ 1,652,653 2,244,453 1,245,920

Net cash used in investing activities--purchase of
leasehold improvements and equipment .................... (762,617) (860,912) (659,332)

Financing activities
Borrowings on notes payable ............................... 2,750,000 -- --
Payments on notes payable ................................. (617,158) (860,692) (960,691)
Distributions to stockholders ............................. (360,394) (514,041) (602,624)
Purchase of common stock .................................. (2,500,000) -- --
Net borrowings on revolving line of credit ................ -- -- 900,000
----------- ----------- ----------
Net cash used in financing activities .................. (727,552) (1,374,733) (663,315)
----------- ----------- ----------
Increase (decrease) in cash ............................... 162,484 8,808 (76,727)
Cash at beginning of year ................................. 753,258 915,742 924,550
----------- ----------- ----------
Cash at end of year ....................................... $ 915,742 $ 924,550 $ 847,823
=========== =========== ==========
</TABLE>

See accompanying notes.

F-33
<PAGE>

UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS
February 3, 1996

(1) SIGNIFICANT ACCOUNT POLICIES

Basis of Presentation

In fiscal 1996, the Company changed its fiscal year-end to a
fifty-two/fifty-three week year which ends on the Saturday closest to January
31.

Description of Business

Uhlmans Inc. (the Company--formerly Fred W. Uhlman and Co.) operates 34
family apparel stores in Ohio, Michigan and Indiana.

Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Trade Accounts Receivable

Retail customer accounts receivable are charged-off in full if no payment
has been applied against the unpaid balance of the customer's account during
the last seven months of the fiscal year and no action has been taken by the
customer to repay the account. The allowance for doubtful accounts is based on
historical bad debt experience and an evaluation of the past-due status of the
accounts. The credit risk associated with the Company's accounts receivable is
limited by the large number of customers in the Company's customer base.
Substantially all of the Company's customers reside in Ohio, Indiana and
Michigan.

Advertising

The Company expenses the production costs of advertising as incurred.
Advertising expense for fiscal 1994, 1995 and 1996 was approximately
$1,695,000, $1,650,000 and $1,700,000, respectively. No advertising costs have
been capitalized by the Company.

Merchandise Inventories

Merchandise inventories are valued by use of the retail method and are
stated at the lower of cost or market using the first-in, first-out method.

Leasehold Improvements and Equipment

Leasehold improvements and equipment (including significant renewals and
betterments) are capitalized at cost. The Company provides for depreciation
and amortization by the straight-line method for financial-reporting purposes
and by accelerated methods for income-tax purposes. Leasehold improvements are
amortized over 10 years which approximates the lease terms. Equipment is
depreciated over its useful life (generally 5 to 10 years).

Income Taxes

Under an election privilege afforded by provisions of the Internal Revenue
Code, the Company has elected Subchapter S status for federal income tax
reporting. Accordingly, no provision has been made for federal income taxes as
the income of the Company is included in the stockholders' personal income tax
returns.

Financial Instruments

The Company records all financial instruments at cost. The fair value of
all financial instruments approximates cost.

F-34
<PAGE>

UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

(1) SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impairment of Assets

The Company has not elected early adoption of Statement of Financial
Accounting Standard No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
becomes effective beginning with the Company's first quarter of fiscal 1997.
The Company does not believe that the adoption of SFAS 121 will have a
material effect on the Company's financial position or results of operations.

(2) NOTES PAYABLE

The Company's lending agreement with banks (the agreement) provides for an
unsecured term note of $5,000,000 and an unsecured $12,000,000 revolving line
of credit (the revolver) (increasing to $14,500,000 during the period from
September 15 to December 15), and expires June 1, 1997.

Interest on the term note is at a base rate (8-1/4% at February 3, 1996)
fluctuating with prime plus 1/4%--2-1/2% dependent on the Company's financial
position. Interest on the revolver is at a base rate (6-3/4% at February 3,
1996) fluctuating with LIBOR plus 1-1/2%--3% dependent on the Company's
financial position. A commitment fee of 1/2% per annum is due on the unused
portion of the revolver.

The agreement requires the Company to maintain certain financial ratios and
net worth requirements. The agreement also limits annual stockholder
distributions to $40,000 plus an amount equivalent to income taxes that would
otherwise be payable. Provisions of the agreement were complied with during
fiscal 1994, 1995 and 1996.

Details of notes payable are as follows:

<TABLE>
<CAPTION>
January 31, February 3,
1995 1996
------------- ---------------
<S> <C> <C>
Revolving line of credit with banks ............................. $ 9,500,000 $10,400,000
Term note payable to banks, due in semiannual installments of
$350,000 plus interest through January 1, 1999 ................ 3,950,000 3,150,000
Subordinated notes payable to stockholders ($677,014 in 1995 and
$597,366 in 1996) and to former stockholders, unsecured, due in
semiannual installments of $70,685 plus interest at 12% through
May 31, 1998 .................................................. 1,201,650 1,060,280
Other unsecured notes payable ................................... 86,946 67,625
----------- -----------
14,738,596 14,677,905
Less current maturities ......................................... 860,692 908,995
----------- -----------
Totals .......................................................... $13,877,904 $13,768,910
=========== ===========
</TABLE>

The future maturities of long-term notes payable for fiscal years 1998
through 2000 are $11,241,371, $1,477,539 and $1,050,000, respectively.

Interest paid in fiscal 1994, 1995 and 1996 amounted to $1,253,904,
$1,463,607 and $1,617,645, respectively.

(3) COMMON STOCK

On November 25, 1986, the Company entered into a Stock Redemption and Share
Transfer Restriction Agreement (the Agreement) with certain stockholders of
the Company and redeemed 34,100 shares of common stock for $2,584,098. On July
19, 1993, the Company redeemed 18,745 shares of common stock not owned by
management for $3,913,706. The 1993 redemption was financed by an increase in
the term note with the banks of $2,500,000 and unsecured subordinated notes
payable in the amount of $1,413,706.

The Company has the option in the event of termination of employment to
purchase shares of the Company's common stock owned by the management group.
The price per share is the book value per share. The Company also has the
obligation to purchase the shares of the Company owned by the president of the
Company in the event

F-35
<PAGE>

UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

(3) COMMON STOCK (Continued)

of his death at 133% of book value per share at the end of the preceding
fiscal year. The Company carries life insurance on the life of the president
of the Company to fund the obligation.

(4) RENTAL EXPENSE

The Company leases all facilities and certain equipment under
noncancellable operating leases. Total rental expense amounted to $3,906,282,
$3,747,293 and $3,667,703 (including contingent rental expense of $213,390
$261,696 and $230,738) for fiscal years 1994, 1995 and 1996, respectively,
including $767,899, $775,999 and $746,979 applicable to leases with related
parties for the same periods.

Future minimum rental commitments under noncancellable operating leases
with initial terms of more than one year are as follows:

Fiscal years:
1997 ............................... $ 2,883,776
1998 ............................... 2,475,548
1999 ............................... 1,820,334
2000 ............................... 1,474,366
2001 ............................... 809,138
2002 and thereafter ................ 2,218,049
Total ................................ $11,681,211

Certain leases have provisions for additional contingent rentals based on
percentages of sales and contain options to renew for additional terms ranging
from one to twenty years.

(5) EMPLOYEE BENEFIT PLANS

The Company has a defined-benefit pension plan (the "Plan") covering the
majority of its employees. The benefits are primarily based on the employee's
compensation. The Company's funding policy is to contribute amounts to the
Plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus additional amounts as
the Company may determine to be appropriate. Effective December 31, 1994, the
Company curtailed all future benefit accruals of participants in the Plan that
resulted in a gain of $39,244 which is included in the results of operations
for the year ended January 31, 1995.

The Company has recorded an additional minimum liability of $110,089 and
$147,875 as of January 31, 1995 and February 3, 1996, respectively, which
represent the amounts required to bring the Company's recorded pension asset
equal to the excess of the accumulated benefit obligation over plan assets.
Intangible assets (included in other assets) of $110,089 and $94,358 as of
January 31, 1995 and February 3, 1996, respectively, were recorded to the
extent of the unrecognized prior service costs and net transition obligation.
The difference between the additional minimum liability and intangible asset
as of February 3, 1996 was included as a reduction of shareholders' equity.

F-36
<PAGE>

UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

(5) EMPLOYEE BENEFIT PLANS (Continued)

The following table sets forth the funded status and amounts recognized in
the Company's balance sheets for the Plan:

<TABLE>
<CAPTION>
January 31, February 3,
1995 1996
----------- -----------
<S> <C> <C>
Projected benefit obligation (substantially all vested) ............................ $ 1,547,517 $ 1,745,457
----------- -----------
Plan assets at fair value, primarily invested in common trust funds
and U. S. Treasury and agency securities ......................................... 1,407,071 1,675,363
----------- -----------
Projected benefit obligation in excess of plan assets .............................. (140,446) (70,094)
Unrecognized prior service cost .................................................... 110,089 94,358
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions .................................... 17,205 68,265
Unrecognized net asset ............................................................. (17,205) (14,748)
Minimum liability .................................................................. (110,089) (147,875)
----------- -----------
Net pension liability .............................................................. $ (140,446) $ (70,094)
=========== ===========
The net pension liability is included in:
Prepaid (accrued) expenses ....................................................... $ (30,357) $ 77,781
Long-term liabilities ............................................................ (110,089) (147,875)
----------- -----------
$ (140,446) $ (70,094)
=========== ===========
</TABLE>

Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
Period from
February 1,
1995 through
Year ended January 31, February 3,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest cost on projected benefit obligation .... $ 116,299 $ 125,095 $ 112,641
--------- --------- ---------
Service cost--benefits earned during the period 88,483 92,630 --
Return on plan assets (gain) loss ................ (24,522) 43,777 (241,959)
Net amortization and deferral .................... (80,331) (141,640) 144,117
--------- --------- ---------
Net periodic pension cost ........................ $ 99,929 $ 119,862 $ 14,799
========= ========= =========
</TABLE>

Assumptions used in the actuarial determinations for the Plan are:

<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -------
<S> <C> <C> <C>
Weighted average discount rate ........................ 7.5% 7.5% 6.5%
Expected long-term rate of return on plan assets ...... 7.5% 7.5% 6.5%
Rate of increase in future compensation levels ........ 4.0% -- --
</TABLE>

In fiscal 1996, the Company established a 401(k) profit sharing plan for
the benefit of all qualifying employees. Employer matching contributions are
made monthly based upon a percentage of qualified employees' contributions,
and amounted to $52,000 in fiscal year 1996. No additional profit sharing
contributions were made by the Company in fiscal year 1996.

F-37
<PAGE>

UHLMANS INC.
NOTES TO FINANCIAL STATEMENTS (Continued)

(6) OTHER POSTRETIREMENT BENEFIT PLAN

The Company sponsors a defined benefit health care plan that provides
postretirement medical benefits to a group of 17 retired employees. No
additional employees are being added to the Plan. The Plan is contributory,
with retiree contributions adjusted annually to cover any increased costs, and
contains other cost-slimming features such as deductibles and coinsurance. The
accounting for the Plan anticipates future cost-sharing changes. The Company's
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management.

In 1996, the Company adopted FASB Statement No. 106, "Employer's Accounting
for Postretirement Benefits Other than Pensions" and elected to use the
prospective recognition method for transition. The effect of adopting the new
rules increased 1996 net periodic postretirement benefit cost by $2,400 and
decreased 1996 net income by $2,400. Postretirement benefit cost for 1994 and
1995, which was recorded on a cash basis, has not been restated.

The following table presents the Plan's funded status reconciled with
amounts recognized in the Company's balance sheet at February 3, 1996:

<TABLE>
<S> <C>
Accumulated postretirement benefit obligation for retirees .......................... $ 100,000
Plan assets at fair value ........................................................... --
Accumulated postretirement benefit obligation in excess of plan assets .............. 100,000
Transition obligation ............................................................... (94,600)
Unrecognized net gain ............................................................... (3,000)
---------
(97,600)
---------
Accrued post retirement benefit liability .......................................... $ 2,400
=========

Net periodic postretirement benefit cost includes the following components:

Interest cost ....................................................................... $ 7,700
Amortization of transition obligation over 11 years ................................. 9,500
---------
Net periodic postretirement benefit cost ............................................ $ 17,200
=========
</TABLE>

Medical trend rates are not applicable since the subsidy is not related to
trend rates. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% for 1996.

F-38

<PAGE>

[Flip-Out Page]

<PAGE>

[Flip-Out Page]

<PAGE>

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

No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering covered by this Prospectus, and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus
does not constitute an offer to sell, or the solicitation of an offer to buy,
the Common Stock in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Prospectus Summary .................................................. 5
Risk Factors ........................................................ 12
Use of Proceeds ..................................................... 16
Dividend Policy ..................................................... 16
Capitalization ...................................................... 17
Dilution ............................................................ 18
Selected Consolidated Historical Financial and
Operating Data .................................................... 19
Unaudited Pro Forma Combined Financial Data ......................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ........................................................ 30
Business ............................................................ 36
Management .......................................................... 44
Certain Relationship and Related Transactions ....................... 54
Principal Stockholders .............................................. 55
Overallotment Option ................................................ 56
Description of Certain Indebtedness ................................. 57
Description of Capital Stock ........................................ 58
Shares Eligible for Future Sale ..................................... 61
Underwriting ........................................................ 63
Legal Matters ....................................................... 64
Experts ............................................................. 64
Additional Information .............................................. 64
Index to Financial Statements ....................................... F-1
</TABLE>

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

Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.

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

[LOGO]

Common Stock

---------------
PROSPECTUS
---------------

Donaldson, Lufkin & Jenrette
Securities Corporation

Bear, Stearns & Co. Inc.

CS First Boston

, 1996
-----------

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

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following is a statement of estimated expenses of the issuance and
distribution of the securities being registered other than underwriting
compensation:

SEC registration fee ......................................... $66,207
-------
NASD filing fee .............................................. 19,700
-------
Nasdaq National Market original listing fee .................. 25,000
-------
Blue sky fees and expenses (including attorneys' fees
and expenses) ..................................... ......... *
Printing and engraving expenses ..................... ......... *
Transfer agent's fees and expenses .................. ......... *
Accounting fees and expenses ........................ ......... *
Legal fees and expenses ............................. ......... *
Miscellaneous expenses ....................................... *
-------
Total ....................................................... $
=======

- -------------
*To be filed
by amendment.

All amounts are estimated except for the SEC registration fee and the NASD
filing fee.

Item 14. Indemnification of Directors and Officers.

The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any person who is, or
is threatened to be made, a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe that his conduct was illegal. A Delaware corporation may indemnify any
person who is, or is threatened to be made, a party to any threatened, pending
or completed action or suit by or in the right of the corporation by reason of
the fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit, provided such person acted in good faith
and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests except that no indemnification is permitted
without judicial approval if the officer or director is adjudged to be liable
to the corporation. Where an officer or director is successful on the merits
or otherwise in the defense of any action referred to above, the corporation
must indemnify him against the expenses which such officer or director has
actually and reasonably incurred.

The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
Section 145.

In that regard, the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
a director or officer of such corporation, or is or was serving at the request
of such corporation as a director, officer or member of another corporation,
partnership, joint venture,

II-1
<PAGE>

trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of such corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Indemnification in connection with an action or suit by or in the
right of such corporation to procure a judgment in its favor is limited to
payment of settlement of such an action or suit except that no such
indemnification may be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the indemnifying corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine that, despite
the adjudication of liability but in consideration of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.

Item 15. Recent Sales of Unregistered Securities.

<TABLE>
<CAPTION>
DATE OF AGGREGATE OFFERING
NAME SALE TITLE SHARES PRICE
- ---------------- ------- ----------- ------ -----------------
<S> <C> <C> <C> <C>
Dan Edmondson 06/16/93 Common Stock 500 $ 2,500.00
Linda Galayda 06/28/93 Common Stock 3,000 $15,000.00
Mark White 09/30/93 Common Stock 9,024 $19,401,60
Sandra Bornstein 01/28/94 Common Stock 6,050 $13,007.50
Eddy Osborne 02/22/94 Common Stock 9,024 $19,401.60
Pat Bowman 10/31/94 Common Stock 9,024 $19,401.60
Peter Realmuto 11/08.94 Common Stock 1,880 $ 188.00
Tom Buttaccio 12/05/94 Common Stock 9,024 $19,401.60
Mark Hess 01/15/95 Common Stock 400 $ 40.00
Kathy Bodin 02/20/95 Common Stock 400 $ 40.00
Dan Singer 01/15/95 Common Stock 600 $ 60.00
Harry Gray 02/20/95 Common Stock 300 $ 30.00
Bob Mitchell 02/20/95 Common Stock 300 $ 30.00
Jerry Forrest 01/26/95 Common Stock 9,024 $19,401.60
David Slaughter 01/28/95 Common Stock 9,024 $19,401.60
Joshua Bekenstein 04/07/95 Common Stock 10,000 $ 1,000.00
Jim Hanks 04/07/95 Common Stock 235 $ 505.25
Bernard Fuchs 04/07/95 Common Stock 75,000 $ 7,500.00
Bernard Fuchs 04/07/95 Common Stock 9,400 $20,210.00
Elizabeth Winkler 04/10/95 Common Stock 9,000 $19,350.00
Joanne Swartz 04/15/95 Common Stock 5,120 $11,008.00
June Betz 05/17/95 Common Stock 1,750 $ 5,040.00
Doug Scarth 08/16/95 Common Stock 2,820 $ 282.00
Tom Hill 11/06/95 Common Stock 200 $ 20.00
Josh Bekenstein 12/27/95 Common Stock 5,000 $ 500.00
Dan Singer 01/22/96 Common Stock 300 $ 30.00
Bob Mitchell 01/23/96 Common Stock 150 $ 15.00
Bob Hart 02/29/96 Common Stock 600 $ 60.00
Bernard Fuchs 03/15/96 Common Stock 375,000 $ 3,750.00
Ron Sells 03/28/96 Common Stock 1,500 $ 150.00
Dan Singer 04/17/96 Common Stock 200 $ 430.00
Carl Tooker 05/01/96 Common Stock 80,000 $ 8,000.00
Carl Tooker 05/01/96 Common Stock 10,000 $21,500.00
Bernard Fuchs 06/05/96 Common Stock 9,400 $20,210.00
Joanne Turano 06/05/95 Common Stock 450 $ 45.00
</TABLE>

The Company relied upon Section 4(2) of the Securities Act of 1933 in
connection with the foregoing sales of unregistered securities.

II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
<S> <C>
*3.1 Form of Underwriting Agreement.
**3.1 Certificate of Incorporation of Apparel Retailers, Inc.
(Incorporated by Reference to Exhibit 3.1 of Registration No.
33-68258 on Form S-4).
**3.2 By-Laws of Apparel Retailers, Inc. (Incorporated by Reference to
Exhibit 3.2 of Registration No. 33-68258 on Form S-4).
**4.1 Form of Indenture between Apparel Retailers, Inc. and The First
National Bank of Boston, as Trustee, relating to the 12 3/4%
Senior Discount Debentures due 2005 of Apparel Retailers, Inc.
(Incorporated by Reference to Exhibit 4.1 of Registration No.
33-68258 on Form S-4).
**4.2 Form of Indenture among Specialty Retailers, Inc., The First
National Bank of Boston, as Trustee, and Palais Royal, Inc., as
Guarantor, relating to the 10% Senior Notes due 2000 of Specialty
Retailers, Inc. (including form of note) (Incorporated by
Reference to Exhibit 4.2 of Registration No. 33-68258 on Form
S-4).
**4.3 Form of Indenture among Specialty Retailers, Inc., The First
National Bank of Boston, as Trustee, and Palais Royal, Inc., as
Guarantor, relating to the 11% Senior Subordinated Notes due 2003
of Specialty Retailers, Inc. (including form of note)
(Incorporated by Reference to Exhibit 4.3 on Registration No.
33-68258 on Form S-4).
**4.4 Form of Indenture between 3 Bealls Holding Corporation and
Bankers Trust Company, as Trustee, relating to 3 Bealls Holding
Corporation's 9% Subordinated Debentures due 2002 (Incorporated
by Reference to Exhibit 4.2 of Registration No. 33-24571 on
Form S-4) and First Supplemental Indenture dated August 2, 1993
(Incorporated by Reference to Exhibit 4.4 of Registration No.
33-68258 on Form S-4).
**4.5 Form of Indenture between 3 Bealls Holding Corporation and IBJ
Schroder Bank and Trust Company, as Trustee, relating to 3
Bealls Holding Corporation's 7% Junior Subordinated Debentures
due 2002 (Incorporated by Reference to Exhibit 4.3 of
Registration No. 33-24571 on Form S-4) and First Supplemental
Indenture dated August 2, 1993 (Incorporated by Reference to
Exhibit 4.5 of Registration No. 33-68258 on Form S-4).
**4.6 Indenture by and between Specialty Retailers, Inc. and The
First National Bank of Boston, as Trustee, relating to the 11%
Series C and Series D Senior Subordinated Notes due 2003 of
Specialty Retailers, Inc. dated July 27, 1995 (including form
of note), (Incorporated by Reference to Exhibit 4.1 on Form
10-Q of Apparel Retailers, Inc., dated October 28, 1995).
**4.7 Form of Indenture among SRI Receivables Purchase Co., Inc.,
Specialty Retailers, Inc., as Administrative Agent, and Bankers
Trust Company, as Trustee and Collateral Agent, relating to the
12.5% Trust Certificate-Backed Notes of SRI Receivables
Purchase Co., Inc. (including form of note). (Incorporated by
Reference to Exhibit 4.1 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996).
**4.8 Amended and Restated Pooling and Servicing Agreement by and
among SRI Receivables Purchase Co., Inc., Specialty Retailers,
Inc. and Bankers Trust (Delaware) dated as of August 11, 1995
(Incorporated by Reference to Exhibit 4.6 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.9 First Amendment to Amended and Restated Pooling and Servicing
Agreement by and among SRI Receivables Purchase Co., Inc.,
Specialty Retailers, Inc. and Bankers Trust (Delaware), dated
as of May 30, 1996 (Incorporated by Reference to Exhibit 4.2 on
Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.10 Amended and Restated Series 1993-1 Supplement among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated
by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996).
**4.11 Amended and Restated Series 1993-2 Supplement among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated
by Reference to Exhibit 4.4 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996).

II-3
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
**4.12 First Amendment to the Series 1993-2 Supplement and Revolving
Certificate Purchase Agreement by and among Specialty
Retailers, Inc., SRI Receivables Purchase Co., Inc., Bankers
Trust (Delaware) as Trustee for the SRI Receivables Master
Trust, the financial institutions parties thereto and National
Westminster Bank Plc, New York branch dated as of August 11,
1995 (Incorporated by Reference to Exhibit 4.5 on Form 10-Q of
Apparel Retailers, Inc., dated as of May 4, 1996).
**4.13 Amended and Restated Series 1995-1 Supplement by and among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) on behalf of the Series 1995- 1
Certificateholders dated as of May 30, 1996 (Incorporated by
Reference to Exhibit 4.6 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996).
**4.14 Amended and Restated Receivables Purchase Agreement among SRI
Receivables Purchase Co., Inc. and Originators dated as of May
30, 1996 (Incorporated by Reference to Exhibit 4.7 on Form 10-Q
of Apparel Retailers, Inc., dated May 4, 1996).
**4.15 Certificate Purchase Agreements between SRI Receivables Purchase
Co., Inc. and the Purchasers of the Series 1993-1 Offered
Certificates (Incorporated by Reference to Exhibit 4.10 of
Registration No. 33-68258 on Form S-4).
**4.16 Revolving Certificate Purchase Agreement between SRI
Receivables Purchase Co., Inc., the Facility Agent and the
Revolving Purchasers with respect to the Class A-R Certificates
(Incorporated by Reference to Exhibit 4.11 of Registration No.
33-68258 on Form S-4).
**4.17 Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National Bank of Boston,
as agent for itself and other financial institutions dated
January 29, 1994 (Incorporated by Reference to Exhibit A of
Current Report on Form 8-K of Apparel Retailers, Inc. dated
February 9, 1994).
**4.18 First Amendment dated July 14, 1994 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.13 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.19 Second Amendment dated October 31, 1994 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.14 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.20 Third Amendment dated January 5, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.15 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.21 Fourth Amendment dated March 31, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.16 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995).
**4.22 Fifth Amendment dated July 7, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc., and the First National Bank of Boston, as agent for
itself and other financial institutions dated as of January 28,
1994 (Incorporated by Reference to Exhibit 4.2 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.23 Sixth Amendment dated July 27, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.3 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.24 Seventh Amendment dated February 1, 1996 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc., and the First National Bank of Boston, as agent for
itself and other financial institutions dated as of January 28,
1994 (Incorporated by Reference to Exhibit 4.8 on Form 10-Q of
Apparel Retailers, Inc., dated as of May 4, 1996).

II-4
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
**4.25 Eighth Amendment dated as of May 30, 1996 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and The First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.9 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996).
**4.26 Seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc. and the First National Bank
of Boston, as agent for itself and other financial institutions
dated March 31, 1995 (Incorporated by Reference to Exhibit 4.17
on Form 10-K of Apparel Retailers, Inc. dated January 28, 1995).
**4.27 First Amendment dated July 7, 1995 to the seasonal Revolving
Credit Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc., and the First National Bank of Boston, as agent
for itself and other financial institutions dated March 31,
1995 (Incorporated by Reference to Exhibit 4.4 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.28 Second Amendment dated July 27, 1995 to the seasonal Revolving
Credit Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc., and the First National Bank of Boston, as agent
for itself and other financial institutions dated March 31,
1995 (Incorporated by Reference to Exhibit 4.5 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**4.29 Third Amendment dated February 1, 1996 to the seasonal
Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc., and the First National Bank of
Boston, as agent for itself and other financial institutions
dated March 31, 1995 (Incorporated by Reference to Exhibit 4.10
on Form 10-Q of Apparel Retailers, Inc., dated as of May 4,
1996).
**4.30 Fourth Amendment dated as of May 30, 1996 to the seasonal
Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and The First National Bank of Boston,
as agent for itself and other financial institutions dated as
of March 31, 1995 (Incorporated by Reference to Exhibit 4.11 on
Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996).
**4.31 Certificate Purchase Agreement among SRI Receivables Purchase
Co., Inc., Specialty Retailers, Inc. and the Certificate
Purchaser dated as of August 11, 1995 (Incorporated by
Reference to Exhibit 4.9 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995).
*5.1 Opinion of Kirkland and Ellis.
**10.1 Purchase Agreement dated July 22, 1993 by and among Apparel
Retailers, Inc., Specialty Retailers, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Bear, Stearns & Co. Inc.
relating to the sale of Apparel Retailers, Inc. 12 3/4% Senior
Discount Debentures due 2005 (Incorporated by Reference to
Exhibit 10.1 of Registration No. 33-68258 on Form S-4).
**10.2 Registration Rights Agreement dated August 2, 1993 by and among
Apparel Retailers, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Bear, Stearns & Co. Inc. relating to the sale of
Apparel Retailers, Inc. 12 3/4% Senior Discount Debentures due
2005 (Incorporated by Reference to Exhibit 10.2 of Registration
No. 33-68258 on Form S-4).
**10.3 Senior Management Agreement and Stock Option Agreement between
Specialty Retailers, Inc., Bain Venture Capital, Citicorp
Venture Capital, Ltd., and Bernard Fuchs, dated as of May 26,
1989 (Incorporated by Reference to Exhibit 10.8 of Registration
No. 33-27714 on Form S-1) and Amendment to Senior Management
Agreement and Stock Option Agreement dated February 1, 1993
(Incorporated by Reference to Exhibit 10.3 of Registration No.
33-68258 on Form S-4).
**10.4 Equity Stock Purchase Agreement by and among Specialty
Retailers, Inc., Tyler Capital Fund, L.P. Tyler Massachusetts,
L.P., Tyler International, L.P.-I, Tyler International,
L.P.-II, Bain Venture Capital, Citicorp Capital Investors,
Ltd., Acadia Partners, L.P., Drexel Burnham Lambert
Incorporated, and certain other Purchasers, dated as of
December 28, 1988 (Incorporated by Reference to Exhibit 10.9 of
Registration No. 33-27714 on Form S-1) and Amendments to Equity
Stock Purchase Agreement dated September 21, 1992 and August 2,
1993 (Incorporated by Reference to Exhibit 10.4 of Registration
No. 33-68258 on Form S-4).

II-5
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
**10.5 Registration Agreement by and among Specialty Retailers, Inc.,
Tyler Capital Fund, L.P. Tyler Massachusetts, L.P., Tyler
International, L.P.-I, Tyler International, L.P.-II, Bain
Venture Capital, Citicorp Capital Investors, Ltd., Acadia
Partners, L.P., Drexel Burnham Lambert Incorporated, and
certain other Purchasers, dated as of December 29, 1988
(Incorporated by Reference to Exhibit 10.10 of Registration No.
33-27714 on Form S-1) and Amendment to Registration Agreement
dated August 2, 1993 (Incorporated by Reference to Exhibit 10.5
of Registration No. 33-68258 on Form S-4).
**10.6 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of August 2, 1982 (Incorporated by Reference to Exhibit
10.11 of Registration No. 33-27714 on Form S-1).
**10.7 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of March 15, 1979, as amended (Incorporated by
Reference to Exhibit 10.12 of Registration No. 33-27714 on Form
S-1).
**10.8 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of November 7, 1978, as amended (Incorporated by
Reference to Exhibit 10.13 of Registration No. 33-27714 on Form
S-1).
**10.9 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated October 4, 1983, as amended (Incorporated by Reference to
Exhibit 10.14 of Registration No. 33-27714 on Form S-1).
**10.10 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of December 21, 1983, as amended (Incorporated by
Reference to Exhibit 10.15 of Registration No. 33-27714 on Form
S-1).
**10.11 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of March 21, 1985, as amended (Incorporated by
Reference to Exhibit 10.16 of Registration No. 33-27714 on Form
S-1).
**10.12 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of November 22, 1985, as amended (Incorporated by
Reference to Exhibit 10.17 of Registration No. 33-27714 on Form
S-1).
**10.13 Apparel Retailers, Inc. Stock Option Plan (Incorporated by
Reference to Exhibit 10.13 to Registration No. 33-68258 on Form
S-4).
**10.14 Form of Stock Option Agreement between Apparel Retailers, Inc.
and Executive to be named therein (Incorporated by Reference to
Exhibit 10.14 to Registration No. 33-68258 on Form S-4).
**10.15 Form of Management Agreement by an among Specialty Retailers,
Inc., the Bain Entities, Citicorp Venture Capital, Ltd. and
Executive to be named therein (Incorporated by Reference to
Exhibit 10.22 of Registration No. 33-32045 on Form S-1) and Form
of First Amendment (Incorporated by Reference to Exhibit 10.15 to
Registration No. 33-68258 on Form S-4).
**10.16 Professional Services Agreement between Specialty Retailers, Inc.
and Bain Capital Partners (Incorporated by Reference to Exhibit
10.21 of Registration No. 33-54504 on Form S-1).
**10.17 Employment Agreement between Specialty Retailers, Inc. and Carl
E. Tooker dated June 9, 1993 (Incorporated by Reference to
Exhibit 10.17 to Registration No. 33-68258 on Form S-4).
**10.18 Stock Option Agreement between Specialty Retailers, Inc. and Carl
E. Tooker dated June 9, 1993 (Incorporated by Reference to
Exhibit 10.18 to Registration No. 33-68258 on Form S-4).
**10.19 Purchase agreement dated September 2, 1994 by and among Palais
Royal, Inc. and Beall-Ladymon Corporation relating to the sale
of certain assets of Beall-Ladymon Corporation (Incorporated by
Reference to Exhibit 10.1 on Form 10-Q of Apparel Retailers,
Inc., dated July 30, 1994).
**10.20 Purchase Agreement dated July 20, 1995 by and among Specialty
Retailers, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, relating to the sale of the Company's 11% Series C
Senior Subordinated Notes due 2003 (Incorporated by Reference
to Exhibit 10.1 on Form 10-Q of Apparel Retailers, Inc., dated
October 28, 1995).

II-6
<PAGE>

EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------
**10.21 Registration Rights Agreement dated July 27, 1995 by and
between Specialty Retailers, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation, relating to the sale of the
Company's 11% Series C Senior Subordinated Notes due 2003
(Incorporated by Reference to Exhibit 10.2 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995).
**10.22 Employment Agreement between Mark Shulman and Specialty
Retailers, Inc., dated as of January 8, 1994 (Incorporated by
Reference to Exhibit 10.1 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995).
**10.23 Stock Option Agreement between Mark Shulman and Apparel
Retailers, Inc., dated as of January 31, 1994 (Incorporated by
Reference to Exhibit 10.2 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995).
**10.24 Employment Agreement between James Marcum and Specialty
Retailers, Inc., dated as of May 15, 1995 (Incorporated by
Reference to Exhibit 10.3 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995).
**10.25 Employment Agreement between Stephen Lovell and Specialty
Retailers, Inc., dated as of May 19, 1995 (Incorporated by
Reference to Exhibit 10.4 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995).
**10.26 Agency Agreement between Specialty Retailers, Inc. and Palais
Royal, Inc. dated January 29, 1995 (Incorporated by Reference to
Exhibit 10.26 on Form 10-K of Apparel Retailers, Inc., dated
February 3, 1996)
**10.27 Securities Purchase Agreement among Palais Royal, Inc. and
certain selling stockholders of Uhlmans, Inc. dated May 9, 1996
(Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Stage
Stores, Inc., dated June 12, 1996.
***12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
**21.1 List of Registrant's Subsidiaries (Incorporated by Reference to
Exhibit 21.1 to Registration No. 33-68258 on Form S-4).
***23.1 Consent of Price Waterhouse LLP.
***23.2 Consent of Ernst & Young LLP.
*23.3 Consent of Kirkland & Ellis (included in opinion filed as Exhibit
5.1).
***24.1 Powers of attorney (included in signature page included in this
Part II).
</TABLE>

- -------------
* To be filed by amendment.
** Previously filed.
*** Filed herewith.

(b) Financial Statement Schedules:

Schedule III - Condensed Financial Information

Schedule VIII - Consolidated Valuation Accounts

Item 17. Undertakings.

The undersigned registrant hereby undertakes:

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

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

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

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

provided, however, that the undertakings set forth in paragraph (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed

II-7
<PAGE>

by the registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in this registration
statement.

(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post- effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

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

In addition, the undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling 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 Act and will be governed by the
final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-8
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas
on June 26, 1996.

STAGE STORES, INC.

By: /s/ Carl Tooker
--------------------------------------------------
Name: Carl Tooker
Title: President, Chief Executive Officer and Director

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on June 26, 1996, by the following
persons in the capacities indicated with respect to Stage Stores, Inc.:

Signature Capacity
--------- --------

* Director and Chairman
- -----------------------
Bernard Fuchs

/s/ Carl Tooker President, Chief Executive Officer and Director
- ----------------------- (Principal Executive Officer)
Carl Tooker

* Executive Vice President and Chief Financial Officer
- ----------------------- (Principal Financial and Accounting Officer)
James Marcum

* Director
- -----------------------
Joshua Bekenstein

* Director
- -----------------------
Adam Kirsch

- -----------------------
Peter Mulvihill Director

* Director
- -----------------------
Lasker Meyer

* By /s/ Carl Tooker
- -----------------------
Carl Tooker
Attorney-in-Fact

II-9
<PAGE>

Schedule III

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Balance Sheet
(in thousands, except par value and numbers of shares)

<TABLE>
<CAPTION>
January 28, February 3,
1995 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents ......................................... $ 796 $ 9
Intercompany advances ............................................. 6,997 7,240
Debt issue costs, net of amortization ............................. 4,588 4,163
Investment in subsidiary .......................................... 17,750 35,340
Deferred income taxes ............................................. 5,640 10,042
-------- --------
$ 35,771 $ 56,794
======== ========

Liabilities and Stockholders' Deficit
Accrued expenses .................................................. $ 7,294 $ 6,369
Intercompany advances ............................................. -- --
Long-term debt .................................................... 96,748 109,817
-------- --------
Total liabilities ............................................... 104,042 116,186
-------- --------

Preferred stock, par value $1.00, non-voting, 2,500 shares
authorized, zero shares issued and outstanding .................. -- --
Common Stock, par value $0.01, 15,000,000 shares authorized,
11,381,141 and 11,470,902 shares issued and outstanding,
respectively .................................................... 113 115
Class B common stock, non-voting, par value $0.01, 1,500,000 shares
authorized, 1,468,750 shares issued and outstanding ............. 15 15
Additional paid-in capital ........................................ 3,565 3,793
Accumulated deficit ............................................... (71,964) (63,315)
-------- --------
Stockholders' deficit ........................................... (68,271) (59,392)
-------- --------
$ 35,771 $ 56,794
======== ========
</TABLE>

The accompanying notes are an integral part of this
condensed financial information.

<PAGE>

Schedule III

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Statement of Operations and Accumulated Deficit
(in thousands)

<TABLE>
<CAPTION>
For the Period from Fiscal Year
August 2, 1993 to --------------------
January 29, 1994 1994 1995
--------------- -------- ---------
<S> <C> <C> <C>
Interest income ............................. $ 18 $ 30 $ 18
Interest expense ............................ (5,471) (11,954) (13,511)
-------- -------- --------

Loss before income tax and equity in earnings
of subsidiary ............................. (5,453) (11,924) (13,493)
Income tax benefit .......................... 1,761 4,022 4,550
-------- -------- --------
Loss before equity in earnings of subsidiary (3,692) (7,902) (8,943)
Equity in earnings of subsidiary ............ 910 14,224 19,673
-------- -------- --------
Net income (loss) ........................... (2,782) 6,322 10,730

Accumulated deficit:
Beginning of period ........................ -- (78,154) (71,964)
Dividends on common stock .................. (74,804) -- --
Adjustment for minimum pension liability ... (568) (132) (2,081)
-------- -------- --------
End of period .............................. $(78,154) $(71,964) $(63,315)
======== ======== ========
</TABLE>

The accompanying notes are an integral part of this
condensed financial information.

<PAGE>

Schedule III

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Condensed Statement of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
For the Period from Fiscal Year
August 2, 1993 to --------------------
January 29, 1994 1994 1995
---------------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) .......................................................... $ (2,782) $ 6,322 $ 10,730
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Accretion of discount ..................................................... 5,233 11,515 13,070
Amortization of debt issue costs .......................................... 207 437 438
Deferred federal income tax ............................................... (1,761) (3,879) (4,402)
Equity in earnings of subsidiary .......................................... (910) (14,224) (19,673)
Changes in operating assets and liabilities:
Increase (decrease) in accrued liabilities ............................... 31 7,116 (641)
Intercompany advances .................................................... -- (7,382) (243)
-------- -------- --------
Total adjustments ....................................................... 2,800 (6,417) (11,451)
-------- -------- --------
Net cash provided by (used in) operating
activities ............................................................. 18 (95) (721)
-------- -------- --------

Cash Flows from Financing Activities:
Proceeds from:
Long-term debt ............................................................ 80,000 -- --
Common stock .............................................................. 33 97 68
Redemption of Common stock ................................................. -- -- (122)
Additions to debt issue cost ............................................... (4,453) -- (12)
Dividends paid ............................................................. (74,804) -- --
-------- -------- --------
Net cash provided by (used in) financing activities ....................... 776 97 (66)
-------- -------- --------

Net increase (decrease) in cash ............................................ 794 2 (787)
Cash and cash equivalents:
Beginning of period ....................................................... -- 794 796
-------- -------- --------
End of period ............................................................. $ 794 $ 796 $ 9
======== ======== ========

Supplemental Schedule of Noncash Investing and
Financing Activities:
Debt issue costs accrued for by the Company or paid
by subsidiary ............................................................. $ 779 $ -- $ --
======== ======== ========
</TABLE>

The accompanying notes are an integral part of this
condensed financial information.

<PAGE>

Stage Stores, Inc.
(formerly Apparel Retailer, Inc.)
Notes To Condensed Financial Information

NOTE 1--BASIS OF PRESENTATION:

The accompanying condensed financial statements present the financial
position and results of operations of Stage Stores, Inc. (the "Company") on a
separate company basis. The condensed financial statements of the Company have
been prepared in accordance with Rule 10-01 of Regulation S-X and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. The Company's
investment in its wholly-owned subsidiary is accounted for using the equity
method.

The Company's fiscal year ends on the Saturday nearest to January 31 in the
following calendar year. For example, references to "1995" mean the fiscal
year ended February 3, 1996.

NOTE 2--HOLDING COMPANY FORMATION:

The Company was incorporated under the laws of Delaware on June 17, 1993 at
the direction of the shareholders of Specialty Retailers, Inc. ("SRI"). On
August 2, 1993, the Company acquired all of the common stock of SRI and the
existing stockholders of SRI acquired all of the common stock of the Company.
The Company has no operations of its own and its primary asset is the common
stock of the SRI.

NOTE 3--INCOME TAXES:

The Company files a consolidated federal income tax return with its
subsidiaries. The Company's recorded tax benefit represents the impact of its
tax assets and liabilities on the consolidated group.

<PAGE>

Schedule VIII

Stage Stores, Inc.
(formerly Apparel Retailers, Inc.)
Consolidated Valuation Accounts
(in thousands)

<TABLE>
<CAPTION>
Additions
Balance at ----------------------------
beginning Charged to Charged to
of costs other Balance at end
year and expenses accounts Deductions of year
---------- ------------ ------------ ---------- --------------
Description
- ---------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts: (1)
Fiscal Year:
1993 ................... $7,855 $6,590 $ -- $12,501(2) $1,944
====== ======= ===== ======= ======
1994 .................. $1,944 $3,176 $ 486(3) $ 2,374 $3,232
====== ======= ===== ======= ======
1995 .................. $3,232 $4,905 $ -- $ 5,377 $2,760
====== ======= ===== ======= ======

Reserve for Shrinkage:
Fiscal Year:
1993 .................. $ 160 $4,042 $ -- $ 4,004 $ 198
====== ======= ===== ======= ======
1994 .................. $ 198 $4,459 -- $ 4,459 $ 198
====== ======= ===== ======= ======
1995 .................. $ 198 $8,967 $ -- $ 8,808 $ 357
====== ======= ===== ======= ======
</TABLE>

(1) Includes reserve for uncollectible service charge and late fee income.

(2) Includes $6.1 million which has been reclassified to accrued liabilities
as a result of the implementation of the Accounts Receivable Program.

(3) This represents the initial allowance for doubtful accounts associated
with the accounts receivable purchased in an acquisition.

<PAGE>

EXHIBIT INDEX

The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K.

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
<S> <C> <C>
*3.1 Form of Underwriting Agreement. --
**3.1 Certificate of Incorporation of Apparel Retailers, Inc.
(Incorporated by Reference to Exhibit 3.1 of Registration No.
33-68258 on Form S-4). --
**3.2 By-Laws of Apparel Retailers, Inc. (Incorporated by Reference to
Exhibit 3.2 of Registration No. 33-68258 on Form S-4). --
**4.1 Form of Indenture between Apparel Retailers, Inc. and The First
National Bank of Boston, as Trustee, relating to the 12 3/4%
Senior Discount Debentures due 2005 of Apparel Retailers, Inc.
(Incorporated by Reference to Exhibit 4.1 of Registration No.
33-68258 on Form S-4). --
**4.2 Form of Indenture among Specialty Retailers, Inc., The First
National Bank of Boston, as Trustee, and Palais Royal, Inc., as
Guarantor, relating to the 10% Senior Notes due 2000 of Specialty
Retailers, Inc. (including form of note) (Incorporated by
Reference to Exhibit 4.2 of Registration No. 33-68258 on Form
S-4). --
**4.3 Form of Indenture among Specialty Retailers, Inc., The First
National Bank of Boston, as Trustee, and Palais Royal, Inc.,
as Guarantor, relating to the 11% Senior Subordinated Notes due
2003 of Specialty Retailers, Inc. (including form of note)
(Incorporated by Reference to Exhibit 4.3 on Registration No.
33-68258 on Form S-4). --
**4.4 Form of Indenture between 3 Bealls Holding Corporation and
Bankers Trust Company, as Trustee, relating to 3 Bealls
Holding Corporation's 9% Subordinated Debentures due 2002
(Incorporated by Reference to Exhibit 4.2 of Registration No.
33-24571 on Form S-4) and First Supplemental Indenture dated
August 2, 1993 (Incorporated by Reference to Exhibit 4.4 of
Registration No. 33-68258 on Form S-4). --
**4.5 Form of Indenture between 3 Bealls Holding Corporation and IBJ
Schroder Bank and Trust Company, as Trustee, relating to 3
Bealls Holding Corporation's 7% Junior Subordinated Debentures
due 2002 (Incorporated by Reference to Exhibit 4.3 of
Registration No. 33-24571 on Form S-4) and First Supplemental
Indenture dated August 2, 1993 (Incorporated by Reference to
Exhibit 4.5 of Registration No. 33-68258 on Form S-4). --
**4.6 Indenture by and between Specialty Retailers, Inc. and The
First National Bank of Boston, as Trustee, relating to the
11% Series C and Series D Senior Subordinated Notes due 2003 of
Specialty Retailers, Inc. dated July 27, 1995 (including form
of note), (Incorporated by Reference to Exhibit 4.1 on Form
10-Q of Apparel Retailers, Inc., dated October 28, 1995). --
**4.7 Form of Indenture among SRI Receivables Purchase Co., Inc.,
Specialty Retailers, Inc., as Administrative Agent, and
Bankers Trust Company, as Trustee and Collateral Agent,
relating to the 12.5% Trust Certificate-Backed Notes of SRI
Receivables Purchase Co., Inc. (including form of note).
(Incorporated by Reference to Exhibit 4.1 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996). --
**4.8 Amended and Restated Pooling and Servicing Agreement by and
among SRI Receivables Purchase Co., Inc., Specialty
Retailers, Inc. and Bankers Trust (Delaware) dated as of August
11, 1995 (Incorporated by Reference to Exhibit 4.6 on Form 10-Q
of Apparel Retailers, Inc., dated October 28, 1995). --

<PAGE>

SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
**4.9 First Amendment to Amended and Restated Pooling and Servicing
Agreement by and among SRI Receivables Purchase Co., Inc.,
Specialty Retailers, Inc. and Bankers Trust (Delaware), dated as
of May 30, 1996 (Incorporated by Reference to Exhibit 4.2 on Form
10-Q of Apparel Retailers, Inc., dated May 4, 1996). --
**4.10 Amended and Restated Series 1993-1 Supplement among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated
by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996). --
**4.11 Amended and Restated Series 1993-2 Supplement among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) dated as of May 30, 1996 (Incorporated
by Reference to Exhibit 4.4 on Form 10-Q of Apparel Retailers,
Inc., dated May 4, 1996). --
**4.12 First Amendment to the Series 1993-2 Supplement and Revolving
Certificate Purchase Agreement by and among Specialty Retailers,
Inc., SRI Receivables Purchase Co., Inc., Bankers Trust
(Delaware) as Trustee for the SRI Receivables Master Trust, the
financial institutions parties thereto and National Westminster
Bank Plc, New York branch dated as of August 11, 1995
(Incorporated by Reference to Exhibit 4.5 on Form 10-Q of Apparel
Retailers, Inc., dated as of May 4, 1996). --
**4.13 Amended and Restated Series 1995-1 Supplement by and among SRI
Receivables Purchase Co., Inc., Specialty Retailers, Inc. and
Bankers Trust (Delaware) on behalf of the Series 1995- 1
Certificateholders dated as of May 30, 1996 (Incorporated by
Reference to Exhibit 4.6 on Form 10-Q of Apparel Retailers, Inc.,
dated May 4, 1996). --
**4.14 Amended and Restated Receivables Purchase Agreement among SRI
Receivables Purchase Co., Inc. and Originators dated as of May
30, 1996 (Incorporated by Reference to Exhibit 4.7 on Form 10-Q
of Apparel Retailers, Inc., dated May 4, 1996). --
**4.15 Certificate Purchase Agreements between SRI Receivables Purchase
Co., Inc. and the Purchasers of the Series 1993-1 Offered
Certificates (Incorporated by Reference to Exhibit 4.10 of
Registration No. 33-68258 on Form S-4). --
**4.16 Revolving Certificate Purchase Agreement between SRI Receivables
Purchase Co., Inc., the Facility Agent and the Revolving
Purchasers with respect to the Class A-R Certificates
(Incorporated by Reference to Exhibit 4.11 of Registration No.
33-68258 on Form S-4). --
**4.17 Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and the First National Bank of Boston,
as agent for itself and other financial institutions dated
January 29, 1994 (Incorporated by Reference to Exhibit A of
Current Report on Form 8-K of Apparel Retailers, Inc. dated
February 9, 1994). --
**4.18 First Amendment dated July 14, 1994 to Revolving Credit Agreement
by and among Specialty Retailers, Inc., Palais Royal, Inc. and
the First National Bank of Boston, as agent for itself and other
financial institutions dated as of January 28, 1994 (Incorporated
by Reference to Exhibit 4.13 on Form 10-K of Apparel Retailers,
Inc. dated January 28, 1995). --
**4.19 Second Amendment dated October 31, 1994 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc. and the First National Bank of Boston, as agent for
itself and other financial institutions dated as of January 28,
1994 (Incorporated by Reference to Exhibit 4.14 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995). --

<PAGE>

SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
**4.20 Third Amendment dated January 5, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.15 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995). --
**4.21 Fourth Amendment dated March 31, 1995 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais Royal,
Inc. and the First National Bank of Boston, as agent for itself
and other financial institutions dated as of January 28, 1994
(Incorporated by Reference to Exhibit 4.16 on Form 10-K of
Apparel Retailers, Inc. dated January 28, 1995). --
**4.22 Fifth Amendment dated July 7, 1995 to Revolving Credit Agreement
by and among Specialty Retailers, Inc., Palais Royal, Inc., and
the First National Bank of Boston, as agent for itself and other
financial institutions dated as of January 28, 1994 (Incorporated
by Reference to Exhibit 4.2 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
**4.23 Sixth Amendment dated July 27, 1995 to Revolving Credit Agreement
by and among Specialty Retailers, Inc., Palais Royal, Inc. and
the First National Bank of Boston, as agent for itself and other
financial institutions dated as of January 28, 1994 (Incorporated
by Reference to Exhibit 4.3 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
**4.24 Seventh Amendment dated February 1, 1996 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc., and the First National Bank of Boston, as agent
for itself and other financial institutions dated as of January
28, 1994 (Incorporated by Reference to Exhibit 4.8 on Form 10-Q
of Apparel Retailers, Inc., dated as of May 4, 1996). --
**4.25 Eighth Amendment dated as of May 30, 1996 to Revolving Credit
Agreement by and among Specialty Retailers, Inc., Palais
Royal, Inc. and The First National Bank of Boston, as agent for
itself and other financial institutions dated as of January 28,
1994 (Incorporated by Reference to Exhibit 4.9 on Form 10-Q of
Apparel Retailers, Inc., dated May 4, 1996). --
**4.26 Seasonal Revolving Credit Agreement by and among Specialty
Retailers, Inc., Palais Royal, Inc. and the First National
Bank of Boston, as agent for itself and other financial
institutions dated March 31, 1995 (Incorporated by Reference to
Exhibit 4.17 on Form 10-K of Apparel Retailers, Inc. dated
January 28, 1995). --
**4.27 First Amendment dated July 7, 1995 to the seasonal Revolving
Credit Agreement by and among Specialty Retailers, Inc.,
Palais Royal, Inc., and the First National Bank of Boston, as
agent for itself and other financial institutions dated March
31, 1995 (Incorporated by Reference to Exhibit 4.4 on Form 10-Q
of Apparel Retailers, Inc., dated October 28, 1995). --
**4.28 Second Amendment dated July 27, 1995 to the seasonal Revolving
Credit Agreement by and among Specialty Retailers, Inc.,
Palais Royal, Inc., and the First National Bank of Boston, as
agent for itself and other financial institutions dated March
31, 1995 (Incorporated by Reference to Exhibit 4.5 on Form 10-Q
of Apparel Retailers, Inc., dated October 28, 1995). --
**4.29 Third Amendment dated February 1, 1996 to the seasonal
Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc., and the First National Bank of
Boston, as agent for itself and other financial institutions
dated March 31, 1995 (Incorporated by Reference to Exhibit 4.10
on Form 10-Q of Apparel Retailers, Inc., dated as of May 4,
1996). --

<PAGE>

SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
**4.30 Fourth Amendment dated as of May 30, 1996 to the seasonal
Revolving Credit Agreement by and among Specialty Retailers,
Inc., Palais Royal, Inc. and The First National Bank of Boston,
as agent for itself and other financial institutions dated as
of March 31, 1995 (Incorporated by Reference to Exhibit 4.11 on
Form 10-Q of Apparel Retailers, Inc., dated May 4, 1996). --
**4.31 Certificate Purchase Agreement among SRI Receivables Purchase
Co., Inc., Specialty Retailers, Inc. and the Certificate
Purchaser dated as of August 11, 1995 (Incorporated by
Reference to Exhibit 4.9 on Form 10-Q of Apparel Retailers,
Inc., dated October 28, 1995). --
*5.1 Opinion of Kirkland and Ellis. --
**10.1 Purchase Agreement dated July 22, 1993 by and among Apparel
Retailers, Inc., Specialty Retailers, Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Bear, Stearns & Co. Inc.
relating to the sale of Apparel Retailers, Inc. 12 3/4% Senior
Discount Debentures due 2005 (Incorporated by Reference to
Exhibit 10.1 of Registration No. 33-68258 on Form S-4). --
**10.2 Registration Rights Agreement dated August 2, 1993 by and among
Apparel Retailers, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Bear, Stearns & Co. Inc. relating to the sale of
Apparel Retailers, Inc. 12 3/4% Senior Discount Debentures due
2005 (Incorporated by Reference to Exhibit 10.2 of Registration
No. 33-68258 on Form S-4). --
**10.3 Senior Management Agreement and Stock Option Agreement between
Specialty Retailers, Inc., Bain Venture Capital, Citicorp Venture
Capital, Ltd., and Bernard Fuchs, dated as of May 26, 1989
(Incorporated by Reference to Exhibit 10.8 of Registration No.
33-27714 on Form S-1) and Amendment to Senior Management
Agreement and Stock Option Agreement dated February 1, 1993
(Incorporated by Reference to Exhibit 10.3 of Registration No.
33-68258 on Form S-4). --
**10.4 Equity Stock Purchase Agreement by and among Specialty Retailers,
Inc., Tyler Capital Fund, L.P. Tyler Massachusetts, L.P., Tyler
International, L.P.-I, Tyler International, L.P.-II, Bain Venture
Capital, Citicorp Capital Investors, Ltd., Acadia Partners, L.P.,
Drexel Burnham Lambert Incorporated, and certain other
Purchasers, dated as of December 28, 1988 (Incorporated by
Reference to Exhibit 10.9 of Registration No. 33-27714 on Form
S-1) and Amendments to Equity Stock Purchase Agreement dated
September 21, 1992 and August 2, 1993 (Incorporated by Reference
to Exhibit 10.4 of Registration No. 33-68258 on Form S-4). --
**10.5 Registration Agreement by and among Specialty Retailers, Inc.,
Tyler Capital Fund, L.P. Tyler Massachusetts, L.P., Tyler
International, L.P.-I, Tyler International, L.P.-II, Bain Venture
Capital, Citicorp Capital Investors, Ltd., Acadia Partners, L.P.,
Drexel Burnham Lambert Incorporated, and certain other
Purchasers, dated as of December 29, 1988 (Incorporated by
Reference to Exhibit 10.10 of Registration No. 33-27714 on Form
S-1) and Amendment to Registration Agreement dated August 2, 1993
(Incorporated by Reference to Exhibit 10.5 of Registration No.
33-68258 on Form S-4). --
**10.6 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of August 2, 1982 (Incorporated by Reference to Exhibit
10.11 of Registration No. 33-27714 on Form S-1). --
**10.7 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of March 15, 1979, as amended (Incorporated by Reference
to Exhibit 10.12 of Registration No. 33-27714 on Form S-1). --

<PAGE>

SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
**10.8 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of November 7, 1978, as amended (Incorporated by
Reference to Exhibit 10.13 of Registration No. 33-27714 on Form
S-1). --
**10.9 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated October 4, 1983, as amended (Incorporated by Reference to
Exhibit 10.14 of Registration No. 33-27714 on Form S-1).
**10.10 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of December 21, 1983, as amended (Incorporated by
Reference to Exhibit 10.15 of Registration No. 33-27714 on Form
S-1). --
**10.11 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of March 21, 1985, as amended (Incorporated by Reference
to Exhibit 10.16 of Registration No. 33-27714 on Form S-1).
**10.12 Lease Agreement between PR Investments and Palais Royal, Inc.,
dated as of November 22, 1985, as amended (Incorporated by
Reference to Exhibit 10.17 of Registration No. 33-27714 on Form
S-1). --
**10.13 Apparel Retailers, Inc. Stock Option Plan (Incorporated by
Reference to Exhibit 10.13 to Registration No. 33-68258 on Form
S-4). --
**10.14 Form of Stock Option Agreement between Apparel Retailers, Inc.
and Executive to be named therein (Incorporated by Reference to
Exhibit 10.14 to Registration No. 33-68258 on Form S-4). --
**10.15 Form of Management Agreement by an among Specialty Retailers,
Inc., the Bain Entities, Citicorp Venture Capital, Ltd. and
Executive to be named therein (Incorporated by Reference to
Exhibit 10.22 of Registration No. 33-32045 on Form S-1) and Form
of First Amendment (Incorporated by Reference to Exhibit 10.15 to
Registration No. 33-68258 on Form S-4). --
**10.16 Professional Services Agreement between Specialty Retailers, Inc.
and Bain Capital Partners (Incorporated by Reference to Exhibit
10.21 of Registration No. 33-54504 on Form S-1). --
**10.17 Employment Agreement between Specialty Retailers, Inc. and Carl
E. Tooker dated June 9, 1993 (Incorporated by Reference to
Exhibit 10.17 to Registration No. 33-68258 on Form S-4). --
**10.18 Stock Option Agreement between Specialty Retailers, Inc. and Carl
E. Tooker dated June 9, 1993 (Incorporated by Reference to
Exhibit 10.18 to Registration No. 33-68258 on Form S-4). --
**10.19 Purchase agreement dated September 2, 1994 by and among Palais
Royal, Inc. and Beall-Ladymon Corporation relating to the
sale of certain assets of Beall-Ladymon Corporation
(Incorporated by Reference to Exhibit 10.1 on Form 10-Q of
Apparel Retailers, Inc., dated July 30, 1994). --
**10.20 Purchase Agreement dated July 20, 1995 by and among Specialty
Retailers, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, relating to the sale of the Company's 11% Series C
Senior Subordinated Notes due 2003 (Incorporated by Reference
to Exhibit 10.1 on Form 10-Q of Apparel Retailers, Inc., dated
October 28, 1995). --
**10.21 Registration Rights Agreement dated July 27, 1995 by and
between Specialty Retailers, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation, relating to the sale of the
Company's 11% Series C Senior Subordinated Notes due 2003
(Incorporated by Reference to Exhibit 10.2 on Form 10-Q of
Apparel Retailers, Inc., dated October 28, 1995). --
**10.22 Employment Agreement between Mark Shulman and Specialty
Retailers, Inc., dated as of January 8, 1994 (Incorporated
by Reference to Exhibit 10.1 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995). --

<PAGE>

SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBERS
- ------- --------- ----------
**10.23 Stock Option Agreement between Mark Shulman and Apparel
Retailers, Inc., dated as of January 31, 1994 (Incorporated
by Reference to Exhibit 10.2 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995). --
**10.24 Employment Agreement between James Marcum and Specialty
Retailers, Inc., dated as of May 15, 1995 (Incorporated by
Reference to Exhibit 10.3 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995). --
**10.25 Employment Agreement between Stephen Lovell and Specialty
Retailers, Inc., dated as of May 19, 1995 (Incorporated by
Reference to Exhibit 10.4 on Form 10-Q of Apparel Retailers,
Inc., dated April 29, 1995). --
**10.26 Agency Agreement between Specialty Retailers, Inc. and Palais
Royal, Inc. dated January 29, 1995 (Incorporated by Reference to
Exhibit 10.26 on Form 10-K of Apparel Retailers, Inc., dated
February 3, 1996). --
**10.27 Securities Purchase Agreement among Palais Royal, Inc. and
certain selling stockholders of Uhlmans, Inc. dated May 9, 1996
(Incorporated by Reference to Exhibit 10.1 on Form 10-Q of Stage
Stores, Inc., dated June 12, 1996. --
***12.1 Statement Regarding Computation of Ratio of Earnings to Fixed
Charges --
**21.1 List of Registrant's Subsidiaries (Incorporated by Reference to
Exhibit 21.1 to Registration No. 33-68258 on Form S-4). --
***23.1 Consent of Price Waterhouse LLP. --
***23.2 Consent of Ernst & Young LLP. --
*23.3 Consent of Kirkland & Ellis (included in opinion filed as Exhibit
5.1). --
***24.1 Powers of attorney (included in signature page included in this
Part II). --
</TABLE>

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

* To be filed by amendment.
** Previously filed.
*** Filed herewith.

KIRKLAND & ELLIS

EXHIBIT 5.1

June 1996

Stage Stores, Inc.
10201 Main Street
Houston, Texas 77025

Re: Shares of Common Stock, $.01 par value

Ladies and Gentlemen:

We are acting as counsel to Stage Stores, Inc., a Delaware corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), of a Registration Statement on Form S-1 (File No. 333-5855)
(the "Registration Statement") pertaining to the registration of a proposed
offering of shares of the Company's Common Stock, $.01 par value per share
(the "Common Stock") yielding gross proceeds of up to $192 million.

We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments
as we have deemed necessary for the purposes of this opinion, including the
following: (i) Amended and Restated Certificate of Incorporation and the
Bylaws of the Company, each as amended to the date hereof; and (ii) certain
resolutions adopted by the Board of Directors of the Company. In addition, we
have made such other and further investigations as we have deemed necessary to
enable us to express the opinions hereinafter set forth.

Based upon the foregoing and having regard to legal considerations that we
deem relevant, and subject to the comments and qualifications set forth below,
it is our opinion that the Common Stock has been duly authorized.

For purposes of this opinion, we have with your permission made the
following assumptions, in each case without independent verification: (i) the
authenticity of all documents submitted to us as originals, (ii) the
conformity to the originals of all documents submitted to us as copies, (iii)
the authenticity of the originals of all documents submitted to us as copies,
(iv) the genuineness of the signatures of persons signing all documents in
connection with which this opinion is rendered, (v) the authority of such
persons signing all documents on behalf of the parties thereto and (vi) the
due authorization, execution and delivery of all documents by the parties
thereto.

We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the incorporation by reference of this opinion in a
registration statement filed under Rule 462(b) under the Securities Act of
1933, as amended, which incorporates by reference the contents of the
Registration Statement. In giving such consent, we do not thereby concede that
we are within the category of persons whose consent is required under Section
7 of the Securities Act or the Rules and Regulations promulgated thereunder.

We do not find it necessary for purposes of this opinion to cover, and
accordingly we do not purport to cover herein, the application of the
securities or "Blue Sky" laws of the various states to the offering and sale
of the Common Stock.

This opinion shall be limited to the laws of the State of Delaware.

This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.

Very truly yours,

KIRKLAND & ELLIS

EXHIBIT 12.1

STAGE STORES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(dollars in thousands)

<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------- ---------------------
1991 1992 1993 1994 1995 IQ 1995 1Q 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before extraordinary income .... $ 3,961 $12,235 $13,426 $ 6,630 $10,730 $ 2,438 $ 2,652
Minority interest in Bealls Holding ... 749 -- -- -- -- -- --
Income tax expense .................... 3,993 8,340 7,569 4,317 6,767 1,833 1,1805
------- ------- ------- ------- ------- ------- -------
Income before income tax, minority
interest and extraordinary item ..... 8,703 20,575 20,995 10,947 17,497 4,271 4,457
======= ======= ======= ======= ======= ======= =======
Fixed charges charged to expense:
Rental expense (1) .................. 7,275 7,575 8,803 8,879 10,051 2,212 2,507
Interest expense .................... 33,928 32,384 37,607 41,694 44,770 10,724 11,714
Dividend and accretion on redeemable
preferred stock of subsidiary ..... 749 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total fixed charges charged to
expense ........................... 41,952 39,959 46,410 50,573 54,821 12,936 14,221
------- ------- ------- ------- ------- ------- -------
Income before income tax, minority
interest, extraordinary item and
fixed charges charged to expense .... $50,655 $60,534 $67,405 $61,520 $72,318 $17,207 $18,678
======= ======= ======= ======= ======= ======= =======
Fixed charges charged to accruals:
Rental expense (1) .................. $ 898 $ 803 $ 298 $ 446 $ 1,516 $ 1,211 $ 67
Interest expense .................... 667 381 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total fixed charges charged to
accruals ............................ 1,565 1,184 298 446 1,516 1,211 67
------- ------- ------- ------- ------- ------- -------
Total fixed charges ................... $43,517 $41,143 $46,708 $51,019 $56,337 $14,147 $14,288
======= ======= ======= ======= ======= ======= =======
Radio of earnings to fixed charges .... 1.16 1.47 1.44 1.21 1.28 1.22 1.31
======= ======= ======= ======= ======= ======= =======
</TABLE>

- -------------
(1) Rental expense comprises one-third of all rental expenses incurred during
the period. This is deemed by management to be representative of the
interest factor of rental payments.

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 15, 1996,
relating to the financial statements of Stage Stores, Inc. which appears in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedules for the period and two years ended February 3,
1996 listed under Item 16(b) of this Registration Statement when such
schedules are read in conjunction with the financial statements referred to in
our report. The audits referred to in such report also included these
schedules. We also consent to the references to us under the headings
"Experts" in such Prospectus.

PRICE WATERHOUSE LLP

Houston, Texas
June 26, 1996

EXHIBIT 23.2

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 22, 1996, with respect to the financial
statements of Uhlmans Inc. included in the Registration Statement (Form S-1
No. 333-5855) and related prospectus of Stage Stores, Inc. for the
registration of shares of its common stock.

Ernst & Young LLP

Toledo, Ohio
June 26, 1996