STAGE STORES INC, 424B1, 1996-10-28

STAGE STORES INC
424B1, 1996-10-28
DEPARTMENT STORES

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11,000,000 Shares

[Stage Stores Inc. Logo]
BEALLS (bullet) PALAIS ROYAL (bullet) STAGE

Common Stock
($.01 par value)

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

Of the 11,000,000 shares of Common Stock (the "Common Stock") offered hereby
(the "Offering"), 10,000,000 shares are being sold by Stage Stores, Inc.
("Stage Stores" or the "Company") and 1,000,000 shares are being sold by
certain stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any proceeds from the sale of shares by the
Selling Stockholders. See "Principal and Selling Stockholders." Prior to
the Offering, there has been no public market for the Common Stock. For
information relating to the factors considered in determining the
initial public offering price, see "Underwriting."

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "STGE", subject to notice of issuance.

Of the Common Stock offered hereby, 220,000 shares will be reserved
for sale to officers and employees of the Company and a pension plan for
their benefit. See "Underwriting."
-------------

For a discussion of certain factors that should be considered in
connection with an investment in the Common Stock, see "Risk Factors"
beginning on page 12 herein.
-------------

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

<TABLE>
<CAPTION>
Underwriting
Discounts Proceeds to
Price to and Proceeds to Selling
Public Commissions Company (1) Stockholders
- ----------- ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Per Share .... $16.50 $1.00 $15.50 $15.50
Total (2) .... $181,500,000 $11,000,000 $155,000,000 $15,500,000
</TABLE>

(1)Before deduction of expenses payable by the Company estimated at
$1,300,000.

(2)The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to
purchase up to 1,650,000 additional shares (up to 750,000 additional
shares from the Company and up to 900,000 outstanding shares from the
Selling Stockholders) to cover over-allotments of shares. If the option
is exercised in full, the total Price to Public will be $208,725,000,
Underwriting Discounts and Commissions will be $12,650,000, Proceeds to
Company will be $166,625,000 and Proceeds to Selling Stockholders will be
$29,450,000.
-------------

The shares are offered by the several Underwriters when, as and if issued by
the Company, delivered to and accepted by the Underwriters and subject to their
right to reject orders in whole or in part. It is expected that the shares will
be ready for delivery on or about October 30, 1996, against payment in
immediately available funds.

CS First Boston
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated

The date of this Prospectus is October 24, 1996.

<PAGE>

[The graphics on page 2 consist of models wearing typical apparel sold by the
Company and certain labels of such apparel.]

Bringing name-brand apparel to the Heartland of America. . .personally,
profitably.

Our small town stores become the shopping
destinations for families for miles around.

2
<PAGE>

[The graphic on page 3 consist of a map highlighting the states in which the
Company has stores and certain labels of apparel articles sold by the
Company.]

Bringing name-brand apparel to the Heartland of America. . .personally,
profitably.

Stage Stores, Inc. currently operates 301 stores in 16 states with
an additional 24 stores planned to open by the end of 1996.

3
<PAGE>

[The graphics on page 4 consist of the Company logo and three of the Company's
store fronts.]

STAGE STORES INC.

A unique retail concept - offering name-brand apparel to small
towns and communities throughout the central United States.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK 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 OFFERING, 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. ("SRI").
References to a particular year are 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 otherwise
indicated, (i) the information in this Prospectus reflects a .94727 for 1
reverse stock split of the common stock to be consummated prior to the Offering
and (ii) 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 314 stores through its "Stage", "Bealls" and
"Palais Royal" trade names in 20 states throughout the central United States.
Approximately 77% 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 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 program 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 25 new stores
and acquired 34 stores to date in 1996, and expects to open approximately 10
additional new stores during the remainder of 1996. The Company's goal is to
open at least 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
August 3, 1996 of $95.0 million, an increase of 78%. 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. For 1995,
Uhlmans had net sales of $59.7 million and operating income of $2.2 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 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 approximately 1,200 potential micromarkets in the central United
States and contiguous states which meet these criteria.

7
<PAGE>

The Offering

<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by:
The Company (1) ................................ 10,000,000 shares
Selling Stockholders (1) ....................... 1,000,000 shares
-----------------
Total .......................................... 11,000,000 shares
=================
Common Stock to be outstanding after the
Offering (2) .................................. 22,520,892 shares

Use of proceeds ................................. The net proceeds to be received by the Company from the
Offering are estimated to be approximately $153.7 million and
will be used (i) 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 for an aggregate amount of approximately $135.2
million, (ii) to pay consent fees for amendments to certain
covenants in the indebtedness of SRI and (iii) to pay a $2.0
million fee to terminate the Professional Services Agreement
(as defined). The remaining net proceeds will be used for
general corporate purposes. See "Use of Proceeds" and
"Certain Relationships and Related Transactions." The Company
will not receive any of the proceeds from the sale of shares
by the Selling Stockholders.

Nasdaq National Market symbol ................... "STGE"
</TABLE>

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

(1) Assumes that the Underwriters' over-allotment option is not exercised.
(2) Includes 1,351,967 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 1,511,523 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 (including a .94727
for 1 reverse stock split of the common stock to be consummated prior to 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
---------------------------------------------------------------------------------
Pro Forma
1991 1992 1993(1) 1994 1995(2) 1995(2)
-------- -------- -------- -------- -------- --------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales ...................................... $447,142 $504,401 $557,422 $581,463 $682,624 $742,373
Gross profit ................................... 135,569 154,265 172,579 182,804 214,277 229,498
Selling, general and administrative
expenses ..................................... 116,403 129,193 135,011 134,715 159,625 168,936
Service charge income (3) ...................... 22,840 29,670 20,003 8,515 10,523 11,374
Store opening and closure costs ................ 255 120 199 5,647 3,689 3,689
Operating income (4) ........................... 41,751 54,622 57,372 50,957 61,486 68,247
Net interest expense ........................... 33,407 31,771 36,377 40,010 43,989 34,713
Income before extraordinary item ............... 3,961 12,235 13,426 6,630 10,730 20,673
Pro forma earnings per common
share(5) ..................................... -- -- -- -- -- 0.91
Margin and other data:
Gross profit margin ............................ 30.3% 30.6% 31.0% 31.4% 31.4% 30.9%
Selling, general and administrative
expense rate ................................. 26.0% 25.6% 24.2% 23.2% 23.4% 22.8%
Operating income margin (4) .................... 9.3% 10.8% 10.3% 8.8% 9.0% 9.2%
Adjusted operating income margin (6) ........... 8.1% 8.7% 8.4% 9.2% 9.4% 9.4%
Adjusted operating income (6) .................. $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996 $ 70,036
Depreciation and amortization .................. 10,049 9,065 9,259 9,997 12,816 13,712
Capital expenditures ........................... 4,768 7,631 8,503 19,706 28,638 --
Store data: (7)
Comparable store sales growth:
Bealls/Stage (8) .............................. 4.1% 5.1% 7.2% 4.8% 3.3% --
Palais Royal .................................. (2.8)% (9.8)% 0.8% 1.7% 1.4% --
Total Company (9) ............................. 2.9% 1.8% 6.3% 4.1% 0.8%(10) --
Net sales per selling square foot:
Bealls/Stage (8) .............................. $ 113 $ 118 $ 129 $ 138 $ 142 --
Palais Royal .................................. 228 191 200 205 203 --
Total Company (9) ............................. 138 138 149 157 157 --
Total selling square footage (11) .............. 3,354 3,418 3,472 3,516 4,581 --
Number of stores open at end of
period(12) ................................... 159 175 180 188 256 290
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------
July 29, August 3, Pro Forma
1995 1996 August 3, 1996
------------ -------------- ---------------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C>
Statement of operations data:
Net sales ............................... $296,931 $345,927 $362,443
Gross profit ............................ 92,838 108,704 112,697
Selling, general and administrative
expenses .............................. 70,877 84,335 86,425
Service charge income (3) ............... 5,124 5,902 6,171
Store opening and closure costs ......... 1,176 301 301
Operating income (4) .................... 25,909 29,970 32,142
Net interest expense .................... 21,365 24,054 18,091
Income before extraordinary item ........ 2,659 3,520 8,563
Pro forma earnings per common
are (5) ............................... -- -- 0.37
Margin and other data:
Gross profit margin ..................... 31.3% 31.4% 31.1%
Selling, general and administrative
expense rate .......................... 23.9% 24.4% 23.8%
Operating income margin (4) ............. 8.7% 8.7% 8.9%
Adjusted operating income margin (6) .... 8.5% 7.8% 8.0%
Adjusted operating income (6) ........... $ 25,134 $ 27,128 $ 29,031
Depreciation and amortization ........... 5,721 6,844 7,148
Capital expenditures .................... 16,786 15,183 --
Store data: (7)
Comparable store sales growth:
Bealls/Stage (8) ....................... 3.8% 7.7% --
Palais Royal ........................... 0.9% 6.2% --
Total Company (9) ...................... 0.5% 7.3% --
Net sales per selling square foot:
Bealls/Stage (8) ....................... -- -- --
Palais Royal ........................... -- -- --
Total Company (9) ...................... -- -- --
Total selling square footage (11) ....... 4,365 5,361 5,361
Number of stores open at end of
period(12) ............................ 242 308 308
</TABLE>

<TABLE>

<CAPTION>
<S> <C> <C>
Balance sheet data (at end of period):
Working capital ............................... $ 181,118 $ 218,686
Total assets .................................. 463,240 487,412
Total long-term debt .......................... 425,353 308,354
Stockholders' (deficit) equity ................ (68,428) 70,329(13)
</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 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 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 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) Pro forma earnings per common share reflects the impact of a .94727 for 1
reverse stock split of the common stock to be consummated prior to the
Offering.

(6) 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
----------------------------------------------------------------------
Pro Forma
1991 1992 1993 1994 1995 1995
-------- -------- -------- -------- -------------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating income ........................ $41,751 $54,622 $57,372 $50,957 $61,486 $68,247
Plus: Store opening and closure costs .. 255 120 199 5,647 3,689 3,689
Less: Positive impact of proprietary
credit card program on
operating income ..................... 5,942 11,062 10,743 2,927 1,179 1,900
------- ------- ------- ------- ------- -------
Adjusted operating income .............. $36,064 $43,680 $46,828 $53,677 $63,996 $70,036
======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
Six Months Ended
---------------------------------------
July 29, August 3, Pro Forma
1995 1996 August 3, 1996
-------- --------- --------------
(in thousands)
<S> <C> <C> <C>
Operating income ........................ $25,909 $29,970 $32,142
Plus: Store opening and closure costs ... 1,176 301 301
Less: Positive impact of proprietary
credit card program on
operating income ...................... 1,951 3,143 3,412
------- ------- -------
Adjusted operating income ............... $25,134 $27,128 $29,031
======= ======= =======
</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.

10
<PAGE>

(7) 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.

(8) 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>
Six Months Ended
Fiscal Year ----------------------------
------------------------------------ July 29, August 3,
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% 0.3% 7.7%
Net sales per selling square foot ... $119 $125 $137 $146 $145 -- --
</TABLE>

(9) 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>
Six Months Ended
Fiscal Year ----------------------------
------------------------------------ July 29, August 3,
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% 0.4% 6.8%
Net sales per selling square foot ... $138 $138 $143 $151 $150 -- --
</TABLE>

(10) 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 3.0%.

(11) 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.

(12) 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.

(13) Reflects non-recurring charges, net of tax, totalling approximately $15.0
million in connection with the early retirement of the Senior Discount
Debentures and the write-off of related debt issue costs, the payment of
consent fees for amendments to certain covenants in the indebtedness of SRI
and the termination of the Professional Services Agreement (as defined).

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 August 3, 1996, on a pro forma basis to give
effect to the Offering, the Company's total consolidated indebtedness would have
been $308.4 million and total stockholders' equity would have been $70.3
million. See "Capitalization."

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 consummate 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 capital
expenditure and working capital requirements, and the Company's ability to meet
such 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 seven
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. 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 existing or new
competitors 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 expects to enter 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 represent a significant portion of the Company's business,
accounting for approximately 55.6% of the Company's net sales for 1995. In
recent years (and continuing in the first six months of 1996), there have been
substantial increases in the rate of charge-offs on the Company's accounts
receivable. To date, aggregate increases in finance charges and late fee
collections have more than offset the increases in charge-offs. 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 rate of charge-offs on the
Company's accounts receivable portfolio will not increase further or that
increases in finance charges and late fee collections will continue to offset
any such increases in charge-offs.

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 Company will be able to continue to securitize its
receivables in this manner. There can be no assurance that receivables will
continue to be generated by credit card holders, 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 18.2%, Acadia Partners, L.P. ("Acadia") and
certain of its affiliates will beneficially own 14.7%, Court Square Capital
Limited ("Court Square"), a subsidiary of Citicorp Banking Corporation
("Citicorp"), will beneficially own 7.2% (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 4.7% 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 44.8% of the combined voting power of the
Company's Common Stock and would be in a position to significantly influence the
affairs of the Company and the outcome of all matters requiring a stockholder
vote, including the election of the Board of Directors. See "Principal
Stockholders" and "Management."

Dilution

Based upon an initial public offering price of $16.50 per share, the
Offering will result in immediate and substantial dilution of $15.45 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 Common Stock has been approved 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 has been 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 22,520,892 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. Beginning 90
days following the Offering, 11,125,792 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. In connection with the
Offering, stockholders holding in the aggregate 10,433,275 shares (or 46.3% of
the total outstanding common stock after the Offering) have agreed not to sell
or otherwise dispose of any shares for a period of 180 days from the date of
this Prospectus, and the Company has agreed not to sell 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 CS
First Boston Corporation. No prediction can be made as to the effect 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 1,894,540 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 (as defined) and does not expect to pay cash 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 10,000,000 shares of
Common Stock by the Company in the Offering (after deducting the underwriting
discounts and estimated expenses of the Offering) are estimated to be
approximately $153.7 million. 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 $135.2 million, (ii) to pay consent fees for amendments to certain
covenants in the indebtedness of SRI and (iii) to pay a $2.0 million fee to
terminate the Professional Services Agreement (as defined). The remaining net
proceeds will be used for general corporate purposes. The Company will receive
no proceeds from the sale of shares by the Selling Stockholders. 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 cash 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
existing 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" and
"--Restriction on Payment of Dividends on Common Stock."

16
<PAGE>

CAPITALIZATION

The following table sets forth the historical consolidated capitalization of
the Company at August 3, 1996 and adjusted to give pro forma effect to 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.

<TABLE>

<CAPTION>
August 3, 1996
-------------------------
Historical Pro Forma
----------- -----------
(in thousands)
<S> <C> <C>
Long-term debt, including current portion:
Revolving credit agreement (1) ............... $ 7,500 $ 7,500
Senior Discount Debentures, net (2) .......... 116,999 --
Senior Notes ................................. 130,000 130,000
Senior Subordinated Notes, net (2) ........... 116,606 116,606
SRPC Notes ................................... 30,000 30,000
Other long-term debt ......................... 24,248 24,248
-------- --------
Total long-term debt ........................ 425,353 308,354
Stockholders' equity (deficit) (3) ............ (68,428) 70,329(4)
-------- --------
Total capitalization ........................ $356,925 $378,683
======== ========
</TABLE>

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

(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 $32.1 million and $1.6 million,
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
21,168,925 shares will be outstanding, (ii) 3,000,000 shares of non-voting
Class B Common Stock, of which 1,351,967shares 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 1,511,523
shares of Common Stock will be outstanding immediately following
consummation of the Offering. See "Description of Capital Stock."

(4) Reflects non-recurring charges, net of tax, totalling approximately $15.0
million in connection with the early retirement of the Senior Discount
Debentures and the write-off of related debt issue costs, the payment of
consent fees for amendments to certain covenants in the indebtedness of SRI
and the termination of the Professional Services Agreement.

17
<PAGE>

DILUTION

The net tangible book value of the Company as of August 3, 1996, without
giving effect to the Offering, but giving effect to a .94727 for 1 reverse stock
split of the common stock to be consummated prior to the Offering, was
approximately $(115.0) million, or $(9.19) 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 the receipt of $153.7 million
of estimated net proceeds from the sale by the Company of shares of common stock
in the Offering and the use of such net proceeds as described under "Use of
Proceeds," the pro forma net tangible book value of the Company at August 3,
1996 would have been approximately $23.8 million, or $1.05 per share of common
stock. This represents an immediate increase in net tangible book value of
$10.24 per share to the existing stockholders and an immediate net tangible book
value dilution of $15.45 per share to new investors purchasing shares in the
Offering.

The following table illustrates this dilution:

<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share ........................................ $16.50
Net tangible book value per share,
without giving effect to the Offering ....................................... $(9.19)
Increase in pro forma net tangible book value per share attributable to new
investors ................................................................... 10.24
------
Pro forma net tangible book value per share after the Offering ................. 1.05
------
Dilution per share to new investors ............................................ $15.45
======
</TABLE>

The foregoing computations assume no exercise of stock options. As of
September 20, 1996, there were 1,255,761 options with exercise prices below the
initial public offering price to purchase shares of Common Stock at a weighted
average exercise price of approximately $3.57 per share. If all of such options
had been exercised at August 3, 1996, the net tangible book value per share of
common stock, without giving effect to the Offering but giving effect to the
reverse stock split at such date, would have been $(8.02) and the pro forma net
tangible book value per share after giving effect to the Offering and the
reverse stock split would have been $1.19, representing an immediate dilution to
new investors of $15.31 per share and an immediate increase in net tangible book
value of $9.21 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 six-month periods
ended July 29, 1995 and August 3, 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 six-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
----------------------------------------------------------
1991 1992 1993(1) 1994 1995(2)
---------- --------- --------- --------- ----------
(dollars in thousands, except per share and store data)
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales .......................................... $447,142 $504,401 $557,422 $581,463 $682,624
Cost of sales and related buying, occupancy and
distribution expenses ............................ 311,573 350,136 384,843 398,659 468,347
-------- -------- -------- -------- --------
Gross profit ....................................... 135,569 154,265 172,579 182,804 214,277
Selling, general and administrative expenses ....... 116,403 129,193 135,011 134,715 159,625
Service charge income (3) .......................... 22,840 29,670 20,003 8,515 10,523
Store opening and closure costs .................... 255 120 199 5,647 3,689
-------- -------- -------- -------- --------
Operating income (4) ............................... 41,751 54,622 57,372 50,957 61,486
Other non-operating income (expense) ............... 359 (2,276) -- -- --
Net interest expense (5) ........................... 33,407 31,771 36,377 40,010 43,989
-------- -------- -------- -------- --------
Income before income tax and extraordinary item .... 8,703 20,575 20,995 10,947 17,497
Income tax expense ................................. 3,993 8,340 7,569 4,317 6,767
-------- -------- -------- -------- --------
Income before extraordinary item ................... 4,710 12,235 13,426 6,630 10,730
Minority interest expense .......................... (749) -- -- -- --
Extraordinary item ................................. -- -- (16,208) (308) --
-------- -------- -------- -------- --------
Net income (loss) .................................. $ 3,961 $ 12,235 $ (2,782) $ 6,322 $ 10,730
======== ======== ======== ======== ========
Earnings (loss) per common share (6) ............... $ 0.10 $ 0.77 $ (0.39) $ 0.48 $ 0.80
======== ======== ======== ======== ========
Margin and other data:
Gross profit margin ................................ 30.3% 30.6% 31.0% 31.4% 31.4%
Selling general and administrative expense rate .... 26.0% 25.6% 24.2% 23.2% 23.4%
Operating income margin (4) ........................ 9.3% 10.8% 10.3% 8.8% 9.0%
Adjusted operating income margin (7) ............... 8.1% 8.7% 8.4% 9.2% 9.4%
Adjusted operating income (7) ...................... $ 36,064 $ 43,680 $ 46,828 $ 53,677 $ 63,996
Depreciation and amortization ...................... 10,049 9,065 9,259 9,997 12,816
Capital expenditures ............................... 4,768 7,631 8,503 19,706 28,638

Store data: (8)
Comparable store sales growth:
Bealls/Stage (9) .................................. 4.1% 5.1% 7.2% 4.8% 3.3%
Palais Royal ...................................... (2.8)% (9.8)% 0.8% 1.7% 1.4%
Total Company(10) ................................. 2.9% 1.8% 6.3% 4.1% 0.8%(11)
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
Number of stores open at end of period(13) ......... 159 175 180 188 256

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

Six Months Ended
--------------------------------
July 29, 1995 August 3, 1996
--------------- ---------------
(dollars in thousands,
except per share and store data)
<S> <C> <C>
Statement of operations data:
Net sales ............................................. $296,931 $345,927
Cost of sales and related buying, occupancy and
distribution expenses ............................... 204,093 237,223
-------- --------
Gross profit .......................................... 92,838 108,704
Selling, general and administrative expenses .......... 70,877 84,335
Service charge income (3) ............................. 5,124 5,902
Store opening and closure costs ....................... 1,176 301
-------- --------
Operating income (4) .................................. 25,909 29,970
Other non-operating income (expense) .................. -- --
Net interest expense (5) .............................. 21,365 24,054
-------- --------
Income before income tax and extraordinary item ....... 4,544 5,916
Income tax expense .................................... 1,885 2,396
-------- --------
Income before extraordinary item ...................... 2,659 3,520
Minority interest expense ............................. -- --
Extraordinary item .................................... -- --
-------- --------
Net income (loss) ..................................... $ 2,659 $ 3,520
======== ========
Earnings (loss) per common share (6) .................. $ 0.20 $ 0.26
======== ========
Margin and other data:
Gross profit margin ................................... 31.3% 31.4%
Selling general and administrative expense rate ....... 23.9% 24.4%
Operating income margin (4) ........................... 8.7% 8.7%
Adjusted operating income margin (7) .................. 8.5% 7.8%
Adjusted operating income (7) ......................... $ 25,134 $ 27,128
Depreciation and amortization ......................... 5,721 6,844
Capital expenditures .................................. 16,786 15,183

Store data: (8)
Comparable store sales growth:
Bealls/Stage (9) ..................................... 3.8% 7.7%
Palais Royal ......................................... 0.9% 6.2%
Total Company(10) .................................... 0.5% 7.3%
Net sales per selling square foot:
Bealls/Stage (9) ..................................... -- --
Palais Royal ......................................... -- --
Total Company(10) .................................... -- --
Total selling square footage(12) ...................... 4,365 5,361
Number of stores open at end of period(13) ............ 242 308

Balance sheet data (at end of period):
Working capital ....................................... $161,658 $181,118
Total assets .......................................... 394,945 463,240
Long-term debt ........................................ 372,972 425,353
Redeemable preferred stock ............................ -- --
Stockholders' (deficit)(14) ........................... (78,297) (68,428)
</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 7 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 7 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 $1.24. 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 1993, 1994, 1995 and the six months ended August 3, 1996.
Historical earnings (loss) per common share does not reflect the impact of a
.94727 for 1 reverse stock split of the common stock to be consummated prior
to the Offering.

(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 Six Months Ended
---------------------------------------------------- ----------------------
July 29, August 3,
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 $25,909 $29,970
Plus: Store opening and closure cost ............. 255 120 199 5,647 3,689 1,176 301
Less: Positive impact of proprietary credit card
program on operating income .................... 5,942 11,062 10,743 2,927 1,179 1,951 3,143
------- ------- ------- ------- ------- ------- -------
Adjusted operating income ........................ $36,064 $43,680 $46,828 $53,677 $63,996 $25,134 $27,128
======= ======= ======= ======= ======= ======= =======
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
Fiscal Year Six Months Ended
---------------------------------------------------- ---------------------
July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- --------- --------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Service charge income:
Consolidated ........................................ $22,840 $29,670 $32,547 $35,183 $41,321 $19,228 $23,968
Certificateholders' portion ......................... -- -- 12,544 26,668 30,798 14,104 18,066
------- ------- ------- ------- ------- ------- -------
Reported service charge income (i) .................. 22,840 29,670 20,003 8,515 10,523 5,124 5,902
------- ------- ------- ------- ------- ------- -------
Servicing and bad debt costs:
Consolidated ........................................ 16,898 18,608 21,374 22,504 28,551 11,158 15,215
Certificateholders' portion -- -- 8,814 15,956 19,400 7,290 10,766
------- ------- ------- ------- ------- ------- -------
Reported in selling, general and
administrative expenses (ii) ...................... 16,898 18,608 12,560 6,548 9,151 3,868 4,449
Loss (gain) on sale of receivables:
Certificateholders' portion of service
charge income ..................................... -- -- 12,544 26,668 30,798 14,104 18,066
Certificateholders' portion of servicing
and bad debt costs ................................ -- -- 8,814 15,956 19,400 7,290 10,766
Return to Certificateholders ........................ -- -- 3,219 8,200 11,529 5,547 5,629
Other ............................................... -- -- (2,789) 1,552 62 572 (19)
------- ------- ------- ------- ------- ------- -------
Total (gain) loss on sale of receivables (iii) .... -- -- (3,300) (960) 193 (695) (1,690)
------- ------- ------- ------- ------- ------- -------
Total positive impact of proprietary credit
card program on operating income [(i)-(ii)
-(iii)] ......................................... $ 5,942 $11,062 $10,743 $ 2,927 $ 1,179 $ 1,951 $ 3,143
======= ======= ======= ======= ======= ======= =======
</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>
Six Months Ended
Fiscal Year ----------------------
------------------------------------ July 29, August 3,
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% 0.3% 7.7%
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>
Six Months Ended
Fiscal Year -----------------------
------------------------------------ July 29, August 3,
1991 1992 1993 1994 1995 1995 1996
Total Company ----- ----- ----- ----- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Comparable store sales growth ....... 2.9% 1.8% 5.4% 3.2% 0.5% 0.4% 6.8%
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 3.0%.

(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 (the "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, the application of the net
proceeds of the Offering and a .94727 for 1 reverse stock split of the common
stock to be consummated prior to 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 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)(i) 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 .................. 43,989 1,637 2,595(c) (13,508)(j) 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(d) 5,328(k) 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 ................... $ 0.80 $ 0.91
======== ========
Weighted average common shares
outstanding .......................... 13,434(5) 22,726
======== ========
</TABLE>

23
<PAGE>

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED AUGUST 3, 1996

<TABLE>
<CAPTION>
Historical
---------------------------- Acquisition Offering Pro Forma
Company Uhlmans(6) Adjustments(1) Adjustments(2) Combined
-------------- ------------- ----------------- ----------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales .............................. $345,927 $16,516 $ -- $ -- $362,443
Cost of sales and related buying,
occupancy and distribution expenses .. 237,223 13,030 (507)(e) -- 249,746
-------- ------- ------- ------- --------
Gross profit ........................... 108,704 3,486 507 -- 112,697
Selling, general and administrative
expenses ............................. 84,335 3,751 (1,411)(f) (250)(l) 86,425
Service charge income .................. 5,902 269 -- -- 6,171
Store opening and closure costs ........ 301 -- -- -- 301
-------- ------- ------- ------- --------
Operating income (loss) ................ 29,970 4 1,918 250 32,142
Interest expense, net .................. 24,054 554 885(g) (7,402)(m) 18,091
-------- ------- ------- ------- --------
Income (loss) before income tax and
extraordinary item ................... 5,916 (550) 1,033 7,652 14,051
Income tax expense (benefit) (3) ....... 2,396 -- 184(h) 2,908(n) 5,488
-------- ------- ------- ------- --------
Income (loss) before extraordinary
item (4) ............................. $ 3,520 $ (550) $ 849 $ 4,744 $ 8,563
======== ======= ======= ======= ========

Earnings per common share data:
Earnings per common share
before extraordinary item ............ $ 0.26 $ 0.37
======== ========
Weighted average common shares
outstanding .......................... 13,678(5) 22,957
======== ========
</TABLE>

24
<PAGE>

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS

Note 1--Acquisition Adjustments

Uhlmans Consolidation Program

The Company has substantially completed 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
paid severance to each individual whose employment has been terminated as a
result of the Uhlmans Consolidation Program. Additionally, all leases associated
with Uhlmans' corporate offices and distribution center have been terminated.

Although the consolidation of the Uhlmans general office functions took place
over a period of two 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 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 the Company's
proprietary credit card as compared to historical levels, since Uhlmans had 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--Long-term
Indebtedness--SRPC Notes."

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 has absorbed 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.

(c) Elimination of Uhlmans' historical interest expense of $(1,637) offset by
interest on the SRPC Notes of $3,750 and amortization of debt issue costs
of $482.

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

25
<PAGE>

Six months ended August 3, 1996:
(e) Elimination of Uhlmans' historical personnel costs associated with the
buying and distribution functions which the Company has absorbed into its
existing central office of $(606) offset by incremental freight due to
the use of the Company's distribution center of $99.

(f) 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 $(1,547)
offset by amortization of goodwill resulting from the acquisition of
$136.

(g) Elimination of Uhlmans' historical interest expense of $(554) offset by
interest on the SRPC Notes of $1,250 and amortization of debt issue costs
of $189.

(h) Income tax benefit of Uhlmans' historical loss of $(209) and remaining
acquisition adjustments of $393.

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:
(i) 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."

(j) Elimination of historical interest expense and amortization of debt issue
costs associated with the Senior Discount Debentures of $(13,070) and
$(438), respectively.

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

Six months ended August 3, 1996:
(l) Elimination of the expense associated with the termination of the
Professional Services Agreement (as defined) of $(250).

(m) Elimination of historical interest expense and amortization of debt issue
costs associated with the Senior Discount Debentures of $(7,183) and
$(219), respectively.

(n) Income tax expense associated with the Offering adjustments of $2,908.

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
six months ended August 3, 1996, respectively.

Note 4--Non-Recurring Charges

In the fiscal quarter in which the Offering is consummated (currently
expected to be the third quarter of 1996), the Company expects to incur
non-recurring charges, net of tax, totaling approximately $15.2 million in
connection with the early retirement of the Senior Discount Debentures and the
write-off of related debt issue costs, the payment of consent fees for
amendments to certain covenants in the indebtedness of SRI and the termination
of the Professional Services Agreement (as defined).

Note 5--Reverse Stock Split

The historical weighted average common shares outstanding does not give
effect to a .94727 for 1 reverse stock split of the common stock to be
consummated prior to the Offering.

Note 6--Uhlmans Historical Statement of Operations

Statement of operations data for Uhlmans includes results only for the period
from February 4, 1996 through June 3, 1996, the date when Uhlmans was acquired
and from which it is included in the Company's historical results of operation.

26
<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
August 3, 1996 of $95.0 million, an increase of 78%. 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 $27.3
million, including acquisition expenses and net of cash acquired. In 1995,
Uhlmans had net sales of $59.7 million and operating income of $2.2 million. The
Company has substantially completed 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. As a result of the Uhlmans Consolidation Plan the
Company has eliminated approximately $4.0 million of annualized Uhlmans
historical overhead costs. 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 has introduced 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 proprietary credit card usage
as compared to historical levels since Uhlmans had not aggressively promoted its
own 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 sells, on a daily basis, the accounts receivable purchased
from the Company to the Trust in exchange for cash or

27
<PAGE>

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 August 3, 1996 was $55.8 million,
which represented 25.2% 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 Six Months Ended
---------------------------------------------- --------------------------------
1991 1992 1993 1994 1995 July 29, 1995 August 3, 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) (68.7) (68.6)
----- ----- ----- ----- ----- ----- -----
Gross profit ............................ 30.3 30.6 31.0 31.4 31.4 31.3 31.4
Selling, general and administrative
expenses .............................. (26.0) (25.6) (24.2) (23.2) (23.4) (23.9) (24.4)
Service charge income ................... 5.1 5.9 3.6 1.5 1.5 1.7 1.7
Store opening and closure costs ......... (0.1) -- -- (1.0) (0.5) (0.4) --
----- ----- ----- ----- ----- ----- -----
Operating income ........................ 9.3 10.8 10.3 8.8 9.0 8.7 8.7
Net interest expense .................... (7.5) (6.3) (6.5) (6.9) (6.4) (7.2) (7.0)
----- ----- ----- ----- ----- ----- -----
Income before income tax, minority
interest and extraordinary item ....... 1.9% 4.1% 3.8% 1.9% 2.6% 1.5% 1.7%
===== ===== ===== ===== ===== ===== =====
Income before extraordinary item ........ 0.9% 2.4% 2.4% 1.1% 1.6% 0.9% 1.0%
===== ===== ===== ===== ===== ===== =====
Other data:
Adjusted operating income (1) ........... 8.1% 8.7% 8.4% 9.2% 9.4% 8.5% 7.8%
</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. This
calendar shift, combined with the timing of the Company's promotional events and
holidays, has had the effect of increasing year-to-year comparable store
performance during the first half of 1996 and will likely have the effect of
decreasing comparable store performance during the second half of 1996.

28
<PAGE>

Six Months Ended August 3, 1996 Compared to Six Months Ended July 29, 1995

Sales for the first six months of 1996 increased 16.5% to $345.9 million from
$296.9 million in the comparable period in 1995. The increase in sales for the
six month period was primarily due to an 11.1% increase in sales from stores
opened during 1996 and 1995 combined with a 6.8% increase in comparable store
sales. The significant increase in comparable store sales was primarily
attributable to the strong performance of the Company's Bealls stores combined
with a one-week shift in the comparable calendar period due to the 53-week year
in 1995. Adjusting for this shift in the fiscal calendar, the increase in
comparable store sales for the first six months of 1996 would have been 4.2%. As
mentioned above, the effect of this calendar shift will likely negatively affect
comparable store sales comparisons for the third and the fourth quarters of
1996.

Gross profit for the first six months of 1996 increased 17.1% to $108.7
million from $92.8 million in the comparable period in 1995 as a result of the
opening/acquisition of 67 stores during the twelve month period ended August 3,
1996. Gross profit margin increased to 31.4% for the first six months of 1996
from 31.3% in the comparable period in 1995. The increase in gross profit margin
was derived from the application of fixed buying, occupancy and distribution
expenses over a larger sales base, partially offset by the favorable impact of
vendor discount programs related to the purchase of new inventory for the
opening of 68 new stores during the first six months of 1995 (as compared to 19
new stores receiving such discounts in the first six months of 1996).

Selling, general and administrative expenses as a percent of sales for the
first six months of 1996 increased to 24.4% from 23.9% in the comparable period
in 1995 due to an increase in bad debt expense associated with the Company's
proprietary credit card program as well as certain non-recurring costs
associated with the Company's expansion program. Bad debt expense as a percent
of sales increased to 2.3% for the first six months of 1996 from 1.5% for the
comparable period in 1995. The increase in bad debt was the result of a general
rise in the level of personal bankruptcies in the Company's accounts receivable
portfolio. As a result of the acquisition of Uhlmans, the Company incurred $0.4
million (0.1% of sales) of duplicative costs during the first six months of 1996
related to the Uhlmans central office which has been eliminated as of August 31,
1996. Advertising expenses as a percentage of sales remained unchanged at
approximately 3.8% for the first six months of 1996 and 1995.

Service charge income for the first six months of 1996 increased 15.7% to
$5.9 million from $5.1 million for the comparable period in 1995. Service charge
income increased due to an increase in the average level of accounts receivable
balances combined with an increased yield on the accounts receivable portfolio.
The increased yield resulted primarily from an increase in late fees applied to
delinquent accounts.

Operating income increased 15.7% for the first six months of 1996 as compared
to comparable period in 1995 due to the factors described above.

Interest expense for the first six months of 1996 increased 12.5% to $24.3
million from $21.6 million for the comparable period in 1995. Interest expense
increased due to (i) the issuance of $30.0 million in aggregate principal amount
of SRPC Notes during May 1996, (ii) the issuance of $18.3 million in aggregate
principal amount of Senior Subordinated Notes during August 1995 and (iii) the
increase in the accretion of discount on the Senior Discount Debentures.

As a result of the foregoing, the Company's net income for the first six
months of 1996 increased by 29.6% to $3.5 million from $2.7 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 0.8%
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 3.0%.

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

29
<PAGE>

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 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 charge-offs 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 percent 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 percent 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 percent 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 percent 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 percent 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,

30
<PAGE>

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 percent of sales for 1994 decreased to 8.8% from
10.3% for 1993 as a result of the items discussed above. 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.

31
<PAGE>

Liquidity and Capital Resources

At August 3, 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 $117.0 million, $30.0 million of
SRPC Notes and $24.2 million of certain other debt.

On June 3, 1996, the Company purchased Uhlmans for approximately $27.3
million, including acquisition costs and net of cash acquired. The Company,
through SRPC, issued $30.0 million in aggregate principal amount of SRPC Notes
during May 1996, the proceeds of which were used to fund the Uhlmans'
acquisition. 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. Amounts received by SRPC from its
Retained Interest are expected to provide a source of cash flows to pay the
interest on the SRPC Notes. The scheduled amortization of principal will
commence in December 1999 and is subject to the collection experience of the
receivables underlying the Trust Certificates at that time. 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 increased $11.0 million to $181.1 million at August 3,
1996 from $170.1 million at February 3, 1996, due primarily to the issuance of
the SRPC Notes and the acquisition of Uhlmans.

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 cash interest payments during 1996 and 1997 to be
approximately $5.5 million higher than the 1995 level due to the issuance of the
Series D Senior Subordinated Notes and the SRPC Notes. Capital expenditures are
generally for new store openings, remodeling of existing stores and facilities
and customary store maintenance. Capital expenditures for the first six months
of 1996 were $15.2 million as compared to $16.8 million for the comparable
period of 1995 as a result of fewer stores opened or acquired. Management
expects capital expenditures to be approximately $12.8 million for the last six
months of 1996 consisting primarily of the opening of approximately 16 new
stores, the conversion of most of the Uhlmans stores to Stage stores, routine
store maintenance, store remodels and renovations at the corporate headquarters.
Required principal payments on debt during 1996 and 1997 aggregate $2.4 million.

The Company's short-term liquidity needs are provided by (i) existing cash
balances, (ii) operating cash flows, (iii) the Accounts Receivable Program and
(iv) the Revolving Credit Agreements (as defined below). The Company expects to
fund its long-term liquidity needs from its operating cash flows, 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 August 3, 1996,
$14.5 million of the capacity under the Revolving Credit Agreement was utilized
of which $7.0 million of this amount was used to collateralize letters of
credit. 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.

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 $50.0 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") to third parties 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

32
<PAGE>

in the Trust above the level required to support the term certificates
(aggregating $200.1 million at August 3, 1996), up to a maximum of $40.0
million. As of August 3, 1996, the outstanding balance under the revolving
certificate was $1.1 million. The Company's Retained Interest at August 3, 1996
was $55.8 million, which represented 25.2% 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. 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 accounts receivable balances exceed
the amount of accounts receivable required to support the Trust Certificates and
any 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. 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.

33
<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 59 stores to date in 1996, and
expects to open approximately 10 additional stores during the remainder of 1996.
In addition, the Company's goal is to open at least 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 program, 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, and 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

34
<PAGE>

small markets. Historically, the Company has achieved higher profit margins in
its small market stores. For 1995, store 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 43 buyers who average approximately 11 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

35
<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 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 and 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. 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 and 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 successfully operate in
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 25 new stores and acquired 34 stores to
date in 1996, and expects to open approximately 10 additional new stores during
the remainder of 1996. In addition, the Company's goal is to open at least 55
new stores in 1997. Since 1994, store additions have allowed the Company to
begin operating in 14 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 margins
than

36
<PAGE>

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.

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 August 3, 1996 of $95.0 million, an increase
of 78%. 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; Liquidity."

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.

37
<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 sales 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.

<TABLE>
<CAPTION>
Department 1994 1995
---------- ---- ----
<S> <C> <C>
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%
=== ===
</TABLE>

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.

38
<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
August 31, 1996, there were more than 1.6 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. 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 September 19, 1996, the Company employed 11,570 employees, including 1,143
central office employees. 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.

39
<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.

The Company currently operates stores located in the following states:

<TABLE>
<CAPTION>
Number of Stores (1)
------------------------------------
Year End
----------------- September 20,
Location 1994 1995 1996
- ------------------ ------- ------- ------------
<S> <C> <C> <C>
Alabama ............ 3 3 3
Arizona ............ -- -- 2
Arkansas ........... -- 12 13
Colorado ........... 11 12 11
Illinois ........... -- 5 11
Indiana (2) ........ -- -- 3
Iowa ............... -- 3 6
Kansas ............. -- 2 3
Louisiana .......... -- 26 27
Michigan (2) ....... -- -- 6
Minnesota .......... -- -- 1
Mississippi ........ -- 6 7
Missouri ........... 1 4 5
Nebraska ........... -- -- 1
New Mexico ......... 8 8 9
Ohio (2) ........... -- -- 25
Oklahoma ........... 11 13 13
South Dakota ....... -- -- 2
Texas .............. 153 161 165
Wyoming ............ 1 1 1
--- --- ---
Total ............. 188 256 314
=== === ===
</TABLE>

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

(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. Most leases provide for a base rent amount plus
contingent rentals, generally based upon a percentage of gross sales.

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.

40
<PAGE>

MANAGEMENT

Directors and Executive Officers

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

<TABLE>
<CAPTION>
Name Age Position
- --------------------------- -------------------------------------------------
<S> <C> <C>
Bernard Fuchs(1) ...... 70 Chairman and Director
Carl Tooker ........... 49 Chief Executive Officer, President and Director
Mark Shulman .......... 47 Executive Vice President/Chief Merchandising
Officer
James Marcum .......... 37 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) .. 38 Director
Adam Kirsch(2) ........ 35 Director
Peter Mulvihill(2) .... 37 Director
Lasker Meyer .......... 70 Director
</TABLE>

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee.

The Company expects to expand the size of the Board to add three
directorships by the end of 1997, 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 Chief Executive Officer of Ann Taylor
from 1985 to 1987, President and Chief Executive Officer 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.

41
<PAGE>

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 director since June 1992 and 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., Diagnostics 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. 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.

42
<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) 186,612 1,260

Carl Tooker, 1995 538,416 43,305 67,600 (5) -- 87
President, 1994 468,750 56,128 67,600 (5) 47,363 174
Chief Executive Officer and Director ... 1993 247,916 75,000 132,116 (6) 189,454 --

Mark Shulman, 1995 302,082 75,000 9,600 (7) 14,208 783
Executive Vice President and 1994 276,614 41,250 393,984 (8) 94,727 160
Chief Merchandising Officer ............ 1993 -- -- -- -- --

James Marcum, 1995 183,333 55,000 184,722 (9) 94,727 173
Executive Vice President and 1994 -- -- -- -- --
Chief Financial Officer ................ 1993 -- -- -- -- --

Stephen Lovell, 1995 183,333 55,000 173,535(10) 71,045 268
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 (as defined)
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.

43
<PAGE>

Option/SAR Grants in Last Fiscal Year

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

<TABLE>
<CAPTION>
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 or 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 ...... 14,209 3.5 3.04 6/10/05 27,000 68,850
James Marcum ...... 94,727 23.2 3.04 6/01/05 180,000 459,000
Stephen Lovell .... 71,045 17.4 3.04 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 ........ 79,949 153,750 44,426/62,235 210,540/264,120
Carl Tooker .......... -- -- 85,254/151,563 420,000/702,000
Mark Shulman ......... -- -- 37,890/71,045 114,000/202,800
James Marcum ......... -- -- -/94,727 -/212,000
Stephen Lovell ....... -- -- -/71,045 -/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.

44
<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, 278,259 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. The Fuchs Management Agreement terminates at the end of
1998.

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 142,090 shares of SRI's common
stock at an original purchase price of $5.28 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 $0.11 per share and the right to receive payments equaling
$1.00 per option share ratably over the vesting schedule.

Tooker Employment Agreement

The Company and Carl Tooker expect to enter into an employment agreement (the
"Tooker Employment Agreement") which will provide for Mr. Tooker's employment as
President and Chief Executive Officer. The Tooker Employment Agreement will
provide for an initial base salary of $600,000 plus an annual incentive bonus as
agreed to with the Compensation Committee. The Tooker Employment Agreement will
also provide 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 for good reason, Mr. Tooker would be entitled to 18 months' 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 will also provide 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, Mr. Tooker would be entitled to three years' 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 would vest
immediately. The Tooker Employment Agreement will contain certain non-compete
and confidentiality provisions. The Tooker Employment Agreement will renew
annually in accordance with its terms unless terminated by either party.

Other Employment Agreements

The Company expects to enter into employment agreements with Messrs. Shulman,
Marcum, Lovell and Lucas which will provide for their initial base salaries as
well as annual incentive bonuses as agreed to with the Compensation Committee.
The employment agreements will also provide for annual performance reviews,
salary

45
<PAGE>

increases at the discretion of the Compensation Committee, and participation
in all other bonus and benefit plans available to executive officers of the
Company. The initial base salaries, which will be 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 Lovell Executive Vice President and $300,000
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 would be 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 employment
agreements will also provide that, following a change of control (as defined in
the respective employment agreements), the respective individual would be
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 unvested options for the purchase of Common Stock
held by the aforementioned individuals would vest immediately. The employment
agreements will also contain certain non-compete and confidentiality provisions.
Each of the employment agreements will renew annually in accordance with its
terms unless terminated by either party.

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 1,894,540 shares. As of September 20, 1996, options to purchase an aggregate
of 1,511,523 shares of Common Stock at prices from $0.11 to $21.11 are currently
outstanding under the 1993 Stock Option Plan. In connection with the Offering,
the Compensation Committee has granted options to purchase 255,762 shares of
Common Stock under this plan to members of executive management at an exercise
price of $21.11 per share with a five-year cliff vesting requirement. 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 Board of Directors or the
Compensation Committee (the "Plan Administrator") 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 Plan Administrator 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

46
<PAGE>

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 Plan Administrator, rights
to these forms of contingent compensation are forfeited if a recipient's
employment or performance of services terminates within 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 Plan Administrator. 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 Plan Administrator 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 Plan
Administrator may determine.

An 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 Plan Administrator, 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 Plan Administrator. 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 Plan Administrator, subject to such adjustments as the
Plan Administrator 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 Plan Administrator 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 Plan Administrator 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 Plan Administrator. 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 Plan Administrator 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 Plan
Administrator. 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 Plan Administrator, 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 of 1986, as amended (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.

47
<PAGE>

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.

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

48
<PAGE>

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., after exercise of a nonqualified stock option that
was granted within six months of such exercise to the extent a six month holding
period is required), 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

49
<PAGE>

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.

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 Benefit Equalization 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. The Company is currently considering
adopting a supplemental employee retirement plan (the "Proposed SERP"). If
adopted, the Proposed SERP may provide for certain additional retirement
benefits for the Company's senior management upon retirement at or after a
certain age with a certain number of years of service with the Company.
Additionally, the Proposed SERP may provide for certain accelerated benefits
which could be triggered upon, among other things, a change of control of the
Company.

The estimated annual benefits payable upon retirement under the Retirement
Plan, and Equalization Plan 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--$172,000; Mr. Shulman--$110,000; Mr.
Marcum--$133,000; Mr. Lovell--$117,000; and Mr. Lucas--$49,000. No amounts were
paid or distributed during 1995 or to date in 1996 pursuant to any of the above
plans 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
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.

50
<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.

The Company has made loans, in an aggregate principal amount of $774,700, to
certain executive officers of the Company. These loans are full recourse loans
and are secured by a pledge of the shares of Common Stock owned by such
executive officers. The following executive officers' loans bear interest at
5.7% interest and have a maturity date of April 15, 1997: Carl Tooker, $343,200,
Mark Shulman, $230,300, James Marcum, $115,000, Stephen Lovell, $86,200. In
addition, the following executive officers have the following full recourse
loans outstanding which bear market rates of interest: Carl Tooker, $380,000,
James Marcum, $75,000, Stephen Lovell, $150,000.

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 in 1996 prior
to the Offering. Upon consummation of the Offering, Bain will receive a fee of
$2.0 million to terminate this agreement.

51
<PAGE>

PRINCIPAL AND SELLING 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 September 20, 1996,
1,351,967 shares of Class B Common Stock were outstanding, 1,250,584 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 September 20, 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 Selling Stockholder,
(iii) each director and named executive officer and (iv) all executive officers
and directors as a group.

<TABLE>
<CAPTION>
Percentage Percentage of
Number of of Total Shares Percentage of
Shares of Voting Power Owned Prior Total Shares
Common Prior to to the Shares to Owned After
Name Stock Owned the Offering Offering be Sold the Offering (1)
------------------------------- ------------ ------------ ------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Bain Capital Funds ............... 5,012,868 (2) 44.4% 39.7% 904,400 18.2%
Acadia (3) ....................... 3,330,095 29.5 26.4 14.7
Court Square (4) ................. 1,620,651 3.1 12.8 7.2

Directors and Executive Officers
Bernard Fuchs (5) ................ 1,067,526 9.5 8.4 4.7
Joshua Bekenstein (6) ............ 5,080,343 45.0 40.2 904,400 18.5
Adam Kirsch (6) .................. 5,059,032 44.8 40.0 912,990 18.4
Carl Tooker ...................... 141,901 1.3 1.1 *
Mark Shulman ..................... 40,733 * * *
Jerry Ivie (7) ................... 32,323 * * *
Lasker Meyer (8) ................. 12,800 * * *
Stephen Lovell ................... 14,209 * * *
James Marcum ..................... 18,945 * * *
Peter Mulvihill (9) .............. 0 * * *
All executive officers and
directors as a group
(10 Persons) (10) ............... 6,454,944 57.2% 51.1% 28.5%

ther Selling Stockholders
12 other Selling Stockholders,
each of whom is selling less
than 40,000 shares in the
Offering ........................ 379,795 1.8% 1.7% 87,010 1.3%
</TABLE>

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

* Less than 1%.

(1) Assumes no exercise of the Underwriters' over-allotment option and does not
give effect to any purchase, if any, by such persons in the Offering.

(2) Includes 3,951,122 shares of Common Stock held by Tyler Capital Fund, L.P.;
809,567 shares of Common Stock held by Tyler Massachusetts, L.P.; 236,814
shares of Common Stock held by Tyler International; 15,067 shares of Common
Stock held by BCIP Associates ("BCIP Associates"); and 295 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
Bain Funds and certain related persons have granted the Underwriters

52
<PAGE>

an option to purchase an aggregate of 600,000 shares of Common Stock as
part of the Underwriters' over- allotment option. 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 Partners L.P. ("FCP") and Rosecliff-Specialty
Retailing 1989 Partners, L.P. ("Rosecliff"), both affiliates of Acadia.
Acadia has granted the Underwriters an option to purchase 300,000 shares of
Common Stock as part of the Underwriters' over-allotment option. The
address of Acadia and FCP is 201 Main Street, Fort Worth, Texas 76102. The
address of Rosecliff is 65 East 55th Street, New York, New York 10022.

(4) Court Square is a subsidiary of Citicorp, a Delaware corporation. Amount
and percentage shown as owned include 1,250,584 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) 445,216 shares held by The Fuchs
Family Limited Partnership for which Mr. Fuchs may be deemed to possess
beneficial ownership and (ii) 8,904 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.
Shares to be sold by Mr. Kirsch include 8,590 shares of Common Stock
held of record by Mr. Kirsch.

(7) Includes 334 shares of Common Stock that may be acquired through options
exercisable within 60 days.

(8) Includes 1,670 shares of Common Stock that may be acquired through options
exercisable within 60 days.

(9) 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 Rosecliff.
However, he does not hold or share voting or dispositive power as to shares
beneficially owned by Acadia or Rosecliff.

(10) Amount shown includes 10,908 shares of Common Stock that such persons or
group could acquire upon the exercise of options exercisable within 60
days.

53
<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 $6.17 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, SRI 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 general unsecured obligations and rank senior
to all subordinated debt including the Series B Senior Subordinated Notes.

Series B Senior Subordinated Notes. During 1993, SRI 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, SRI 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. The Series D Senior
Subordinated Notes rank pari passu with the existing Series B Senior
Subordinated Notes (collectively, the "Senior Subordinated Notes").

54
<PAGE>

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.

As of October 16, 1996, SRI had received 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 $50.0
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.

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 and 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.

55
<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, 22,520,892 shares of Common Stock will be issued and
outstanding, 1,351,967 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 will 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 September 20, 1996, there were 11,168,925 shares of Common Stock
outstanding held by 110 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 Company's indebtedness, 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.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "STGE", subject to notice of issuance.

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 September 20, 1996, there were 1,351,967 shares of Class B Common Stock
outstanding held by 11 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

56
<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

57
<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 Company's Common Stock will be
ChaseMellon Shareholder Services, L.L.C.

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 22,520,892 shares of common
stock outstanding. The 11,000,000 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, 11,520,892 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.
Beginning 90 days following the Offering, 11,125,792 shares of common stock will
be eligible 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 CS First Boston Corporation 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. 10,433,275 outstanding shares (or 46.3% of the total
outstanding Common Stock after 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, 8,963,611 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 Company, subject to certain limitations, to file a
"long-form" registration statement on Form S-1 covering all or

58
<PAGE>

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.

59
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated October 24, 1996 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom CS First Boston
Corporation, Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and PaineWebber Incorporated are acting as representatives
(the "Representatives"), have severally but not jointly agreed to purchase from
the Company the following respective numbers of shares of Common Stock:

<TABLE>

<CAPTION>
Number of
Underwriter Shares
- ----------- -----------
<S> <C>
CS First Boston Corporation ............................. 1,859,000
Bear, Stearns & Co. Inc. ................................ 1,859,000
Donaldson, Lufkin & Jenrette Securities Corporation ..... 1,859,000
PaineWebber Incorporated ................................ 1,859,000
The Buckingham Research Group Incorporated .............. 264,000
Dillon, Read & Co. Inc. ................................. 264,000
A.G. Edwards & Sons, Inc. ............................... 264,000
EVEREN Securities, Inc. ................................. 132,000
Goldman, Sachs & Co. .................................... 264,000
Invemed Associates, Inc. ................................ 264,000
Legg Mason Wood Walker, Incorporated .................... 132,000
McDonald & Company Securities, Inc. ..................... 132,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated ...... 264,000
Montgomery Securities ................................... 264,000
Morgan Keegan & Company, Inc. ........................... 132,000
Morgan Stanley & Co. Incorporated ....................... 264,000
Principal Financial Securities, Inc. .................... 132,000
Robertson, Stephens & Company LLC ....................... 264,000
Salomon Brothers Inc .................................... 264,000
Sanders Morris Mundy .................................... 132,000
Southwest Securities Inc. ............................... 132,000
----------
Total .............................................. 11,000,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are purchased. The Underwriting Agreement provides that, in the event of a
default by an Underwriter, in certain circumstances the purchase commitments of
the non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated.

The Company and the Selling Stockholders have granted to the Underwriters an
option, expiring at the close of business on the 30th day after the date of this
Prospectus, to purchase up to 1,650,000 additional shares (up to 750,000
additional shares from the Company and up to 900,000 outstanding shares from the
Selling Stockholders) at the initial public offering price less the underwriting
discounts and commissions, all as set forth on the cover page of this
Prospectus. Such option may be exercised only to cover over-allotments in the
sale of the shares of Common Stock. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
it was obligated to purchase pursuant to the Underwriting Agreement.

Of the shares of Common Stock offered hereby, 220,000 have been reserved (the
"Reserved Shares") for sale to officers and employees of the Company and a
pension plan for their benefit. Any Reserved Shares not so sold will be sold to
the public in the Offering.

The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer shares of Common Stock to
the public initially at the public offering price set forth on the cover page of
this Prospectus and, through the Representatives, to certain dealers at such
price less a concession of $0.60 per share, and the Underwriters and such
dealers may allow a discount of $0.10 per share on sales to certain other

60
<PAGE>

dealers. After the initial public offering, the public offering price and
concession and discount to dealers may be changed by the Representatives.

The Company and certain stockholders (holding in aggregate 10,433,275 shares)
have agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities Exchange Commission a registration statement under the
Securities Act relating to any of its Common Stock or securities convertible or
exchangeable into or exercisable for any shares of Common Stock without the
prior written consent of CS First Boston Corporation for a period of 180 days
from the date of this Prospectus.

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

The shares of Common Stock have been approved for listing on the Nasdaq
National Market subject to official notice of issuance 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.

Prior to the Offering, there has been no public market for the Common Stock.
The initial price to the public for the shares of Common Stock has been
negotiated among the Company and the Representatives. Such initial price was
based on, among other things in addition to prevailing market conditions, the
Company's financial and operating history and condition, its prospects and the
prospects for its industry in general, the management of the Company and the
market prices for securities of companies in businesses similar to that of the
Company.

DLJ has acted 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 will receive customary fees in connection therewith. DLJ makes
a market in the Senior Discount Debentures and, in such capacity, has a position
in such Senior Discount Debentures from time to time. To the extent DLJ owns
Senior Discount Debentures upon expiration of the Tender Offer, it is expected
that DLJ would tender such Senior Discount Debentures into the Tender Offer.

NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company prepare and
file a prospectus with the securities regulatory authorities in each province
where trades of Common Stock are effected. Accordingly, any resale of the Common
Stock in Canada must be made in accordance with applicable securities laws which
will vary depending on the relevant jurisdiction, and which may require resales
to be made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the Common Stock.

Representations of Purchasers

Each purchaser of Common Stock in Canada who receives a purchase confirmation
will be deemed to represent to the Company, the Selling Stockholders and the
dealer from whom such purchase confirmation is received that (i) such purchaser
is entitled under applicable provincial securities laws to purchase such Common
Stock without the benefit of a prospectus qualified under such securities laws,
(ii) where required by law, that such purchaser is purchasing as principal and
not as agent and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."

Right of Action and Enforcement

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

61
<PAGE>

All of the Company's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Ontario purchasers to effect service of process within Canada upon the
Company or such persons. All or a substantial portion of the assets of the
Company and such persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against the Company or such persons in
Canada or to enforce a judgment obtained in Canadian courts against the Company
of such persons outside of Canada.

Notice to British Columbia Residents

A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to the Offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.

CERTAIN U.S. FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK

The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a
non-resident fiduciary of a foreign estate or trust.

This discussion is based on the Code and administrative interpretations as of
the date hereof, all of which are subject to change, including changes with
retroactive effect. This discussion does not address all aspects of U.S. federal
income and estate taxation that may be relevant to Non-U.S. Holders in light of
their particular circumstances and does not address any tax consequences arising
under the laws of any state, local or foreign jurisdiction. Prospective holders
should consult their tax advisors with respect to the particular tax
consequences to them of owning and disposing of Common Stock, including the
consequences under the laws of any state, local or foreign jurisdiction.

Proposed United States Treasury Regulations were issued on April 15, 1996
(the "Proposed Regulations") which, if adopted, would affect the United States
taxation of dividends paid to a Non-U.S. Holder on Common Stock. The Proposed
Regulations are generally proposed to be effective with respect to dividends
paid after December 31, 1997, subject to certain transition rules. The
discussion below is not intended to be a complete discussion of the provisions
of the Proposed Regulations, and prospective investors are urged to consult
their tax advisors with respect to the effect the Proposed Regulations would
have if adopted.

Dividends

Subject to the discussion below, dividends, if any, paid to a Non-U.S. Holder
of Common Stock generally will be subject to withholding tax at a rate of 30% of
the gross amount of the dividend or such lower rate as may be specified by an
applicable income tax treaty. For purposes of determining whether tax is to be
withheld at a 30% rate or at a reduced rate as specified by an income tax
treaty, in accordance with existing United States Treasury Regulations, the
Company ordinarily will presume that dividends paid to an address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted.

Under the Proposed Regulations, to obtain a reduced rate of withholding under
a treaty, a Non-United States Holder would generally be required to provide an
Internal Revenue Service Form W-3 certifying such Non-United States Holder's
entitlement to benefits under a treaty. The Proposed Regulations would also
provide special rules to determine whether, for purposes of determining the
applicability of a tax treaty, dividends paid to a Non-United States Holder that
is an entity should be treated as paid to the entity or to those holding an
interest in that entity.

There will be no withholding tax on dividends paid to a Non-U.S. Holder if
such dividends are effectively connected with the Non-U.S. Holder's conduct
of a trade or business within the United States and if a Form 4224 stating
that the dividends are so connected is filed with the Company or its paying
agent. Instead, the effectively connected dividends will be subject to
regular U.S. net income tax at graduated rates, in the same manner as if the
Non-U.S. Holder were a U.S. resident. In addition to the graduated tax
described above, a non-U.S. corporation

62
<PAGE>

receiving effectively connected dividends may be subject to a "branch profits
tax" which is imposed, under certain circumstances, at a rate of 30% (or such
lower rate as may be specified by an applicable treaty) of the non-U.S.
corporation's effectively connected earnings and profits, subject to certain
adjustments.

Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient, and the amount,
if any of tax withheld. A similar report is sent to the holder. Pursuant to tax
treaties or certain other agreements, the U.S. Internal Revenue Service may make
its reports available to tax authorities in the recipient's country of
residence.

Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information to the
Company or its paying agent.

Gain on Disposition of Common Stock

A Non-U.S. Holder generally will not be subject to U.S. federal income tax
(and no tax will generally be withheld) with respect to gain realized on a sale
or other disposition of Common Stock unless (i) the gain is effectively
connected with a trade or business of such holder in the United States, (ii) in
the case of certain Non-U.S. Holders who are non-resident alien individuals and
hold the Common Stock as a capital asset, such individuals are present in the
United States for 183 or more days in the taxable year of the disposition, (iii)
the Non-U.S. Holder is subject to tax pursuant to the provisions of the Code
regarding the taxation of U.S. expatriates, or (iv) the Company is or has been a
"U.S. real property holding corporation" for federal income tax purposes and the
Non-U.S. Holder owned directly or pursuant to certain attribution rules more
than 5% of the Company's Common Stock (assuming the Common Stock is regularly
traded on an established securities market) at any time within the shorter of
the five-year period preceding such disposition or such holder's holding period.

Information Reporting Requirements and Backup Withholding on Disposition of
Common Stock

Under current United States federal income tax law, information reporting and
backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of Common Stock paid to or through a U.S. office of a broker unless
the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-U.S. office of a non-U.S.
broker. However, U.S. information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds outside the United
States if the payment is made through an office outside the United States of a
broker that is (i) a U.S. Person, (ii) a foreign person which derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States or (iii) a "controlled foreign corporation" for
U.S. federal income tax purposes, unless the broker maintains documentary
evidence that the holder is a Non-U.S. Holder and that certain conditions are
met, or that the holder otherwise is entitled to an exemption.

The Proposed Regulations would, if adopted, alter the foregoing rules in
certain respects. Among other things, the Proposed Regulations would provide
certain presumptions under which a Non-United States Holder would be subject to
backup withholding and information reporting unless the Company receives
certification from the holder of its non-U.S. status.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.

Federal Estate Tax

An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the Common Stock will be
required to include the value thereof in his gross estate for U.S. federal
estate tax purposes, and may be subject to U.S. federal estate tax unless an
applicable estate tax treaty provides otherwise.

63
<PAGE>

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 27,823 shares of Common Stock and 7,688
shares of Class B Common Stock. Mr. Lutz is selling 4,960 shares of Common Stock
in the Offering. Certain legal matters will be passed upon for the Underwriters
by Latham & Watkins, New York, New York.

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 Securities and Exchange
Commission (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.
Such material may also be accessed electronically at the Commission's site on
the World Wide Web located at http://www.sec.gov. 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>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

INDEX TO FINANCIAL STATEMENTS

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

Consolidated Condensed Balance Sheet at February 3, 1996 and August 3, 1996 ............................... F-2
Consolidated Condensed Statement of Income for the three and six months ended July 29, 1995 and
August 3, 1996 .......................................................................................... F-3
Consolidated Condensed Statement of Cash Flows for the six months ended July 29, 1995 and August 3, 1996 .. F-4
Consolidated Condensed Statement of Stockholders' Deficit for the six months ended August 3, 1996 ......... F-6
Notes to Unaudited Consolidated Condensed Financial Statements ............................................ F-7

Audited Financial Statements
Report of Independent Accountants ......................................................................... F-8
Consolidated Balance Sheet at January 28, 1995 and February 3, 1996 ....................................... F-9
Consolidated Statement of Operations for the fiscal years 1993, 1994 and 1995 ............................. F-10
Consolidated Statement of Cash Flows for the fiscal years 1993, 1994 and 1995 ............................. F-11
Consolidated Statement of Stockholders' Deficit for the fiscal years 1993, 1994 and 1995 .................. F-13
Notes to Consolidated Financial Statements ................................................................ F-14

UHLMANS INC.
Report of Independent Auditors ............................................................................ F-26
Balance Sheets at January 31, 1995 and February 3, 1996 ................................................... F-27
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-28
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-29
Statements of Cash Flows for the years ended January 31, 1994 and 1995 and for the period from February
1, 1995 through February 3, 1996 ........................................................................ F-30
Notes to Financial Statements ............................................................................. F-31
</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 August 3, 1996
---------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents ..................................... $ 20,273 $ 18,940
Accounts receivable ........................................... 65,740 64,684
Merchandise inventories ....................................... 150,032 167,769
Prepaid expenses and other current assets ..................... 24,457 29,826
-------- --------
Total current assets ........................................ 260,502 281,219
Property, equipment and leasehold improvements, net ........... 93,118 106,464
Goodwill, net ................................................. 30,876 46,577
Other assets .................................................. 27,837 28,980
-------- --------
$412,333 $463,240
======== ========
Liabilities and Stockholders' Deficit
Accounts payable .............................................. $ 41,494 $ 44,336
Accrued interest .............................................. 12,327 13,009
Accrued expenses and other current liabilities ................ 33,197 37,067
Accrued taxes, other than income taxes ........................ 3,376 5,689
-------- --------
Total current liabilities ................................... 90,394 100,101
Long-term debt ................................................ 335,839 373,362
Related party debt ............................................ 44,200 44,200
Other long-term liabilities ................................... 14,214 14,005
-------- --------
Total liabilities ........................................... 484,647 531,668
-------- --------
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 11,748,686 shares
issued and outstanding, respectively ........................ 115 117
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 4,157
Accumulated deficit ........................................... (76,237) (72,717)
-------- --------
Stockholders' deficit ....................................... (72,314) (68,428)
-------- --------
Commitments and contingencies ................................. -- --
-------- --------
$412,333 $463,240
======== ========
</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>
Three Months Ended Six Months Ended
------------------------------- --------------------------------
July 29, 1995 August 3, 1996 July 29, 1995 August 3, 1996
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales ............................... $154,578 $182,750 $296,931 $345,927
Cost of sales and related buying,
occupancy and distribution expenses ... 108,023 126,127 204,093 237,223
-------- -------- -------- --------
Gross profit ............................ 46,555 56,623 92,838 108,704
Selling, general and
administrative expenses ............... 37,061 45,457 70,877 84,335
Service charge income ................... 2,441 2,989 5,124 5,902
Store opening and closure costs ......... 861 230 1,176 301
-------- -------- -------- --------
Operating income ........................ 11,074 13,925 25,909 29,970
-------- -------- -------- --------
Interest income ......................... 111 116 271 242
-------- -------- -------- --------
Interest expense:
Related party ......................... 1,117 1,118 2,154 2,235
Other ................................. 9,315 10,902 18,550 21,030
Amortization of debt issue costs ...... 480 562 932 1,031
-------- -------- -------- --------
10,912 12,582 21,636 24,296
-------- -------- -------- --------
Income before income tax ................ 273 1,459 4,544 5,916
Income tax expense ...................... 52 591 1,885 2,396
-------- -------- -------- --------
Net income .............................. $ 221 $ 868 $ 2,659 $ 3,520
======== ======== ======== ========

Earnings per common share data:
- -------------------------------

Earnings per common share ............... $ 0.02 $ 0.06 $ 0.20 $ 0.26
======== ======== ======== ========
Weighted average common shares
outstanding ........................... 13,404 13,740 13,390 13,678
======== ======== ======== ========
</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>
Six Months Ended
--------------------------------
July 29, 1995 August 3, 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 2,659 $ 3,520
-------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................ 5,721 6,844
Deferred income taxes ........................................ (490) (833)
Accretion of discount ........................................ 6,722 7,663
Amortization of debt issue costs ............................. 932 1,031
Issuance of long-term debt in lieu of interest payment ....... 147 --
Changes in operating assets and liabilities:
Decrease in accounts receivable ............................ 10,809 5,299
Increase in merchandise inventories ........................ (28,696) (8,205)
Increase in other assets ................................... (8,169) (5,366)
Increase in accounts receivable sold ....................... 1,200 1,100
Decrease in accounts payable and accrued liabilities ....... (1,349) (4,946)
-------- --------
Total adjustments ......................................... (13,173) 2,587
-------- --------
Net cash provided by (used in) operating activities ........ (10,514) 6,107
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired ............................. -- (27,276)
Additions to property, equipment and
leasehold improvements ....................................... (16,786) (15,183)
-------- --------
Net cash used in investing activities ........................ (16,786) (42,459)
-------- --------
Cash flows from financing activities:
Proceeds from:
Revolving credit agreement ................................... -- 7,500
Long-term debt ............................................... 16,458 30,000
Common stock ................................................. 64 292
Payments on:
Long-term debt ............................................... (115) (125)
Redemption of common stock ................................... -- (16)
Additions to debt issue costs ................................ (734) (2,632)
-------- --------
Net cash provided by financing activities .................. 15,673 35,019
-------- --------
Net decrease in cash and cash equivalents .................. (11,627) (1,333)
Cash and cash equivalents:
Beginning of period .......................................... 28,593 20,273
-------- --------
End of period ................................................ $ 16,966 $ 18,940
======== ========
</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 Cash Flows
(in thousands)
(unaudited)

<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
July 29, 1995 August 3, 1996
--------------- ----------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Interest paid .............................................. $13,894 $ 14,885
======= ========
Income taxes paid .......................................... $ 5,862 $ 8,617
======= ========
Supplemental schedule of noncash investing and financing activities:

The Company purchased Uhlmans, Inc. for $27,276 in cash, including acquisition expenses and
net of cash acquired, on June 3, 1996. In conjunction with this acquisition, liabilities were
assumed as follows:
Six Months Ended
August 3, 1996
----------------
Fair value allocated to assets acquired ....................................... $ 34,295
Cash paid for assets acquired, including acquisition expenses ................. (27,276)
--------
Liabilities assumed ........................................................... $ 7,019
========
</TABLE>

The accompanying notes are an integral part of this statement.

F-5
<PAGE>

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

<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,
February 3, 1996 .... 11,470,902 $115 1,468,750 $15 $3,793 $(76,237) $(72,314)
Net income ............ -- -- -- -- -- 3,520 3,520
Vested compensatory
stock options ....... -- -- -- -- 90 -- 90
Issuance of stock ..... 280,994 2 -- -- 290 -- 292
Retirement of stock ... (3,210) -- -- -- (16) -- (16)
---------- ---- --------- --- ------ -------- --------
Balance,
August 3, 1996 ...... 11,748,686 $117 1,468,750 $15 $4,157 $(72,717) $(68,428)
========== ==== ========= === ====== ======== ========
</TABLE>

The accompanying notes are an integral part of this statement.

F-6
<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.) ("Stage Stores"), 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. 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 308 family apparel
stores in the central United States as of August 3, 1996. Stage Stores has no
operations of its own and its primary asset is the common stock of SRI. Stage
Stores and SRI are collectively referred to herein as the "Company".

2. Pursuant to 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 by the Company's private label credit card program. Such
accounts receivable are transferred to a master trust (the "Trust") which has
issued certain certificates to third parties representing undivided interests in
the Trust. SRPC owns an undivided interest in the accounts receivable not
supporting the certificates issued to third parties by the Trust (the "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, the Company completed its acquisition of Uhlmans Inc.
("Uhlmans") for $27.3 million, including acquisition expenses and net of cash
acquired. Uhlmans, which operated 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 financed the 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 15, 1996 from
amounts otherwise received by SRPC from its Retained Interest. Principal
repayments are scheduled to begin on December 1, 1999.

4. Pursuant to Securities and Exchange Commission Staff Bulletins and Staff
policy, common stock options issued during the twelve months prior to the
proposed initial public offering have been included in the calculations of
earnings per common share as if such options were outstanding for all periods
presented.

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 its 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-7
<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-8
<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-9
<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 ............................. $ 0.85 $ 0.50 $ 0.80
Extraordinary item--early
extinguishment of debt ......................... (1.24) (0.02) --
--------- --------- --------
Earnings (loss) per common share after
extraordinary item ............................. $ (0.39) $ 0.48 $ 0.80
========= ========= ========
Weighted average common shares
outstanding .................................... 13,029 13,083 13,434
========= ========= ========
</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
(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-11
<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-12
<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
----------------------
Shares Shares
Outstanding Amount Outstanding Amount
------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Balance, January 30, 1993 ..... 10,559,167 $106 1,468,750 $15

Net loss ...................... -- -- -- --
Dividends on preferred stock .. -- -- -- --
Dividends on common stock ..... -- -- -- --
Accretion on preferred stock .. -- -- -- --
Tax benefits from stock
option activity ............. -- -- -- --
Adjustment for minimum
pension liability ........... -- -- -- --
Issuance of stock ............. 783,998 7 -- --
Retirement of stock ........... (10,024) -- -- --
---------- --- --------- ---
Balance, January 29, 1994 ..... 11,333,141 113 1,468,750 15

Net income .................... -- -- -- --
Vested compensatory stock
options ..................... -- -- -- --
Adjustment for minimum
pension liability ........... -- -- -- --
Issuance of stock ............. 48,000 -- -- --
---------- --- --------- ---
Balance, January 28, 1995 ..... 11,381,141 113 1,468,750 15

Net income .................... -- -- -- --
Vested compensatory stock
options ..................... -- -- -- --
Adjustment for minimum
pension liability ........... -- -- -- --
Issuance of stock ............. 121,621 2 -- --
Retirement of stock ........... (31,860) -- -- --
---------- --- --------- ---
Balance, February 3, 1996 ..... 11,470,902 $115 1,468,750 $15
========== ==== ========= ===

</TABLE>

(restubbed table)

<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
------------ ----------- ------------
<S> <C> <C> <C>
Balance, January 30, 1993 ..... $ 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 ............. 318 -- 325
Retirement of stock ........... (33) -- (33)
------------ ----------- ------------
Balance, January 29, 1994 ..... 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 ............. 97 -- 97
------------ ----------- ------------
Balance, January 28, 1995 ..... 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 ............. 66 -- 68
Retirement of stock ........... (122) -- (122)
------------ ----------- ------------
Balance, February 3, 1996 ..... $3,793 $(76,237) $(72,314)
============ =========== ============
</TABLE>

(end of restubbed table)

The accompanying notes are an integral part of this statement.

F-13
<PAGE>

Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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):

<TABLE>
<CAPTION>
Fiscal Year
----------------------
1993 1994
<S> <C> <C>
--------- ----------
(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
======== ========
</TABLE>

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-14
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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:

<TABLE>
<CAPTION>
<S> <C>
Buildings ..................................... 20-25
Store and office fixtures and equipment ....... 7-12
Warehouse equipment ........................... 5-15
Favorable leases and leasehold improvements ... 15-50
</TABLE>

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-15
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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):

<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
---------------- ----------------
<S> <C> <C>
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
========= =========
</TABLE>

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-16
<PAGE>

Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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):

<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
----------------- -----------------
<S> <C> <C>
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
======== ========
</TABLE>

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

F-17
<PAGE>

Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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):

<TABLE>
<CAPTION>
Fiscal Year
--------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net sales ................ $25,442 $23,174 $ 605
======= ======= =====
Operating income (loss) .. $ (213) $ 618 $ 32
======= ======= =====
</TABLE>

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-18
<PAGE>

Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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-19
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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-20
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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-21
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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) (22,240) (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-22
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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-23
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated 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):

<TABLE>
<CAPTION>
Fiscal Year
------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
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
======== ======== =========
</TABLE>

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):

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

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-24
<PAGE>
Stage Stores, Inc.
(fromerly Apparel Retailers, Inc.)
Notes to Consolidated Statements (Continued)

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

<TABLE>
<CAPTION>
January 28, 1995 February 3, 1996
---------------- -----------------
<S> <C> <C>
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)
======== ========
</TABLE>

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-25
<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-26
<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-27
<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-28
<PAGE>

UHLMANS INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Reduction
Common Stock for Minimum
--------------------------- Retained Pension
Shares Stated Value Earnings Liability Total
----------- ------------ ----------- ----------- ---------
<S> <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-29
<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-30
<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-31
<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, 1995 February 3, 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-32
<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:

<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>

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-33
<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, 1995 February 3, 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-34
<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>
<CAPTION>
<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-35

<PAGE>

[Flip-Out Page]

[The graphics on this page consist of a store front of the Company and the
logos of its stores.]

The store of choice in small town America today!

<PAGE>

[Flip-Out Page]

[The graphics on this page consist of a model wearing typical apparel sold by
the Company, certain labels of such apparel, departments inside Company stores
and the Company's credit cards.]

Modern, beautifully arranged stores with customer service our top priority.

The proprietary credit card
generates customer loyalty
by providing services that
few competitors offer. The
Company's VIP incentive
programs reward the
charge customer with
exclusive discounts and an
array of special privileges.

<PAGE>

[The graphics on this page consist of labels of apparel sold by the Company
and typical departments inside Company stores.]

Modern, beautifully arranged stores with customer service our top priority.

A strong dedication
to customer service,
a reputation for
quality, name-brand
merchandise plus a
convenient shopping
environment enhances
customers satisfaction.

<PAGE>

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

No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer
to buy any of the securities offered hereby in any jurisdiction to any person
to whom it is unlawful to make such offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof or that there has been no change
in the affairs of the Company since such date.

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

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 ........................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .......................................................... 27
Business .............................................................. 34
Management ............................................................ 41
Certain Relationships and Related Transactions ........................ 51
Principal and Selling Stockholders .................................... 52
Description of Certain Indebtedness ................................... 54
Description of Capital Stock .......................................... 56
Shares Eligible for Future Sale ....................................... 58
Underwriting .......................................................... 60
Notice to Canadian Residents .......................................... 61
Certain U.S. Federal Tax Considerations for
Non-U.S. Holders of Common Stock .................................... 62
Legal Matters ......................................................... 64
Experts ............................................................... 64
Additional Information ................................................ 64
Index to Financial Statements ......................................... F-1
</TABLE>

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

Until November 18, 1996, all dealers effecting transactions in the
registered securities, 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.

(STAGE STORES INC. logo)

11,000,000 Shares

Common Stock
($.01 par value)

PROSPECTUS

CS First Boston

Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
PaineWebber Incorporated

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