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s UNITEERDNS DistRicr OUTH TATES CO OF TEXAS FILED MAR 3 1999 Gs

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS

JOHN C. WELD, JR., On Behalf of § No. 1:1 -9 - 0 9 5 7 Himself and All Others Similarly Situated, S CLASS ACTION § Plaintiff, § § vs. § STAGE STORES, INC., CARL TOOKER, § COMPLAINT FOR VIOLATION OF TYLER INTERNATIONAL, -TYLER S510(b) AND 20(a) OF THE -MASSACHUSETTS, L.P., TYLER CAPITAL § SECURITIES EXCHANGE ACT OF FUND L.P., BCIP TRUST ASSOCIATES S 1934 AND SEC RULE 10b-5 L.P., BCIP ASSOCIATES, BAIN § CAPITAL, INC., BAIN VENTURE § CAPITAL, ACADIA PARTNERS L. P., ACADIA FW PARTNERS L.P._ ACADIA MOP, INC., OAK HILLART1\--TER—S) INC., S SANDRA BORNSTEIN, ERNEST R. CRUSE, S RIGO HERNANDEZ, JERRY C. IVIE, JOANNE SWARTZ, MARK SHULMAN, MEL WARD, DONALD R. WESTBROOK, JAMES § MARCUM, STEPHEN LOVELL, CHARLES § SLEDGE, ADAM KIRSCH, JOSHUA § BEKENSTEIN, PETER G. MULVIHILL, CREDIT SUISSE FIRST BOSTON and BEAR, STEARNS & CO. INC., § § Defendants. S Plaintiff Demand A S Trial By Jury

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INTRODUCTION AND OVERVIEW Summary 1. This is an action on behalf of purchasers of Stage Stores, Inc. ("Stage Stores" or the "Company") stock between 5/7/97 and 8/6/98 (the "Class Period"). Stage Stores operates hundreds of retail casual clothing stores in the mid and southwest. 2. In 1988, Stage Stores had been taken "private" in a leveraged buyout ("LBO") arranged and financed by two venture

capital groups -- Bain Capital and Acadia (see ¶1118 and 19, infra). After Stage Stores went private, its business performed much worse than expected and one significant acquisition it made was a failure, making Stage Stores a very poor investment for Bain Capital and Acadia. First in 1992, and again in mid-1996, Bain Capital and Acadia tried to take Stage Stores public to recover on their endangered investment. But both attempts to take Stage Stores public had to be pulled due to lack of sufficient investor interest in the proposed stock sale to permit a large offering to take place. 3. Finally, in 10/96, Stage Stores successfully completed its long-desired IPO at $16-1/2 per share. However, the venture capitalists were able to sell only a very small portion of their shares of Stage Stores stock in the IPO. Thus, Bain Capital and Acadia were planning -- counting on -- a large follow-on secondary offering by Stage Stores during 1997 to allow them to bail out of their troubled investment in Stage Stores at a much higher price. 4. To artificially inflate Stage Stores stock during the Class Period and facilitate the secondary offering at an artifi- cially inflated price, defendants made false and misleading , 97 -1- , ,

statements about Stage Stores' acquisition of the chain of C.R. Anthony Stores ("C.R. Anthony"), including the successful elimina- tion of millions in costs and the successful integration of C.R. Anthony's operations into Stage Stores' operations, the successful conversion of the C.R. Anthony stores to Stage Stores' format and the better-than-expected performance of those converted stores. They also emphasized the success, and indeed acceleration, of Stage Stores' rapid expansion and growth plan of opening new stores, the exceptional profitability of its small town, small store model, Stage Stores' state-of-the-art merchandise mix and inventory controls, the strength of Stage Stores' competitive position and the expertise and depth of Stage Stores' management team. They represented that these favorable factors made Stage Stores a unique company and an exceptionally attractive investment and would result in Stage Stores achieving strong earnings per share ("EPS") growth in F1998, F1999 and F2000 (to end 1/30/99, 1/31/00 and 1/31/01, respectively) -- specifically, EPS of $1.60-$1.85+, $2.22-$2.30+ and $2.75+ in those fiscal years -- with 15%-25% EPS growth going forward. 5. These representations artificially inflated Stage Stores' stock to a Class Period high of $53-3/4 and allowed Bain Capital and Acadia -- who were Stage Stores' two largest and controlling shareholders -- to sell off 6.22 million shares of their Stage Stores stock -- virtually 100% of the shares they owned -- in a 7.1 million share secondary offering on 9/17/97 (the "Secondary Offering"), pocketing $208 million. This Secondary Offering also allowed Stage Stores to sell 650,000 new shares to the public raising $21.7 million in desperately needed equity capital, while ._ -- . -2- 9 6 the underwriters (Credit Suisse First Boston and Bear, Stearns & Co.) got $10+ million of the stock sale proceeds for helping to pull off that stock sale. The apparent strength of Stage Stores' business and its improving financial condition also allowed Stage Stores to refinance some $300 million of its outstanding LBO debt at lower interest rates during the Class Period. During the Class Period, Stage Stores' top officers also pocketed over $7.4 million in illegal insider-trading proceeds, via open market sales of 224,071 shares of their Stage Stores stock at prices as high as $52-1/4 per share. 6. The positive statements and forecasts made by defendants during the Class Period were false. The true facts were: (a) Stage Stores' acquisition of C.R. Anthony was extremely troubled and it was costing significantly more than anticipated to convert the C.R. Anthony stores and taking much longer than planned to complete the conversion process; (b) The performance of many of the converted C.R. Anthony stores was significantly below internally budgeted levels and many of the stores were accumulating large amounts of slow- moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion, its merchandise mix and inventory controls were overwhelmed and not working; many of its stores were accumulating large amounts of slow-moving, over-valued inventory that would have to be liquidated at unprofitable prices; (d) Stage Stores did not write down this over-valued inventory so that it could artificially inflate its reported EPS

— -3- 95 and gross margins and make its store model appear significantly more profitable than, in fact, it was; (e) Stage Stores' chief merchandising officers had misordered millions of dollars worth of undesirable, slow-moving merchandise which was not selling and which would have to be marked down to be sold at greatly reduced prices, adversely impacting Stage Stores' margins and EPS; (f) Stage Stores' top management was in disarray, had lost control of the business and was riddled with dissention over the serious mistakes which had been made; (g) Stage Stores was achieving its reported revenue growth and same-store sales growth by boosting sales by sharply discounting its merchandise; however, at the same time, Stage Stores was inflating its reported margins and EPS by failing to write down or reserve for the remaining inventory of similar merchandise to reflect those discounted prices; (h) Because of the serious problems with Stage Stores' merchandise mix, inventory controls and its troubled C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future and would have to sharply curtail its new store openings in order to conserve cash and try to regain control of Stage Stores' business; and (1) AsAs a result of these negative conditions which were adversely Stage Stores, the quarterly F1998 and F1998, F1999 and F2000 gross margins and EPS being forecast by and for Stage Stores were false, as they were impossible to achieve. 7. After Stage Stores' insiders had completed their insider sales, Stage Stores' stock fell from $53-7/16 on 6/23/98, to — — - -4- 4 F g 4 $41-5/8 on 7/7/98, just nine trading days later, after Stage Stores told analysts its same-store sales growth in 6/98 had slowed due to hot weather, but that this would not prevent Stage Stores from achieving same-store sales growth in 2ndQ F1998 and would not adversely impact Stage Stores' F1998 results, in large part because of the better-than-expected performance of the C.R. Anthony stores. On 7/8/98, Stage Stores again stated that a "temporary weather- related phenomenon" was hurting same-store sales, but again assured investors that "we remain positive on our outlook" -- while forecasting only a slight reduction of 2ndQ F1998 EPS to $.27-$.30, compared to the previously forecasted $.32. Stage Stores' stock fell, but only slightly, closing at $39 on 7/8/98. 8. During the next month, Stage Stores' stock continued to decline as rumors (which Stage Stores denied) circulated regarding Stage Stores' 2ndQ F1998 results. Then, on 8/6/98, Stage Stores revealed a "disastrous" 5% decline in same-store sales during 7/98, admitted its 2ndQ EPS would be only $.02-$.05 and that Stage Stores would suffer very weak 3rdQ EPS as well. Stage Stores' stock utterly collapsed, falling from $23-5/8 on 8/5/98 to $9-7/8 on 8/6/98, a one-day price decline of $13-3/4 or 58%, on volume of 5.3 million shares, the largest one-day absolute or percentage stock- price decline on the largest one-day volume in Stage Stores' history, placing the stock at an all-time low! Due to these negative developments, Standard & Poor's immediately placed Stage Stores on "CreditWatch" with "negative implications." Analysts were immediately skeptical of the claim that these huge EPS shortfalls were due just to hot weather. "The heat may have something to do with it, but they're not only in the Southwest," - 5 - 93 said one analyst. The stock's plunge "is a sign of a sudden drop of confidence in management," said another. One insightful investor posted his comment:

The huge drop in this stock must be attributed to additional factors. There is no way that this stock would drop from a high of $53 four weeks ago to $10 based merely on problems associated with bad weather. Everyone knows that weather is a temporary factor and will improve again. That does not account for an 80% drop. Something bad is happening at this company! Also, it is obvious that some people were privvy [sic] to inside information as there has been consistent selling going on for weeks before today's big drop. I want to know what management is not telling us! 9. Stage Stores' subsequent F1998 results were horrible. For the 2ndQ F1998, Stage Stores reported declining same-store sales and actual net income of only $765,000 or $.03 per share, huge declines from the prior quarter and prior year comparable periods. For the 3rdQ F1998, Stage Stores again reported declining same-store sales and a loss of $3.2 million, or $.11 per share, revealing that its Chief Merchandising Officer had resigned and that it had to sharply curtail its expansion program. Stage Stores continued to try to blame hot weather for these results, however, analysts were skeptical -- "we can't help wonder if the merchandise mix and heavy promotional campaign over the last several months may also be contributing factors" -- and slashed the F1998 and F1999 EPS forecasts for Stage Stores as Stage Stores was now in danger of violatingthefinancialcovenantsinr itsbankdecline lendingagreements. g Stores revealed a same-storet sales in the 4thQ F1998 -- the largest quarterly decline yet -- a real decline in quarterly sales year-over-year, a 4thQ F1998 loss of $2.9 million or $.10 per share, and that it was virtually abandoning its expansion plan -- now to open lust 10 new stores in -6- 9 2 F1999 down from the 80+ stores forecast to be opened in F1999 during the Class Period -- and that Stage Stores would add zero retail square footage in F1999! By 1/99, Stage Stores stock fell to just $6-3/4 and Stage Stores had to amend its bank lending agreements to avoid violation of its borrowing covenants. One analyst noted, "Stage Stores' weather excuse has been worn out . . . [wle have lost confidence in management's ability to achieve meaningful improvement over the near-to-intermediate term." this debacle, just and F2000 EPS of just $.70-$.80 for Stage Stores -- massive reductions from the $2.20+ and $2.75+ EPS levels forecast by and for Stage Stores for F1999 and F2000 during the Class Period! 10. As Stage Stores reported its horrible 3rdQ and 4thQ F1998 results, analysts continued to challenge the "weather excuse" and discovered that, in fact, poor merchandise mix control, serious problems with the C.R. Anthony acquisition, price-cutting to move slow-moving inventory and increased competition were the real reasons for the collapse of Stage Stores' business. Selected analysts' comments are set forth below: • [A]s 1998 progressed, the lack of merchandise execution became more prevalent. That, in turn, further negatively impacted sales, and set into motion the management changes and shift in merchandising direction that took place over the past six months. Stage Stores lust did not have the capability to absorb the C.R. Anthony acquisition as easily as it had expected. It proved to be a lot more difficult than just simply putting a range of merchandise into a new store . . . . • Management has instituted several changes to restore merchandising . . . . We believe the Company's merchandising miscues last year were tied to the significant turnover in the merchant team, i.e. two chief merchants in two years. •

-7- 44 • A continuation of merchandising difficulties . . . had a negative affect on SGE's performance. . . .

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Merchandising difficulties plagued the company • • • • • Management attributes same-store sales declines to . . . some merchandising missteps and increased promotional activity (which resulted in lower average selling prices) to ensure the timely liquidation of seasonal merchandise.

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To help reverse negative comp-store sales trends, the company is eliminating its value pricing program, improving management of receipt flows, and refining marketing/pricing plans. Stage is placing considerable focus on its overall merchandising strategy, broadening its assortments and adding new vendors. This strategy includes introducing better, higher-margin brands; focusing on a younger, more contemporary consumer; readjusting the dress and shoe categories; strengthening existing and building new vendor relationships; and launching a more focused, quality advertising strategy. • Management is attempting to shore up the business by bringing in some new brands, . . . eliminating the value pricing strategy, slowing store growth so it can focus on the business and improve cash flow, and controlling inventory so as to minimize markdown risk. . . . [W]e think it is too early to get excited and don't believe the business will turn before the second half of 1999. • [W]e believe further initiatives must be taken in the areas of merchandise assortment and promotional strategy. These two areas are the core of any retailer and making changes to them can be a slow and difficult process. • [M]erchandise, promotional and competitive issues are the reasons for the relatively weak outlook. We believe it could take 12-18 months before meaningful progress is made. onStage Public investors Stage stock based success store expansion plan, the exceptional profitability of its small

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town, small store model, the success of its C.R. Anthony acquisition and the integration of its operations and conversion of its stores, the better-than-expected performance of the converted stores, Stage Stores' effective merchandise and inventory controls, its strong management team and its forecasts of substantial EPS growth in F1999-F2001 and beyond, and thus paid as high as $53-3/4 for Stage Stores stock during the Class Period, have suffered millions in damage. However, Stage Stores' insiders and controlling shareholders and the Underwriter Defendants, who knew the truth, did not fare nearly so poorly. Before the revelations of 8/98 occurred and Stage Stores stock collapsed, the defendants all took advantage of and personally profited from Stage Stores' artificially inflated stock price. Stage Stores sold 650,000 new shares of its stock to the public, raising $21.7 million in desperately needed new capital. Stage Stores' two largest and controlling shareholders (Bain Capital and Acadia) sold 6.22 million shares of their Stage Stores' stock, virtually 100% of their holdings, pocketing $208 million! Stage Stores' top executives sold 224,071 shares of their stock for over $7.4 million. These illegal stock sales by defendants during the Class Period are summarized below:

Shares Total Defendant Sold Proceeds

Bain Capital (1) 3,517,829 $117,495,489 Acadia Entities (2) 2,709,715 90,504,481 Kirsch/Indi-\,duallyri 32,420 1,082,828 Bekenstein/Individually (3) 37,410 1,249,494 Sledge 2,462 120,638 Mulvihill/Individually (4) 11,604 387,583 Tooker 118,010 3,390,379 Bornstein 4,351 208,923 Cruse 12,551 610,981 Hernandez 3,789 190,870 Ivie 20,000 687,825 Swartz 3,500 182,000 Shulman 35,000 947,483 Ward 6,607 272,438

— 9 - ('‘.; 9

Westbrook 3,592 164,319 Lovell 14,209 710,450 Stage Stores 650,000 21,706,750

Total Stock Sales (5): 7,171,445 $239,528,598

(1) Includes 165,800 shares distributed to various organization to be sold in the Secondary

(2) Shares t.gributed to various Acadia partners to be sold in secondary

(3) Sold through the Joshua Bekenstein 1997 Charitable Remainder Unitrust.

4) Mulvihill's shares sold are included in the 2,709,715 distributed and sold by Acadia.

(5) Totals exclude Mulvihill's shares sold as these amounts are included for Acadia. 12. Instead of the strong F1998 EPS growth forecast during the Class Period, i.e., 2ndQ F1998 EPS of $.30-$.32, 3rdQ F1998 EPS of $.28-$.30, 4thQ F1998 EPS of $.90-$.92 and F1998 EPS of $1.60- $1.86, Stage Stores reported terrible 2ndQ, 3rdQ and 4thQ F1998 results -- resulting in a disastrous decline in EPS in F1998 compared to F1997 and massive reductions in the F1999 and F2000 EPS forecasts for Stage Stores: Stage Stores, Inc. Quarterly Results (in thousands, except EPS) F1996 04/30/96 07/31/96 10/31/96 02/01/97 Year Revenues $163,177 $182,750 $182,562 $248,061 $ 776,550 Net income $ 2,652 $ 868 ($265) $ 10,767 $ 14,022 EPS $.21 $.07 ($.02) $.45 $.88 F1997 05/03/97 08/02/97 11/01/97 01/31/98 Year Revenues $191,512 $238,137 $274,269 $369,398 $1,073,316 Net income $ 7,094 $ 6,246 $ 3,673 $ 17,527 $ 34,540 EPS $.30 $.25 $.13 $.62 $1.30 F1998 05/02/98 08/01/98 10/31/98 01/31/99 Year Revenues $272,788 $271,805 $271,605 $357,300 $1,173,498 Net income $ 9,035 $ 765 ($ 3,152) ($ 2,900) $ 3,700 EPS $.32 $.03 ($.11) ($.10) $.13 S

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13. The artificial inflation of Stage Stores stock, defendants' illegal insider trading and the collapse of Stage Stores' stock as the true facts about the failure of Stage Stores' expansion and growth program, the lack of profitability of its small town, small store model, its merchandise mix and inventory problems, its failure to integrate C.R. Anthony into its operations and to successfully convert the C.R. Anthony stores to the Stage Stores' format, its management failures and Stage Stores' greatly diminished prospects for future growth began to come out, is graphically displayed below.

Stage Stores, Inc.

October 25, 1996 - February 26, 1999 Daily Stock Prices 60 8/5-9/22/97 Company sells 650,000 shares for $21,710,000 50 — Insider Defendants sell 6,330,633 shares for . $211,419,146 7/7-7/11/97 cu 40 — 1...ea Insider Defendants .c sell 68,000 shares for (0 $1,726,875 \ 1. w \ a. 30 i coi2 3/17-4/6/98 Z— Insider Defendants sell 0 . 72,812 shares for 20 — ' $3,573,827

5/12-5/21/97 10 — Insider Defendants sell 50,000 shares VAti\y‘,f% for $1,098,750

0 1 I I I I 1 I•I I I I I I 10/25/96 03/14/97 07/31/97 12/17/97 05/07/98 09/23/98 02/10/99 01/06/97 05/22/97 10/09/97 02/27/98 07/16/98 12/01/98— t : - S7 - 11 - JURISDICTION AND VENUE 14. The claims arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act") and Rule 10b-5. Jurisdiction is conferred by §27 of the 1934 Act. Venue is proper pursuant to §27 of the 1934 Act. Defendants used the instrumentalities of interstate commerce. THE PARTIES Plaintiff

15. John C. Weld, Jr. purchased 125 shares of Stage Stores stock on 08/03/98 at $25.75 per share and was damaged thereby. Defendants 16. Stage Stores is headquartered in Houston, Texas. As of 8/97, Stage Stores operated 600 retail clothing stores in 24 states, in small towns and communities in the central United States. Stage Stores acquired 246 stores through the acquisition of C.R. Anthony in 1997. Approximately 80% of the Stage Stores' stores are located in communities with populations below 30,000 people. The remainder of the Stage Stores' stores operate primarily in suburban Houston. Stage Stores stock traded in an efficient market on the NASDAQ National Market System until 4/98 and on the New York Stock Exchange thereafter. 17. (a) Carl Tooker ("Tooker") is Chairman, President and CEO of Stage Stores. During the Class Period, Tooker sold 118,010 shares of his Stage Stores stock based on inside information, pocketing almost $3.4 million in illegal insider-trading proceeds. These stock sales constituted 48% of the Stage Stores stock actually owned by him.

SS 86 - 12 - (b) Jerry C. Ivie ("Ivie") is Senior Vice President and Treasurer of Stage Stores. During the Class Period, Ivie sold 20,000 shares of his Stage Stores stock based on inside information, pocketing over $687,000 in illegal insider-trading proceeds. These stock sales constituted 65% of the Stage Stores stock actually owned by him. (c) Joanne Swartz ("Swartz") is Vice President-Marketing of Stage Stores. During the Class Period, Swartz sold 3,500 shares of her Stage Stores stock based on inside information, pocketing $182,000 in illegal insider-trading proceeds. (d) Stephen Lovell ("Lovell") is Executive Vice President of Stage Stores. During the Class Period, Lovell sold 14,209 shares of his Stage Stores stock based on inside informa- tion, pocketing over $710,000 in illegal insider-trading proceeds. (e) Mark Shulman ("Shulman") was Executive Vice President and Chief Merchandising Officer of Stage Stores through mid-1997. Shulman was a member of Stage Stores' Board of Directors from 12/9/96 through mid-1997. During the Class Period, Shulman sold 35,000 shares of his Stage Stores stock based on inside information, pocketing over $947,000 in illegal insider-trading proceeds. (f) Mel Ward ("Ward") is Vice President-Real Estate of Stage Stores. During the Class Period, Ward sold 6,607 shares of his Stage Stores stock based on inside information, pocketing over $272,000 in illegal insider-trading proceeds. (g) Donald R. Westbrook ("Westbrook") is a Senior Vice President of Stage Stores. During the Class Period, Westbrook sold

- 13 - 3,592 shares of his Stage Stores stock based on inside information, pocketing over $164,000 in illegal insider-trading proceeds. (h) Sandra Bornstein ("Bornstein") is Senior Vice President of Stage Stores. During the Class Period, Bornstein sold

4,351 shares of her StageStoresstock based on insiderinformation, pocket ing i n illegal (i) Ernest R. Cruse ("Cruse") is a Senior Vice President of Stage Stores. During the Class Period, Cruse sold 12,551 shares of his Stage Stores stock based on inside information, pocketing over $610,000 in illegal insider-trading proceeds. (j) Rigo Hernandez ("Hernandez") is a Senior Vice President of Stage Stores. During the Class Period, Hernandez sold 3,789 shares of his Stage Stores stock based on inside information, pocketing over $190,000 in illegal insider-trading proceeds. (k) James Marcum ("Marcum") is CFO of Stage Stores. (1) Charles Sledge ("Sledge") is an officer of Stage Stores. During the Class Period, Sledge sold 2,462 shares of his Stage Stores stock based on inside information, pocketing over $120,000 in illegal insider-trading proceeds. (m) Adam Kirsch ("Kirsch") was, until 9/17/97, a director of Stage Stores and a member of its Audit Committee which oversaw the accounting and financial functions of the Company and consulted with and reviewed the services provided by the Company's independent auditors. Kirsch is a Managing Director of Bain Capital, Inc. and a general partner of Bain Venture Capital, which sold 100% of its Stage Stores stock during the Class Period (3,517,829 shares) for $117.5 million in illegal insider-trading

: - 14 - 8 4 proceeds. Kirsch sold 32,420 of his own shares in this offering for $1.08 million.

(n) Joshua Bekenstein ("Bekenstein") was a director of Stage Stores until 9/17/97. Until 3/96, Bekenstein was Vice Chairman of Stage Stores. Bekenstein has been a Managing Director of Bain Capital, Inc. and a general partner of Bain Venture Capital, which sold 100% of its Stage Stores stock during the Class Period (3,517,829 shares) for $117.5 million in illegal insider- trading proceeds. Bekenstein sold through the Joshua Bekenstein 1997 Charitable Remainder Unitrust 37,410 of his own shares in this offering for $1.25 million. (o) Peter G. Mulvihill ("Mulvihill") was a director of Stage Stores and a member of its Audit Committee which oversaw the accounting and financial functions of the Company and consulted with and reviewed the services provided by the Company's indepen- dent auditors. Mulvihill is Managing Director of defendant Oak Hill Partners, Inc., the management company for the Acadia entities, which sold almost 100% of the entities' Stage Stores stock during the Class Period (2,709,715 shares) for $90.5 million in illegal insider-trading proceeds. Mulvihill sold 11,604 of the shares distributed to him by Acadia in this offering for over $387,000. (p) The individuals named in 1117(a)-(o) are the "Individual Defendants." 18. Bain Capital, Inc. (which includes Bain Venture Capital) (collectively "Bain Capital") was a controlling shareholder of Stage Stores. After the IPO, Bain Capital continued to own 40% of Stage Stores stock and had two representatives on Stage Stores' 4 , - 15 - 83 Board through 9/17/97. Bain Capital's shares of Stage Stores were owned by the "Bain Capital Funds," i.e., Tyler Capital Fund L.P., Tyler Massachusetts, L.P., Tyler International (collectively the "Tyler entities"), BCIP Associates and BCIP Trust Associates L.P., each of which Bain Capital controlled. Because of Bain Capital's representation on Stage Stores' Board and involvement in its business, it knew the adverse non-public information about the business of Stage Stores, as well as its finances and future prospects via access to internal corporate documents (including the Company's operations compared thereto), conversations with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to its representatives in connection therewith. During the Class Period, Bain Capital participated in the issuance of statements which it knew were false and/or misleading for the purpose of selling Stage Stores' stock. 19. Acadia Partners L.P. (which includes Acadia FW Partners L.P. and Acadia MPG, Inc.) (collectively "Acadia") was a controlling shareholder of Stage Stores. After the IPO, Acadia owned 26% of the outstanding stock of Stage Stores and had a representative on Stage Stores' Board, who was a member of its Audit Committee. Because of Acadia's representation on Stage Stores' Board and its involvement in Stage Stores' business, it knew the adverse non-public information about the business of Stage Stores, as well as its finances and future prospects via access to internal corporate documents (including the Company's operations compared thereto), conversations with other corporate officers and employees, attendance at management and Board of Directors'

- 16 - k 9 meetings and committees thereof and via reports and other infor mation provided to its representatives in connection therewith. During the Class Period, Acadia participated in the issuance of statements which it knew were false and/or misleading for the purpose of selling Stage Stores' stock. 20. The defendants identified in ¶1[16-19 are the "Stage Stores Defendants. " 21. As officers, directors and/or controlling persons of a publicly held company and/or as sellers of Stage Stores stock, the Stage Stores Defendants had a duty to promptly 'disseminate accurate and truthful information with regard to Stage Stores and to correct any previously issued statements that had become untrue and to disclose any adverse trends known to them that would materially affect the operating results of Stage Stores, so that the market price of Stage Stores stock would be based upon truthful and accurate information. 22. The Stage Stores Defendants controlled the contents of Stage Stores' SEC filings, reports and releases. Each of the Stage Stores Defendants participated in preparing Stage Stores' reports, releases and SEC filings alleged herein to be misleading. Because of their access to material non-public information, each of these defendants knew that the adverse facts specified herein were being concealed from the public and that the positive representations which were being made were then false and misleading. Thus, each of the Stage Store Defendants is legally responsible for the falsifying of Stage Stores' reports, financial statements and releases as "group-published" information.

- - 17 - 81 23. Bain Capital, Acadia, Oak, Bekenstein, Kirsch, Mulvihill and Tooker, by reason of their executive positions with Stage Stores or their Board membership or their ownership of Stage Stores stock, were controlling persons of Stage Stores and had the power and influence, and exercised the same, to cause Stage Stores to engaged in the conduct complained of herein. Stage Stores controlled its officers and all of its employees. Bain Capital also controlled its employees, partners or agents, Bekenstein and Kirsch, while Acadia and Oak also controlled its employee, partner or agent Mulvihill. These controlling persons are liable pursuant to §20(a) of the 1934 Act. 24. Credit Suisse First Boston ("First Boston") and Bear, Stearns & Co. Inc. ("Bear Stearns") (the "Underwriter Defendants") are investment banking firms which specialize, inter alia, in underwriting public offerings of securities. First Boston and Bear Stearns served as financial advisors to Stage Stores and co-lead underwriters of Stage Stores' IPO and Secondary Offering in which they sold millions of shares of Stage Stores stock to the public and for which they received a significant portion of the money raised. First Boston was Stage Stores' advisor for the C.R. Anthony acquisition and was intimately involved in that trans- action. Each of these firms was also a marketmaker in Stage Stores stock and purchased and sold Stage Stores stock on a daily basis. To get the underwriting business for Stage Stores' IPO and Secondary Offering, Bear Stearns and First Boston each agreed to participate in the scheme to inflate Stage Stores stock, including promising to issue positive research reports on Stage Stores to • help artificially inflate Stage Stores stock in the aftermarket, in ---- - 18 - . 80

part because they knew Stage Stores, Bain Capital and Acadia were planning a follow-on offering of stock to allow those venture capital investors and controlling shareholders, i.e., Bain Capital and Acadia, to sell off their shares and allow Stage Stores to raisemillionsmore in equity capital sto further tits:educe remaining debt. Becausetheir with Stage Stores, the Underwriter Defendants had constant access to Stage Stores' internal corporate information, including the adverse information concealed by defendants. SCIENTER AND SCHEME ALLEGATIONS Scheme 25. Each defendant is liable for participating in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Stage Stores stock, including making false and misleading statements or concealing material adverse facts while selling Stage Stores stock, and which deceived investors and allowed defendants to sell millions of shares of Stage Stores stock at artificially inflated prices. Knowledge 26. Tooker, Bornstein, Cruse, Hernandez, Shulman, Swartz, Ward, Westbrook, Lovell and Ivie were executives of Stage Stores. They ran Stage Stores as "hands-on" managers, dealing with important issues facing Stage Stores' business, i.e., its sales, the implementation of its aggressive growth, i.e., new store opening program, its C.R. Anthony acquisition, including the integration of its operations into Stage Stores' operations and the conversion of its stores to the Stage Stores' format, as well , as Stage Stores' inventories and merchandise mix.

- 19 - 7 9 27. Because Kirsch and Bekenstein represented Bain Capita -- Stage Stores' largest shareholder -- on Stage Stores' Board and Bain Capital was very concerned over its investment in Stage Stores, they were much more involved in its day-to-day operations than is normally the case with outside directors. To protect Bain Capital's investment, Kirsch and Bekenstein were in frequent contact with Tooker, Shulman and Lovell to get information about Stage Stores' business, and received copies of Stage Stores' operating and budget reports circulated to executives. Because Bain Capital was the largest shareholder of Stage Stores and was concerned over the status of its Stage Stores' investment, it constantly monitored Stage Stores' operations by way of Kirsch's and Bekenstein's presence on Stage Stores' Board and by receiving copies of Stage Stores' operating and budget reports circulated to Stage Stores executives. 28. Because Mulvihill represented Acadia -- Stage Stores' second largest shareholder -- on Stage Stores' Board and Acadia was very concerned over its investment in Stage Stores, he was much more involved in its day-to-day operations than is normally the case with an outside director. To protect Acadia's investment, Mulvihill was in frequent contact with Tooker, Shulman and Lovell to get information about Stage Stores' business, and received copies of Stage Stores' operating and budget reports circulated to executives. Because Acadia was the second largest shareholder of Stage Stores and was concerned over the status of its Stage Stores' investment, it constantly monitored Stage Stores' operations by way of Mulvihill's presence on Stage Stores' Board and by receiving

- 20 - 176 copies of Stage Stores' operating and budget reports circulated to Stage Stores executives. 29. Successful expansion via its aggressive growth, i.e., new store openings and a growth-by-acquisition plan, increased same store sales and the successful integration of C.R. Anthony's operations and conversion of its stores into the Stage Stores' format, as well as controlling its inventories and keeping the right merchandise mix in its stores, were indispensable elements to Stage Stores meeting its internally budgeted and publicly disseminated F1998-F2000 EPS forecasts. Thus, the Stage Stores Defendants constantly monitored each of these key factors affecting Stage Stores' business. 30. The Individual and Stage Stores Defendants closely monitored the performance of Stage Stores' business via reports which Stage Stores' Finance Department (under Marcum) generated on a weekly and monthly basis. There were inventory and merchandise mix reports by store, sales reports by store, and reports detailing the status of the C.R. Anthony conversion program. Store sales, inventory and merchandise mix reports were available on a daily basis. The Finance Department also distributed detailed monthly financial reports comparing Stage Stores' actual financial results to projected results, with respect to sales, margins, markdowns, inventories, merchandise mix on a store-by-store basis, regional basis and company-wide basis. Thus, each of these defendants was apprised of the status of sales, inventories, merchandise mix and profitability of every Stage Stores store so that they knew where Stage Stores stood in terms of the sale of and demand for and pricing of its merchandise, as well as Stage Stores' actual results

- 21 - 77 compared to budget. C.R. Anthony integration, conversion and performance reports were also provided constantly during the Class Period, showing the status and cost of the conversion process and the performance of the converted stores. Thus, these defendants were constantly aware of the merchandise mix and inventory problems and the problems with the conversion of the C.R. Anthony stores and poor performance of the converted stores, as well as the accumulation of slow-moving merchandise and that these problems were being covered up by falsifying Stage Stores' reported results by relying on extreme price-cutting to move merchandise while not marking down remaining, identical inventory to its actual value and thus that Stage Stores' F1998 and F1999 EPS forecasts could and would not be achieved. 31. Because of their top executive positions with Stage Stores and/or involvement in the day-to-day management of its business, each Stage Stores Defendant actually knew, from internal corporate documents and conversations with other corporate officers and employees and their attendance at management and/or Board meetings, the adverse non-public information about Stage Stores' failing growth/expansion plan, inventories and merchandise mix problems, deteriorating revenue and EPS prospects, problems with the C.R. Anthony integration/conversion and the falsification of Stage Stores' financial statements, undertaken to cover up these problems. As a result, defendants knew that Stage Stores would not be able to achieve the F1998-F1999 profit margins and EPS growth being forecast. Thus, each Stage Stores Defendant actually knew or recklessly disregarded that the public statements about Stage

_

5, - 22 - 7 6 Stores pleaded at 11155-57, 59-61, 63, 66-69, 71-76, 79-86, 88-99, 101-112, 114-115 and 117-123 were false or misleading when made. - Motive/Opportunity 32. In addition to having actual knowledge of the falsity of their statements, each of the Stage Stores Defendants had the motive and the opportunity to perpetrate the fraudulent scheme and course of business described herein. 33. Each Stage Stores Defendant had the opportunity to commit the fraud alleged. As the top officers and/or directors of Stage Stores, they controlled the dissemination of, and could thereby falsify, information about Stage Stores' business and finances which reached the investing public and affected the price of Stage Stores' stock. They controlled the content of Stage Stores' press releases, corporate reports and SEC filings, which were created, reviewed and approved by each of these defendants. Also, their insider positions gave them knowledge about Stage Stores' business that was not public -- creating the opportunity for them to make false public statements, artificially inflate Stage Stores' stock price and take advantage of their non-public information. 34. In 1988, Bain Capital and Acadia arranged to take Stage Stores private in cooperation with Stage Stores' then top officers. At that time, they planned to revitalize Stage Stores' operations, increase its profitability and then recover on their LBO investment by taking Stage Stores public again. However, after they took Stage Stores private, Stage Stores' management was not nearly as successful as Bain Capital and Acadia had hoped in improving the operations of Stage Stores. For instance, one significant acquisition made by Stage Stores after the LBO was a disaster and- - 7'5 - 23 - . set back the plan to revitalize Stage Stores and then take it public again by several years. By 1992, Bain Capital and Acadia had become very dissatisfied with their investment in Stage Stores, . which they had not yetbeen able to bring back public. Thus, in 1992, they attempted to take Stage Stores public. However, after presenting the Company to potential investors through a Roadshow and otherwise, there was insufficient investor interest in the stock of Stage Stores to permit Acadia and Bain Capital to complete a public offering of the size they desired and thus the attempt to take Stage Stores public at this time was abandoned, leaving Bain Capital and Acadia still locked into an illiquid investment in a private company that was not performing nearly as well as they hoped. Then, in mid-1996, Bain Capital and Acadia again attempted to take Stage Stores public. However, after presenting Stage , Stores to investors for a second time through a Roadshow and

otherwise, it was again found necessary to postpone or delay this public offering because there was insufficient investor interest in Stage Stores to permit Bain Capital and Acadia to complete a public offering of the size they wanted. Again, Bain Capital and Acadia were left locked in an illiquid private investment in a company that was not performing nearly as well as they had hoped. This situation endangered Bain Capital's and Acadia's investment in Stage Stores and they were determined to find a way to take Stage Stores public and raise a large amount of capital to pay down some of Stage Stores' LBO debt and create a trading market in its stock so that they could find a way out. 35. Given this history, they knew it would be impossible for •

them to sell off all of their holdings in Stage Stores in an I110,1_ 74 - 24 - as that would obviously be perceived by investors as a bailout by Stage Stores' controlling venture capital investors and no such offering could be accomplished. Therefore, they decided that the best course of action was to have the IPO raise most of the money for Stage Stores so it could pay down a part of its large LBO debt, which would reduce the leverage of Stage Stores and make it more profitable. Bain Capital and Acadia, however, intended to sell off all or virtually all of their remaining shares in Stage Stores through a secondary offering, which they knew they would be able to accomplish once they had taken Stage Stores public again, established a trading market in its stock and obtained a commitment from the underwriters of the IPO that they would cooperate with and work with Bain Capital and Acadia in bringing about a secondary offering in which Bain Capital and Acadia could bail out of their remaining investment in Stage Stores. Thus, because this was Bain Capital's and Acadia's plan, it was extremely important to them that after Stage Stores went public, it appeared to be a very successful, rapidly growing chain of retail clothing stores that was achieving substantial profitable growth and would continue to achieve profitable growth in coming years. They hoped that this image presented to investors would result in Stage Stores' stock advancing strongly in price and, in turn, this would enable Bain Capital and Acadia to bail out of their ownership interest in Stage Stores at a much higher and therefore much more profitable to them price. 36. An essential and indeed indispensable element of Stage Stores' business strategy was to grow very rapidly by adding 50-100 new stores per year, partially by new store construction and _ _

- 25 - 73 partially through acquisitions of other retail chains. In order to make acquisitions, however, Stage Stores would have to use its common stock as currency because, due to its highly leveraged financial condition, it did not have either the cash or borrowing capacity to acquire such chains for cash. Because Stage Stores had, by the beginning of the Class Period, identified at least six privately owned retail chains with about 650 stores (in addition to the C.R. Anthony chain it was already in the process of acquiring), it was extremely important to the Stage Store Defendants to keep Stage Stores stock trading at as high a price as possible, as this would make the stock more valuable for acquisition purposes and allow Stage Stores to make the acquisitions it was planning to . pursue by issuing fewer shares of stock than would be necessary if the stock were trading at a lower price and thus enable it to complete the acquisitions on a non- or less-dilutive basis. 37. When Stage Stores went public in 10/96, Bain Capital sold

only 904,400 shares on the IPO at $16-1/2 per share, while Acadia sold no shares. They were both counting on a huge follow-on secondary offering -- the one the Underwriter Defendants had promised to do -- to cash out of their investment, hopefully at a much higher price. 38. At the time of the IPO, the Stage Stores Defendants had discussed the plan to have Bain Capital and Acadia sell off their Stage Stores' holdings via a large secondary offering and, by the Spring of 97, were already working with the Underwriter Defendants in planning the large secondary offering. It was key to the scheme to drive Stage Stores' share price much higher, as in 4/97 Stage

Stores stock was selling at only $20. By 5/97, the Stage Stores_ 72 - 26 - Defendants knew that Stage Stores' aggressive growth strategy was failing, its C.R. Anthony acquisition was troubled, its store merchandise mix and inventory controls were overwhelmed by Stage Stores' overly rapid expansion and not working, and, as a result, Stage Stores' competitive position was impaired and its revenue growth and EPS would likely shortly decline. In order to avoid the consequences of these negative facts becoming public and in order to buffer Stage Stores' business from this decline, these defendants knew it was very important for Stage Stores' insiders to bail out of its stock and to have Stage Stores raise a large amount of new equity capital so it would have a cash hoard to rely on while it tried to restructure or rehabilitate its business. Thus, these defendants wanted Stage Stores to pull off a large but non- dilutive stock offering, which could only be done by pushing up Stage Stores' stock price to much higher levels. 39. Stage Stores' insiders and controlling shareholders realized that its rapid expansion plan was not working as originally anticipated and would likely not produce the kind of profitable growth originally hoped for. They also knew that Stage Stores' C.R. Anthony acquisition was going to be very difficult and that integration of its operations into Stage Stores' operations and conversion of its stores to the Stage Stores' format was going to take much longer and cost much more than had been anticipated. They also knew that Stage Stores lacked adequate management talent to manage and control its rapidly expanding operations and that is inventories and merchandising mix controls were not working properly. Stage Stores' insiders and controlling shareholders knew that these negative conditions would have a very adverse impact on

- 27- 7 1 Stage Stores' growth and profitability and that when these adverse trends became publicly known they would hurt Stage Stores' stock price and would prevent any public offering of its stock at a high price. In order to raise substantial capital for Stage Stores on favorable terms before this negative information became public, and to enable Stage Stores' top insiders and controlling shareholders to sell off larger amounts of their Stage Stores stock than they could legally sell in open market sales, defendants decided to re- finance some $300 million in Stage Stores' debt at lower interest rates and undertake a secondary offering of millions of shares of Stage Stores stock. 40. In a secondary offering, Stage Stores' insiders knew that they could sell shares without the Rule 144 volume restrictions in transactions where underwriters would help them sell the stock and stabilize the price of Stage Stores stock when these large stock sales were taking place. By selling shares in this way, Bain Capital and Acadia could maximize their stock sale proceeds because they could condition the market for the stock offering by issuing very positive reports and forecasts and push the stock up to higher levels, including making Roadshow presentations just before the offering to disseminate very favorable information to potential stock purchasers. Also, they could use the Underwriter Defendants to help merchandize the stock and rely upon the underwriting firms' "firm commitment" purchase obligations to buy all their shares and then resell them while the Underwriter Defendants used special marketing techniques, only allowed to be used in registered stock offerings to "stabilize" the stock price, in effect, thus supporting the market price of the stock via techniques that would

- 28 - L . 70 not be legal in normal open market stock sales. This would enable them to sell large amounts of stock without disrupting the market and they could sell many more shares than they could in open market sales because the stock sold would be registered with the SEC and thus exempt from the volume restrictions of Rule 144. 41. Before the Underwriter Defendants would go along with the scheme however, they extracted from Stage Stores, Bain Capital and Acadia what they knew was an illegal agreement that they would indemnify the Underwriter Defendants against any cost or liability from any suit for their participation in the scheme, knowing that the millions Stage Stores, Bain Capital and Acadia would get from the Secondary Offering, plus Stage Stores' existing D&O insurance, would provide a large buffer and protect them from any adverse consequences of their illegal conduct, thus permitting them to participate in the scheme with impunity. 42. The key element of defendants' scheme was to push Stage Stores stock much higher, artificially inflating it, so that the Secondary Offering would raise larger amounts of money for Stage Stores and Stage Stores' controlling shareholders who sold shares in the Secondary Offering, and so that the stock offering by Stage Stores would be non-dilutive, thus minimizing the adverse impact of the offering on Stage Stores' EPS power going forward. Thus, beginning in 5/97, the defendants, working together, mounted a major publicity campaign, intentionally disseminating extremely favorable, but false, information to the marketplace about Stage Stores, including falsifying Stage Stores' financial results, while deliberately concealing the adverse conditions inside Stage Stores'

-29- G 9 business. As a result, Stage Stores' stock advanced to highly inflated levels.

43. To accomplish the Secondary Offering, Stage Stores and its controlling shareholders had sought out high-powered investment bankers to help them -- First Boston and Bear Stearns. They deter- mined that in return for their share of the Secondary Offering proceeds they were willing to participate in the scheme by merchan- dising Stage Stores stock in the Secondary Offering, including orchestrating a pre-Secondary Offering "Roadshow" to stimulate interest in the Secondary Offering, and by issuing favorable research reports on Stage Stores to support Stage Stores' stock price so Stage Stores could pull off the stock offering at a high price. The Underwriter Defendants conducted a multi-city Roadshow prior to the Secondary Offering during which they and certain of the Individual Defendants (Tooker and Marcum) travelled to, inter alia, New York City, Minneapolis, Chicago, San Francisco, Philadelphia and Los Angeles to meet with potential investors and present highly favorable information about Stage Stores, which was much more positive than that contained in the Secondary Offering Prospectus, including forecasts of strong revenue and profit growth through F1998 and F2000. 44. The Underwriter Defendants assisted Stage Stores in planning the Secondary Offering and purportedly conducted investi- gations into the business, operations, products and future business prospects of Stage Stores, known as a "due diligence" investiga- tion, which was required of them in order to engage in the Secondary Offering. During the course of their "due diligence," the Underwriter Defendants had continual access to confidential _

- 30 - 6 S corporate information concerning Stage Stores' business, financial condition, products and future business plans and prospects. In addition to availing themselves of virtually unbridled access to internal corporate documents, the Underwriter Defendants also communicated with Stage Stores management, particularly Tooker and Marcum. As a result of those constant contacts and communications, the Underwriter Defendants learned of Stage Stores' existing problems.

45. During the Fall of 97, the defendants hurried to complete the Stage Stores' Secondary Offering as they realized that weakening sales prices, the problems with the C.R. Anthony acquisition and the inadequacies and problems with Stage Stores' rapid expansion program and its inventory and merchandising mix problems could not be concealed for much longer. To get the Stage Stores' Secondary Offering business -- which meant millions in profits -- the Underwriter Defendants agreed to participate in the scheme to inflate Stage Stores stock, including helping write and issue a false Prospectus and false research reports on Stage Stores to artificially inflate Stage Stores' stock price. 46. The Underwriter Defendants had the opportunity to commit the fraud by virtue of their participation in the Secondary Offering process and issuance of analyst reports on Stage Stores, while acting as marketmakers in its stock, and were motivated to participate in the scheme by the prospect of earning millions in risk-free underwriting fees, made larger by selling more shares of Stage Stores stock at artificially inflated prices, giving them a direct economic incentive to inflate Stage Stores' stock price on

the Secondary Offering. The Underwriter Defendants orchestrated - 31 - 67 the Secondary Offering Roadshow, helping prepare the "script" for Tooker's and Marcum's presentations. They also issued false research reports on Stage Stores to help artificially inflate its stock after the Secondary Offering. Based on the negative and adverse internal documents and reports of the Company's actual business performance, the Underwriter Defendants knew or recklessly disregarded that those public statements, and those of their securities analysts for which they are responsible, were false and misleading when made and were inflating the price of Stage Stores' common stock. 47. Defendants' fraudulent scheme was a success -- for them. Stage Stores' controlling shareholders, Bain Capital and Acadia, salvaged their endangered investment in Stage Stores by selling off virtually 100% of their shares E:-6.22 million shares -- pocketing million. Period, the Individual Defendants who were officers of Stage Stores sold 224,071 shares for over $7.4 million. Stage Stores sold 650,000 shares for $21.7 million in the Secondary Offering and successfully refinanced $300 million in debt, obtaining lower interest rates. The Underwriter Defendants pocketed $10 million out of the Secondary Offering proceeds. Thus, all the defendants benefited from Stage Stores' artificially inflated stock price and the false image of profitable growth, stability and excellent management presented by defendants.

BACKGROUND TO CLASS PERIOD 48. On 10/25/96, Stage Stores went public via an IPO of 11 million shares at $16-1/2, in which Stage Stores sold 10.75 million shares (including 750,000 shares in the overallotment). Stage Stores raised $155 million and Bain Capital sold 904,000 shares -- '-

14 4 -32-- 6 6 a small percentage of its holdings. Stage Stores stock closed at $19-1/4 on its first day of trading. By early 97, the defendants were planning a large secondary offering, by which Bain Capital and Acadia would sell off virtually all their stock in Stage Stores and rid themselves of their troubled investment. However, Stage Stores' stock was trading well below the price the defendants wanted to get in a secondary offering. So, to try to push Stage Stores stock up, defendants began to "condition" the market by making extremely positive statements about Stage Stores' business and future prospects. 49. On 1/6/97, DLJ issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report stated: Under the new management headed by Carl Tooker, Stage has been able to perfect its business model. . . . [M]anage- ment has identified over 1000 stores in rural communities with similar demographics and very little competition from other department stores. As a result we believe that Stage can grow its . . . EPS at over 15% ...... Stage Stores has historically operated stores in both large towns and small towns. However, given the substantial profitability differential in these two concepts, under the new management of Carl Tooker, Stage redefined its strategy to only target the small town in rural America. . . . This strategy is further aided by the efficient inventory management and distribution system that the company has put in place over the last few years. Also, Stage has a unique merchandising strategy in that they transfer products between stores which most other retailers are unwilling or unable to do. These distribution issues and the relatively small size of the markets also inhibit competition. All these characteristics make Stage Stores a unique retailing concept with very little competition, strong management, and good growth opportunities and this results in superior small town high-teens store economics.

Excellent Growth Opportunity -- Top Line Growth of 13% to 15% and EPS Growth of Over 15%. Stage management has identified additional regions with similar demographics and theIT p lan to expand their store base ix_ a - 33 - 65 these regions going forward. In total, management has identified over 1000 potential stores to open, which will more than triple its current number of stores. . . . We believe that this new store growth through organic growth and acquisitions will enable Stage to grow its top line at over 13% in the long-term, and given the leverage and better management will enable it to grow its EPS at over 15%. 50. On 1/27/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast a 20% five-year EPS growth rate for Stage Stores and also stated: We recently spent half a day with Stage Stores in Houston . . . . Key points from the meetings are as follows: There is Great Depth to the Management Team Probably the most important point emphasized from the meetings is the depth of the management team at Stage. * * * [T]his depth extends well into the ranks of the manage- ment team at Stage Stores. * * *

The important point is . . . the quality of the management team . . . . Stage has the Systems and the Know-how to Bring Great Economies to Acquisition Candidates The second point that came through loud and clear at the meetings is that this is a company that is prepared for acquisitions, one of the vehicles of Stage's growth strategy. Stage has identified 7 chains with over 650 stores in its existing or contiguous states that could be potential acquisitions. * * * Stage's growth opportunities are outstanding. . . . We believe earnings will compound at a 20% rate over the next five years . . . .

- 34 - 64 51. On 3/5/97, Stage Stores announced an agreement to acquire C.R. Anthony for Stage Stores stock. The number of shares Stage Stores would have to issue to complete the acquisition would depend on the trading price of Stage Stores over the 20 days prior to the closing of the acquisition, anticipated to occur in 6/97. Because stockholder approval of the C.R. Anthony acquisition was assured, Stage Stores immediately, i.e., in 3/97, began the process of integrating C.R. Anthony's operations into its operations and of converting C.R. Anthony stores to the Stage Stores' format. 52. On 3/13/97, Stage Stores reported its 4thQ F1996 (ended 2/1/97) results via a release stating "Our growth strategy continues to remain on track." 53. On 3/14/97, DLJ issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in a 3/13/97 conference call and in those conversations. The report forecast a five-year EPS growth rate of 15% for Stage Stores and stated: The company announced last week that it [will] buy C.R. Anthony . . . . We anticipate that the deal will close in the middle of 1997 and will be slightly accretive to the fiscal year. * * * Acquisition Seen As Growth Vehicle Going Forward. With the company having signed a definitive agreement to buy C.R. Anthony, we believe that there is a significant growth opportunity for the company in 1997 and 1998. 54. Despite these positive statements and forecasts, Stage Stores stock traded as low as $20-1/4 on 5/5/97, the same price it had traded for in mid-12/96. In early 5/97, Stage Stores was going to issue its F1996 Annual Report and 1stO F1997 results. The Stage Store Defendants knew this provided them with a unique opportunity

-35- 63

to "condition" the market for the planned Secondary Offering, which they were then working on, by issuing extremely positive but false information about Stage Stores to push Stage Stores' stock price higher. FALSE AND MISLEADING CLASS PERIOD STATEMENTS 55. On 5/7/97, Stage Stores issued its F1996 Annual Report, which included a letter signed by Tooker, which stated: Stage Stores, Inc. has established itself as a unique growth company. . . . [W]e are expanding at a rapid rate [in] smaller markets where competition is less intense and operating costs are lower. We bring to these markets a unique concept with significant management and merchandising strengths; as a result, Stage enjoys one of the highest operating margins in the apparel retailing industry. . . . Even with our rapid growth over the past two years, we are still in the early stages of our expansion program. Stage has identified over 600 additional markets in the central U.S. and contiguous states which meet our demographic and competitive criteria . . . . Our expansion . . . has been successful because Stage has built an infrastructure designed to accommodate profitable growth. . . . As we look to the future, we expect to see continued sales and earnings improvement . . . . 56. Elsewhere, Stage Stores' F1996 Annual Report stated: SINCE 1994, STAGE HAS GROWN BY 137 STORES THROUGH EXPAN- SION AND ACQUISITIONS. SIMULTANEOUSLY, THE COMPANY HAS ALSO SEEN AN AMAZING INCREASE IN ITS PROFITABILITY OF MORE THAN 200 PERCENT. . . . Following a logical, controlled growth strategy, the Company is expanding through new stores openings and acquisitions . . . . With each acquisition, Stage quickly increases profitability by leveraging overhead, applying its merchandising and marketing expertise and introducing proven management systems. . . . Stage has developed a corporate infrastructure in which there is significant depth of experience and skill at every level. The Company has recruited a senior manage- ment team with a broad base of retail knowledge derived from experience with department, specialty and chain stores. Stage's depth is also impressive at the middle _ - 36 - 6 2 management level . . . [this] provides Stage with the broad experience base and in-depth understanding of its concept that is needed to execute the Company's growth plan. . . . With strong management and sophisticated operating strategies, the Company is positioned for profitability. • . . A sophisticated tracking system enables the Company to identify and transfer slow-moving merchandise and keep staple stock items such as jeans and hosiery replenished. • . • The Company also utilizes proprietary management information systems to enhance its distribution, personnel management, credit and accounting functions. 57. On 5/8/97, Stage Stores issued a release reporting its lstQ F1997 sales, which stated: "We are pleased with he sales results for the first quarter which reinforce the success of our growth strategy," commented Carl Tooker, President and Chief Executive Officer. "The strength in our comparable store sales was the result of our small market stores which continue to perform above the chain average." 58. On 5/8/97, Stage Stores announced it would redeem its outstanding 10% notes due 2000, 11% senior B notes due 2003 and its 11% senior D notes due 2003 via a tender offer and consent solicitation. Stage Stores financed this debt retirement by selling $300 million in new notes at lower interest rates. 59. On 5/20/97, Stage Stores issued a release reporting "record" lstQ F1997 results: First Quarter Net Earnings Increase to $7.1 Million or $0.30 Per Share * * * In addition, Mr. Tooker stated ". . . Our pending acquisition of C.R. Anthony Company continues to proceed as expected." 60. On 5/20/97, subsequent to the release of its lstQ F1997 results, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Store shareholders to discuss Stage Store's lstQ F1997 results, its

-37 - - 1 business and its prospects. During the call -- and in follow-up conversations with analysts -- Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony was proceeding as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was on schedule. • The C.R. Anthony acquisition would provide a strong boost to Stage Stores' EPS. • The C.R. Anthony acquisition would be strongly accretive to Stage Stores' EPS during F1998. • Stage Stores' local store model was exceptionally profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • Stage Stores' rapid growth plan, including new store opening plan, was succeeding. • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. • As a result of the foregoing, Stage Stores was forecasting very strong EPS growth in F1998 to $1.60+ per share and ongoing EPS growth of 15%-20%. 61. On 5/29/97, Johnson Rice & Co. issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in those conversations and in the 5/20/97 conference call. The report forecast F1998 EPS of $1.60 for Stage Stores and stated: Anthony's acquisition should be a gem. The pending acquisition . . . is an excellent fit for Stage. . . . Stage should be able to generate $7-10 million in cost savings. . . . [W]e envision significant revenue and margin increases after conversion to the Stage format . . . .

. . . We expect the Company to deliver a secular EPS . growth rate of 20%, before acquisitions. The pending

_ - - 38 - . . 60 acquisition of C.R. Anthony should accelerate EPS growth for the next several years. * * *

Anthony's EPS Impact. . . . In 1998, management indicates that the Company should save $7-10 million by eliminating these costs and add $0.17-$0.22 to 1998 EPS. With the Anthony's acquisition, our preliminary 1997E and 1998E EPS estimates are $1.20 and $1.80, respectively. 62. By 6/13/97, Stage Stores had successfully redeemed 99% of its outstanding 10% and 11% senior notes. On 6/17/97, Stage Stores sold $300 million in 8-1/2%-9% notes due 2005-2007, in a private placement. 63. On 6/13/97, Bear Stearns issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report sharply increased the forecasted F1998 EPS for Stage Stores to $1.80 and stated: *** Our EPS estimates are being adjusted to reflect the acquisition of the CR Anthony chain (238 stores) that is anticipated to close before the end of the month. We are . . . raising our 1998 EPS estimate from $1.62 to $1.80 due to the accretive nature of the acquisition. 64. On 6/26/97, Stage Stores formally completed its acquisition of C.R. Anthony for 3.61 million shares of Stage Stores stock based on Stage Stores' stock trading at approximately $20 per share during 6/1/97-6/19/97. By the end of 6/97, Stage Stores stock had advanced to $26-1/8 -- a then all-time high. Behind the scenes, the defendants were already working on the Secondary Offering so as to take advantage of Stage Stores' increasing stock price.

- - -39- 5 9 65. Each of the statements made between 5/7/97-6/26/97 were false or misleading when issued. The true but concealed facts were: (a) Stage Stores' acquisition of the C.R. Anthony chain was already troubled. It was costing Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and taking much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing. Many of the converted C.R. Anthony stores were performing significantly below internally budgeted or forecasted levels and accumulating large amounts of slow-moving merchandise; (c) Due to Stage Stores' overly rapid expansion through new store openings and the C.R. Anthony acquisition, its merchandise mix and inventory controls were overwhelmed and not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling well -- over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage stores refused to write down this inventory so that it could artificially inflated its reported EPS and gross margins and make its store model and its overall business appear significantly more successful and profitable than, in fact, it was; (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business, and its merchandise mix _ - 40 - 5S and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory;

(f) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and (g) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the F1998 gross margins and EPS being forecast by and for Stage Stores were false when made as, in light of these adverse conditions, those results would be impossible to achieve. 66. On 7/11/97, an article about Stage Stores' acquisition of C.R. Anthony appeared in The Journal Record, which stated: Stage Stores Inc. plans major renovations for the 246 Anthony's stores . . . . [Stage Stores] will remodel and reopen each of the stores . . . within a year. * * * "It's a good organization," Swartz [Vice President- Marketing for Stage Stores] said. "All we're trying to do is take it and improve upon it whenever we can." 67. On 7/16/97, Stage Stores issued a release, stating: Stage Stores, Inc. today announced the appointment of Harry Brown to the position of Executive Vice President and Chief Merchandising Officer. * * * Carl Tooker stated, "We are very pleased that Harry has joined Stage Stores . . . his talent and foresight will enable Stage to continue as one of the fastest growing retailers in the industry." 68. On 7/28/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and _ - 41 - 5 7 repeated information provided by them. Tooker or Marcum reviewed this report before it was issued. The report increased the F1998 EPS forecast for Stage Stores to $1.80, forecast a 25% five-year EPS growth rate for Stage Stores and also stated: Following a long period of restriction due to CS First Boston's advising the company on the C.R. Anthony acquisition, we are reinstating coverage of Stage Stores with a buy rating. The similarity in strategies between Stage and C.R. Anthony (offering branded apparel to small towns) combined with Stage's operating strengths suggest the acquisition should be yen profitable and results in us raising our F1998 estimate by $0.15 to $1.80. . . . [W]e believe there is probably $0.20 of upside potential to our new F1998 earnings estimate as a result of additional synergies from the C.R. Anthony acquisition. Further, we believe Stage Stores is an exciting invest- ment alternative with very attractive returns and exceptional growth opportunities. . . . As a result, we expect Stage will produce $12 million of economic profit in 1997 and an additional $21 million in 1998. 69. On 7/30/97, Montgomery Securities issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. Tooker or Marcum reviewed this report before it was issued and assured Montgomery Securities it was accurate. The report forecast F1998 EPS of $1.80 and a 25% five-year secular growth rate for Stage Stores and also stated: Stage boasts some of the highest operating margins in the department store industry (8.8% in 1996), with a store- level operating profit margin of 18% from its small town units and of 12% on the 10% of its stores in larger metro and suburban locations. . . . Small-market formats have extremely low operating costs . . . . The company is also able to . . . offer a wider variety of merchandise while still maintaining a tight cost structure. * * *

Infrastructure in Place to Support a Chain Twice the Size of the Combined Store Base _ - 56 - 42 - Management planned proactively in the development of its infrastructure, laying a foundation that could accom- modate rapid and substantial expansion. The capacity exists to operate a chain of specialty stores generating about $2 billion in annual sales. The company has made substantial and wise investments in its management information systems and distribution facilities. The following components should allow Stage to align the CRA locations successfully and leverage greater economic efficiencies as the company continues to grow aggressively: • Distribution. . . . The company's distribution center is impressive, with state-of-the-art rapid- movement conveyor systems, recently updated by SDI (the industry's top professionals). The facility can turn around product within 48 hours of receipt and has the capacity to support up to 1,000 stores. Because Stage currently operates only 575 locations, substantial leverage to distribution expenses exists as the chain's store count increases. This distribution strategy results in a very efficient distribution cost structure, below levels incurred by many of Stage's competitors. . . . • Merchandise information systems. Stage's information systems have the capacity to accumulate and analyze store-level performance, merchandising and allocation information at the corporate level. They utilize a central mainframe computer to coordinate and analyze the data and maintain operating efficiency at the wide network of stores. We believe Stage's highly sophisticated management information system is a key driver to the company's considerably high operating margins. Stage's point-of-sale terminals at each store record and transmit a real-time, full accounting of each day's sales by transaction and item to corporate headquarters. Furthermore, the company's stock replenishment system is able to analyze local demographics and historical trends and tailor and allocate merchandise accordingly. An inventory transfer system monitors slower- and faster- movin • merchandise and subse•uentl re•ositions •roduct from one location to another to achieve maximum sell- through, fewer markdowns and better in-stock positions. Stage's merchandising department uses these systems to make highly effective merchandising and allocation decisions. * * *

Earnings Power of Combined Business Is Approximately $2.40 per Share 55 - 43 - We believe an estimate of the entire company's potential earnings power is very important in this situation, as it provides a clearer understanding of the company's valuation at this early point of the recent acquisition and the internal growth of the pre- acquisition store base and strategies. * * *

We estimate that Stage's operating income should approximate $125 million . . . . However, the company will likely benefit from its increased size and related incremental cost savings, the leveraging of overhead and merchandise margin expansion. Therefore, we expect operating margins to expand to approximately 10.5%, resulting in an additional $24 million to operating income on top of the prior $125 million. . . . [Wle believe net income should approximate $66 million, or $2.40 per share, in total earnings power, after interest charges and taxes. 70. This drumbeat of favorable publicity was very successful in pushing up Stage Stores' stock price. By 8/97, Stage Stores reached $32-3/8, its then all-time high. By this date, the work on the Secondary Offering was still proceeding apace. 71. On 8/11/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. Tooker or Marcum reviewed this report before it was issued, adopting it as their own. The report again forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: While we are cognizant of the fact that Stage's stock has had a great run, we believe there is probably $0.20 of upside potential to our 1998 earnings estimate as a result of synergies from the C.R. Anthony acquisition. Further, we believe Stage Stores is an exciting investment alternative with very attractive returns and exceptional growth opportunities. Stage has a unique small market growth strategy . . . . As a result, we expect Stage will produce $12 million of economic profit in 1997 and an additional $21 million in 1998.

. 53 - 44 - 72. On 8/27/97, Stage Stores reported its "record" 2ndQ F1997 results:

qoufafritoeeCrrariy1 Tooker, Chairman, President and Chief Executive sedg,row"tWhe are veryur poloehavseerdsiowhitohf our

Anthony ores is proceeding according to plan . . . ." 73. On 8/27/97, subsequent to the release of its 2ndQ F1997 results, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Store shareholders to discuss Stage Store's 2ndQ F1997 results, its business and its prospects. During the call -- and in follow-up conversations with analysts -- Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony was proceeding as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was on schedule. Stage Stores was on schedule to complete the conversion of the remaining C.R. Anthony stores to the Stage Stores' format. • The performance of the converted stores was exceeding Stage Stores' expectations. The converted C.R. Anthony stores were performing better than expected. The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS. • The C.R. Anthony acquisition would be strongly accretive to Stage Stores' EPS during F1998. • Stage Stores' local store model was exceptionally profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding.

_ -45- 5 3 • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • As a result of the foregoing, Stage Stores was increasing its forecasted EPS growth for F1998 to $1.80+ and forecasting ongoing EPS of 15%-25%.

74. On 8/28/97, DLJ issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in those conversations and on the conference call. The report forecast F1998 EPS of $1.80, a 15% five-year growth rate for Stage Stores and stated: Stage reported second quarter EPS of $0.25 . . . beating our estimate of $0.23 and Street estimates of $0.22. • . • [Ilnventories were up approximately 7% per square foot at the end of the quarter on a core store basis which remains in-line with company plan . . . . * * *

C.R. Anthony Acquisition On Plan . . • . We believe that the C.R. Anthony acquisition will help drive the company's merchandising strategy on a greater scale and, combined with the company's overarching small town department store focus, provide a longer-term catalyst for growth. 75. On 8/28/97, Bear Stearns issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in conversations and in the 8/27/97 conference call. The report forecast F1998 EPS of $1.80 and stated: *** STGE reports 2Q operating results of $0.25 . . . beating our estimate and consensus by $0.03. . . • We are also maintaining our 1998 EPS estimate of $1.80. * * *

*** Conversion of C.R. Anthony is proceeding on schedule.

- 5 2 - 46 - 76. To stimulate investor interest in and create demand for Stage Stores stock to be sold in the Secondary Offering, the Underwriter Defendants and Stage Stores conducted a multi-city Roadshow from 9/1/97 to 9/12/97, during which they and certain of the Individual Defendants (Tooker and Marcum) travelled to, inter alia, New York City, Minneapolis, Chicago, San Francisco, Philadelphia and Los Angeles to meet with potential investors to present highly favorable information about Stage Stores, which was much more positive than that contained in the Secondary Offering Prospectus, including forecasts of strong revenue and profit growth for F1998-F2000. During these Roadshow presentations, Tooker, Marcum and the Underwriter Defendants stated: • Stage Stores' acquisition of C.R. Anthony was proceeding as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was on schedule. Stage Stores was on schedule to complete the conversion of the remaining C.R. Anthony stores to the Stage Stores' format. • The performance of the converted stores was exceeding Stage Stores' expectations. The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998. • Stage Stores' local store model was exceptionally . profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding so well that Stage Stores was likely to accelerate the number of new stores it opened during F1998. 51 - 47 - • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • As a result of the foregoing, Stage Stores was forecasting very strong EPS growth in F1998 and F1999 to $1.80+ and $2.20+ per share, respectively, and 15 9,5-25% EPS growth going forward. 77. Due to the continuing drumbeat of favorable publicity, Stage Stores hit a then all-time high of $35-3/4 on 9/15/97. On 9/17/97, Stage Stores and its top insiders, Bain Capital, Acadia, First Boston and Bear Stearns completed the Secondary Offering of 7.1 million Stage Stores shares at $34-7/8 per share. Bain Capital sold 3.5 million shares for $117.5 million. Acadia sold 2.7 million shares for $90.5 million. Stage Stores sold 650,000 shares for $21.7 million. First Boston and Bear Stearns got $10+ million of the Secondary Offering proceeds. 78. Each of the statements made between 7/11/97-9/12/97 were false or misleading when issued. The true but concealed facts were: (a) Stage Stores' acquisitionisi of the C.R. Anthony chain was extremely troubled. The C.R. Anthony stores acquired had been very run-down, unsuccessful and undesirable. It was costing Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and taking much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing, as many of the converted C.R. Anthony stores were performing significantly

- 48 - , . 50 below internally budgeted or forecasted levels and accumulating large amounts of slow-moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion through new store openings and acquisitions, its merchandise mix and inventory controls were not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling well -- over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage Stores refused to write down this inventory so that it could artificially inflated its reported EPS and gross margins and make its store model and its overall business appear significantly more successful and profitable than, in fact, it was; (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made. For instance, Stage Stores' chief merchandising officer had misordered millions of dollars worth of merchandise that was undesirable, slow-moving and was not selling, which Stage Stores knew would require it to either take huge write-downs of overvalued inventory in the near future or sell off that inventory at greatly reduced prices, which would have a very adverse impact on Stage Stores' results from operations, profit margins and EPS; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business, and its merchandise mix and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory;

- 49 - 49 (f) Stage Stores was achieving its reported revenue growth and same-store sales growth, largely by increasing sales by sharply discounting the price of its merchandise; however, Stage Stores was inflating its reported margins by failing to write down or reserve for sales of inventory of similar merchandise to reflect those discounted prices; (g) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and (h) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the F1998 and F1999 gross margins and EPS being forecast by and for Stage Stores were known by defendants to be false when made as those results would be impossible to achieve. 79. On 9/17/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: We feel confident there is $0.20 of upside potential to our 1998 earnings estimate of $1.80. The key to the upside is sales: The C.R. Anthony stores ran at $99 per square foot and Stage's small market stores generate $141 in sales per square foot. The C.R. Anthony stores are grand opening with the exact same vendors, the same merchandise mix, with 20% more inventory per store, with the same amount of payroll, and with the same fixtures and signage as the Stage/Bealls stores, yet our model looks for sales in the C.R. Anthony stores to only be up 4% in the first year and 2% in the second year. Thus, we feel very comfortable saying $2.00 is quite achievable in 1998.

•

- - 50 - 4S Without additional acquisitions, Stage can grow the top line at a 20% rate over the next five years through high teen square footage growth combined with low single digit comparable store sales. . . . [T]he bottom line should grow at a 35% to 40% rate due to the natural de- leveraging of the balance sheet and leverage on interest expense. 80. On 9/22/97, Bear Stearns issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 EPS of $1.80 and F1999 EPS of $2.20 for Stage Stores and stated: *** Stage is still early in its expansion phase and we believe EPS can grow by 20% annually over the next five years through new store openings, the integration of recent acquisitions and modest comp store gains. *** The CR Anthony acquisition significantly added to its store count and strengthened its position as a dominant retailer of branded apparel in small towns across America. * * * We believe that Stage is one of those unique retail concepts that can grow at a 20% rate over the longer term.

7 * * *

CR Anthony Should Be a Big Earnings Plus -- Stage has tremendous potential to enhance the performance of CR Anthony . . . . Upon the acquisition, Stage eliminated $10.4 million in corporate overhead (to be complete by December 1997) . . . . 81. On 11/5/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: The C.R. Anthony conversions are on schedule and the fundamentals of the story remain excellent. * * *

- - 51 - - 4 7 Stage Stores is an exciting investment alternative with very attractive returns and exceptional growth opportunities. Stage has a unique small market growth strategy where low rents and few direct competitors result in a very attractive store model, with a 44% return on investment in the third year of operation. 82. On 11/20/97, Stage Stores reported "record" 3rdQ F1997 results via a release, stating: Reflecting the impact of strong top-line sales growth, net income before extraordinary items for the quarter was $3.7 million, or $0.13 per share . . . . The strong sales gain was attributed to sales from the newly acquired C.R. Anthony locations, sales from new stores that have opened since the third quarter of last year and comparable store sales increases.

* * *

Carl E. Tooker, Chairman, President and Chief Executive Officer, stated, "We are very pleased with the level of sales and earnings that Stage achieved during the quarter. Our newly opened and converted stores posted strong results, and we were particularly encouraged by the fact that the comparable stores sales increase for the quarter was due entirely to the performance of our small market stores. I believe that these results validate our growth strategy . . . ." 83. On 11/20/97, subsequent to the release of its 3rdQ F1997 results, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Store shareholders to discuss Stage Store's results, its business and its prospects. During the call -- and in follow-up conversations with analysts -- Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony was proceeding as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was on schedule. Stage Stores was on schedule to complete the conversion of the remaining C.R. Anthony stores to the Stage Stores' format. • The performance of the converted stores was exceeding Stage Stores' expectations. The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998.

_

- 52 - 4 • Stage Stores' local store model was exceptionally profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding so well that Stage Stores was likely going to accelerate the number of new stores it opened during F1998. • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • Stage Stores' 1stQ F1998 EPS would be slightly depressed due to the cost and lost revenues associated with the conversion of the remaining C.R. Anthony stores; however, Stage Stores expected its EPS growth to accelerate in the subsequent three quarters of F1998. • As a result of the foregoing, Stage Stores was forecasting very strong EPS growth in F1998 to $1.80+ per share. 84. On 11/20/97, Johnson Rice issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in those conversations and in the conference call. The report forecast F1998 EPS of $1.80 for Stage Stores and stated: Management indicated that converted Anthony's stores are trending at 12-15% higher revenue run-rate vs. Anthony's revenues last year and our estimate of 4%. Each 10% increase in revenues above our 4% estimate would translate into about $0.15 in additional EPS in 1998. The Company plans on finishing the remaining 109 Anthony's conversions in March/April 1998. . . .

- 53 - _ 45 . . . For 1998, we are maintaining our $1.80 EPS estimate at this time, but the strength of the Anthony's conversions bodes well for upside revisions next year. 85. On 11/20/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in conversations and on the conference call. The report forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: However, there were some real positives in the quarter that suggest our 1998 upside estimate of $2.00 is very achievable. The positives are as follows: The newly converted C.R. Anthony stores are running at an annualized sales increase of 12-15% versus our 4% projection . . . . * * * The fundamentals of the story remain excellent. Stage Stores is an exciting investment alternative with very attractive returns and exceptional growth opportunities. . . . * * In 1998, we look for a 43% increase in earnings per share, from $1.26 to $1.80. 86. On 11/24/97, Bear Stearns issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them in conversations and on the conference call. The report forecast F1998 EPS of $1.80 for Stage Stores and stated: We are maintaining our 1998 EPS estimate of $1.80. . . . The conversions of 130 C.R. Anthony stores were completed on schedule. * * *

Stage converted 130 C.R. Anthony stores which are performing exceptionally well and are tracking 12%-15% ahead of plan on an annualized rate. - ; - 54 - 44 * * * Stage has done a great job in converting 130 C.R. Anthony stores in such a relatively short period of time. The remaining 109 stores will be converted by May 1998. We continue to believe that it will continue to integrate the new stores seamlessly and generate positive customer response. 87. Each of the statements made between 9/17/97-11/24/97 were false or misleading when issued. The true but concealed facts were: (a) Stage Stores' acquisition of the C.R. Anthony chain was extremely troubled. The C.R. Anthony stores acquired had been very run-down, unsuccessful and undesirable. It was costing Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and taking much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing; many of the converted C.R. Anthony stores were performing significantly below internally budgeted or forecasted levels and accumulating large amounts of slow-moving, over-valued available inventory; (c) Due to Stage Stores' overly rapid expansion through new store openings and acquisitions, its merchandise mix and inventory controls were not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling and Stage Stores was thus accumulating large amounts of over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage Stores refused to write down this inventory so that it could artificially inflate its reported EPS and gross margins and make its store model and its _ - 55 - , 4 3 overall business appear significantly more successful and profitable than, in fact, it was; (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made. For instance, Stage Stores' chief merchandising officer had misordered millions of dollars worth of merchandise that was undesirable, slow moving and was not selling, which Stage Stores knew would require it to either take huge write-downs of over-valued inventory in the near future or sell off that inventory at greatly reduced prices, which would have a very adverse impact on Stage Stores' results from operations, profit margins and EPS; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business, and its merchandise mix and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory; (f) Stage Stores was achieving its reported revenue growth and same store sales growth, largely by increasing sales by sharply discounting the price of its merchandise; however, Stage Stores was inflating its reported margins by failing to write down or reserve for sales of inventory of similar merchandise at those discounted prices; (g) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and - - 42 - 56 - (h) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the quarterly F1998 and F1998 gross margins and EPS being forecast by and for Stage Stores were known by defendants to be false when made as those results would be impossible to achieve. 88. On 12/10/97, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: The C.R. Anthony conversions are on schedule and the fundamentals of the story remain excellent. 89. On 12/15/97, Johnson Rice issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 EPS of $1.80 for Stage Stores and stated: Anthony's accelerates EPS growth. We expect the June acquisition of Anthony's to accelerate Stage's base 20% growth rate. . . . The fall conversion of 130 stores proceeded without a hitch. * * *

C.R. Anthony Acquisition * * *

Well planned. Typically in a sizable acquisition, an acquiring company assumes significant integration risk. In the Stage-Anthony's combination, the two management teams worked together closely for three months prior to the June closing, reducing integration risk significantly. By deal closing, Stage management had visited all stores and devised detailed plans to coordinate store conversions. Consequently, Stage hit the ground running on the integration. Significant upside potential. The converted. Anthony's stores are on track to exceed the Company guidance of a 4% revenue increase. Management indicated - - 41 - 57 - that the initial conversions are tracking at a 12-15% annualized revenue increase. . . . [ C] onverted Anthony's stores should post a 15-20% increase over the $99 in sales per foot last year. Each 10% revenue increase (beyond the 4% assumption) adds $0.13-0.15 to EPS. Cost savings on track. The Company should gain at least $10 million in cost savings (versus the $7-10 million estimated when the deal was announced) . . . earlier than the estimated March 1998 deadline. . . . Aggressive conversion plan. The Company completed 130 planned fall conversions -- 85 in the third quarter and 45 in the fourth quarter. The remaining 109 stores will be converted in the first half of 1998 (seven overlapping stores will not be converted). * * *

We are maintaining our . . . 1998 EPS estimates of . . . $1.80 . . . . Our preliminary 1999 EPS estimate is $2.25. We believe the Anthony's acquisition holds significant upside potential beyond our 1998 EPS estimate. 90. On 12/29/97, Bear Stearns issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 and F1999 EPS of $1.80 and $2.20, respectively, for Stage Stores and stated: Stage has several sources for upside earnings surprises that could be additive to our $1.80 EPS estimate in fiscal 1998 and $2.20 EPS estimate in 1999. An EPS estimate of $2.00 in 1998 and $2.40 in 1999 is possible based on the benefits from the remaining CR Anthony store conversions . . . . *** Stage is led by seasoned management team and we believe the company is well-positioned to further exploit its highly profitable business model and continue its rapid expansion in small towns. * * *

*** Sales Momentum Should Continue With Completion of Conversions and New Store Openings. . . . [T]he remaining 110 stores will be converted from March-May and we believe these additional stores will be another catalyst for sales gains and margin expansion. Also we expect stage to add another 50-60 new stores in 1998, - - - 58 - 40 although it has the financial resources to add 80-100 new stores. *** 20%-25% EPS Long-Term Growth is Based on Conservative Assumptions. We expect Stage to deliver 20%-25% EPS gains over the next five years . . . . * * *

CR Anthony Should Be a Big Earnings Plus. Stage has tremendous potential to enhance the performance of CR Anthony, which had sales in 1996 of $288 million, EBITDA of $14 million and a store contribution margin of 8.3%. At the time of the acquisition, Stage eliminated $10.4 million in corporate overhead (to be completed by December 1997) and embarked on a plan to raise store contribution to Stage's average levels . . . . Growth Opportunities Include Further Acquisitions As Well as Organic Growth. We believe Stage Stores has developed an excellent prototype and will continue to increase its existing store base through new store openings and strategic acquisitions. After the integration of CR Anthony is completed, we expect Stage to be hungry for another acquisition in the second half of 1998 or early 1999. . . . [M]anagement indicated that it has its eye on six regional, privately-held store chains totaling 425 stores. We believe that Stage will continue its aggressive new store expansion schedule and opportunistically acquire other local chains to supplement its growth objectives. 91. On 12/29/97 and 12/30/97, First Boston issued reports on Stage Stores after discussions with Tooker and Marcum which were based on and repeated information provided by them. The reports forecast F1998 EPS of $1.80, a 25% five-year EPS growth rate for Stage Stores and stated: Stage is running ahead of plan. . . . Margins have been strong, expenses have been well controlled, the converted stores are performing well, and the fundamentals of the story remain excellent. We believe Stage Stores is an exciting investment alternative with very attractive returns and exceptional growth opportunities. . . . Stage has a unique small market growth strategy . . . . As a result, we expect Stage will produce $12 million of economic profit in 1997 and an additional $21 million in 1998. 39 - 59 - 92. On 2/3/98, Everen Securities issued a report on Stage Stores after discussions with Tooker and Marcum. The report forecast F1998 and F1999 EPS of $1.81 and $2.25, a 23% five-year EPS growth rate for Stage Stores and stated: We know of no other major retailer with the company's ability to operate profitably in these markets. • We estimate Stage can grow revenue and EPS at CAGR of 15%-18% and EPS 20%-25% over the next five years. • . . Near-term growth will be higher due to recent acquisition. • By focusing on smaller underserved markets, the company faces less competition, generates higher returns and possesses greater expansion opportunities than other apparel retailers. * * *

• Company possesses a seasoned management team with a proven ability to make acquisitions. Over the last three years, Stage has successfully integrated 209 acquired stores. The company currently has its eye on several potential acquisitions, of which the next could occur mid-1998. 93. On 2/16/98, The Daily News Record published an article about Stage Stores including an interview with Tooker, which stated: DNR: When did you do the C.R. Anthony acquisition? TOOKER: In 1997 we acquired 238 C.R. Anthony stores . . . and proceeded to convert the C.R. Anthony stores to our format. We converted 130 of those stores last year. We also opened 55 new stores. That brings us into 1998 with a store count of 615 right now, including the non- converted C.R. Anthony stores. . . . In 1998 we will finish converting the remaining C.R. Anthony stores and will open an additional 45 stores minimum. The Street's expectation for volume for this year is $1.26 billion. We've managed in the last year to run topside sales increases in excess of 20 percent, comp-store increases in excess of 4 percent and earnings increases in excess of 20 percent. * * * The Street expectation is around . . . $1.80 for 1998. 3S - 60 - * * *

DNR: Your approach seems so simple, it's amazing no one else has thought of it. TOOKER: It's because it's not the most romantic thing in retailing. I don't know too many people who would fly into an airstrip that is 4,000 feet long and get into a pickup to see a site. But we do. Because you know what's going to happen when you get done? You're going to get rent of $3 a foot and you're going to generate sales after two or three years of $140 a foot. So in a 15,000-square-foot store you're going to do $1.8 million. • . . We can pull a four-wall profit out of those stores of 16-18 percent. * * * DNR: How large ultimately can this company grow? TOOKER: There is no limit, quite honestly. There are some 6,000 or 7,000 communities in the United States that fit our population profile. We're only at 10 percent of that number right now. DNR: Do you have a short-term plan? TOOKER: This year when we'll be converting another 100- plus stores and opening 45. As we go forward, our plans call for opening at least 100 new stores as year for the foreseeable future. And that will come with double-digit top-line sales increases. DNR: Will you grow by acquisition or by building new stores? TOOKER: It will be a combination. We are always looking for opportunistic, creative acquisitions . . . . 94. On 3/12/98, Stage Stores reported "record" 4thQ F1997 and - F1997 (ended 1/31/98) results: Net income before extraordinary items for the fourth quarter was $17.5 million, or $0.62 per share, versus $10.8 million, or $0.45 per share, a year ago. * * * For the full year ended January 31, 1998 . . . [n]et income before extraordinary items was $34.5 million, or $1.30 per share, this year compared to $14.0 million or $0.88 per share, a year ago. . • .

- 61 - 3 7 Carl E. Tooker, Chairman, President and Chief Execu- tive Officer, stated, "We are extremely pleased with the level of sales and earnings that Stage achieved during the fourth quarter. Our newly opened and converted stores continued to post strong results and our compar- able stores sales increase for the Quarter was once again driven by the performance of our small market stores." Tooker concluded, "1997 was a year filled with significant milestones and accomplishments. Among other things, we achieved record sales and earnings, we eclipsed the $1 billion sales level for the first time in our history, we completed our largest acquisition to date, we successfully executed an extremely aggressive new store opening and Anthony store conversion schedule

95. On 3/12/98, subsequent to the release of its 4thQ F1997 and F1997 results, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Stores shareholders to discuss these results, its business and its prospects. During the call -- and in follow-up conversations with analysts -- Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony was proceeding as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was on schedule. Stage Stores was on schedule to complete the conversion of the remaining C.R. Anthony stores to the Stage Stores' format. • The performance of the converted stores was exceeding Stage Stores' expectations. The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998. • Stage Stores' local store model was exceptionally profitable due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management.

- 62- 3 6 • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding so well that Stage Stores was going to accelerate the number of new stores it opened during F1998 to 80+ stores. • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • Stage Stores' lstQ F1998 EPS would be slightly depressed due to the cost and lost revenues associated with the conversion of the remaining C.R. Anthony stores; however, Stage Stores expected its EPS growth to accelerate in the subsequent three quarters of F1998. • As a result of the foregoing favorable factors, Stage Stores was forecasting F1998 quarterly EPS of: Q1 $ .30- .32 Q2 .32- .33 Q3 .28- .30 Q4 .90- .92 Year $1.80-1.86 • As a result of the foregoing, Stage Stores was forecasting very strong EPS growth in F1998 and F1999 to $1.80+ and $2.20+, respectively, with 15%-25% EPS growth going forward. 96. On 3/13/98, Montgomery Securities issued a report on Stage Stores which was based on the 3/12/98 conference call and follow-up conversations with Tooker and Marcum. It forecast F1998 and F1999 EPS of $1.80 and $2.20 and a 25% secular EPS growth rate for Stage Stores and stated: • Stage's small-town strategy is working. . . . • Great earnings potential will surface in the second half of 1998. As Stage nears the completion of its alignment of the 240-store C.R. Anthony acquisition in the second quarter, the investment community has begun to realize the earnings potential of this small-town department store chain, in our opinion. We estimate earnings growth of 117% in the third quarter and 45% in the fourth quarter. • Earnings power of $3.00 per share provides visibility to growth. . . . [E]xpansion should drive EPS growth above 25% per year. - 63 - 35 • The acquisition front remains promising. Stage continues to highlight five to six chains of 30-80 stores as likely acquisition candidates. * * *

Management guidance provided further visibility to earnings growth. Management has suggested the potential for up to 40 additional store openings in 1998 (on top of its 36 store openings planned currently) . . . . * * * Outlook

Stage is positioned for an excellent second half of 1998. Stage will convert 64 C.R. Anthony stores . . . the conversion process will temporarily pressure total sales and margin levels below normal levels during the first two quarters of the year. With all C.R. Anthony conversions and 21 new organic stores open after the first half, Stage's earnings performance should begin to accelerate toward the chain's potential. . . . After the first quarter, growth should be considerable for the remainder of 1998 and 1999 as stores mature. Our 1998 EPS estimates are as follows: 1998 EPS 1Q $0.30 2Q $0.32 3Q $0.28 4Q $0.90 Year $1.80 * * * Management is likely to accelerate new store openings by 40 stores in 1998, but related expenses keep 1998 EPS accretion to $0.01-$0.03. On the conference call, the company noted that 40 incremental units might be added to Stage's store base in 1998 (above the current guidance for 40 new stores that the company gave previously). 97. On 3/13/98, Everen Securities issued a report on Stage Stores, which was based on the 3/12/98 conference call and follow- up conversations with Tooker and Marcum. It forecast F1998 and 34 -64- F1999 EPS of $1.85 and $2.25, a five-year EPS growth rate of 23% for Stage Stores and stated:

Stage Stores reported better than expected 4Q98 operating EPS . . . . The outperformance in the quarter was primarily the result of better than expected gross margins . . . . We view the fourth quarter results as very favorable and believe they serve as further validation of the company's ability to prosper in the small markets and grow its business through both internal new store openings and acquisitions. . . . rW]e are modestly increasing our January 1999 EPS estimate to $1.85 per share . . . . We are maintaining our FY99 estimate at $2.25 per share. 98. On 3/13/98, Johnson Rice issued a report on Stage Stores, which was based on the 3/12/98 conference call and follow-up conversations with Tooker and Marcum. It forecast F1998 and F1999 EPS of $1.82 and $2.25 for Stage Stores and stated: Over the next 2-3 years, we expect Stage to deliver accelerating EPS growth from the Anthony's acquisition, margin expansion, and an exciting consolidation opportunity. In Q4, the Company registered its sixth consecutive positive EPS surprise since going public • . . we are raising our 1998 EPS estimate . . . . 99. On 4/30/98, PaineWebber issued a report on Stage Stores based on information provided PaineWebber by Tooker and Marcum. It forecast F1998 and F1999 EPS of $1.80 and $2.21, a 20% secular growth rate for Stage Stores and stated: We are estimating annual earnings growth of at least 20% (excluding acquisitions) over the next several years, as the company realizes targeted expense savings as a result of business synergies, consolidation, and best practices. * * * The company's guidelines for store growth in 1998 is around 40 new stores plus the 15 stores to be obtained from its proposed Tr-North acquisition. This may prove to be conservative in the event that the company does not make any acquisitions in 1998. If that were to be the case, then the company has said that it could likely double that store growth number to 80 new stores. * * * 33 - 65 - CR Anthony integration * * * After acquiring CR Anthony, Stage began converting the stores to its format and name plate. . . . Just over half of the stores have been converted with most of the remainder expected to be completed by spring 1998. The 130 stores that have already been converted are at a gross margin rate that is comparable with the company average. With the other half of the conversions to take place in the first half of 1998, first half earnings will likely be under pressure. . . . This earnings impact should be more than made up in the second half of 1998. 100. Each of the statements made between 12/10/97-4/30/98 were false or misleading when issued. The true but concealed facts were: (a) Stage Stores' acquisition of the C.R. Anthony chain was extremely troubled. The C.R. Anthony stores acquired had been very run-down, unsuccessful and undesirable. It had cost Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and took much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing, as many of the converted C.R. Anthony stores were performing significantly below internally budgeted or forecasted levels and accumulating large amounts of slow-moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion through new store openings and acquisitions, its merchandise mix and inventory controls were overwhelmed and not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling well and thus Stage Stores was 32 - 66 - accumulating large amounts of over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage Stores refused to write down this inventory so that it could artificially inflated its reported EPS and gross margins and make its store model and its overall business appear significantly more successful and , profitable than, in fact, it was; (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made. For instance, Stage Stores' chief merchandising officer had misordered millions of dollars worth of merchandise that was undesirable, slow moving and was not selling, which Stage Stores knew would require it to either take huge write-downs of over-valued inventory in the near future or sell off that inventory at greatly reduced prices, which would have a very adverse impact on Stage Stores' results from operations, profit margins and EPS; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business and its merchandise mix, and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory; (f) Stage Stores was achieving its reported revenue growth and same-store sales growth, largely by increasing sales by

sharply discounting the price of its merchandise; however, Stage Stores was inflating its reported margins by failing to write down or reserve for the large amount of inventory of similar merchandise it held to reflect those discounted prices;

-67- 31 (g) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and (h) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the quarterly F1998 and F1998 and F1999 gross margins and EPS being forecast by and for Stage Stores were known by defendants to be false when made as those results would be impossible to achieve. 101. In early 5/98, Stage Stores issued its F1997 Annual Report which included a letter signed by Tooker, which stated: 1997 was, without question, the most . . . productive and successful year in the Company's history. The year was filled with significant accomplishments and important milestones, and the strong financial results further validated Stage's small market focus. * * * During 1997, we achieved record sales and earnings, surpassing the $1 billion sales level for the first time in our history, and firmly established Stage as the leading retailer of nationally recognized brand name family apparel in small town America. In addition, tremendous strides were made in executing our aggressive growth strategy while making solid progress toward enhancing our merchandising and marketing strategies. We completed our largest acquisition to date and we continued to build upon our infrastructure to support future growth. * * *

The cornerstone of Stage's growth strategy is to profitably capitalize on opportunities in small and under-served markets through new store openings and strategic acquisitions. This strategy was successfully implemented during 1997 as fifty-five new stores were opened and 246 stores were added as a result of the acquisition of C.R. Anthony Company in June. . . . During the last half of the year, 130 of the acquired Anthony locations were converted, on schedule, to the Company's existing store format, and we expect to convert the majority of the remaining Anthony locations during _ - 68 - “ 30 the first half of 1998. To date, the new and converted stores have performed extremely well, exceeding our expectations. . . . By opening fifty-five new stores and converting 130 stores during the year, we confirmed that we have the ability to successfully execute an extremely aggressive expansion program.

102. Elsewhere, Stage Stores' F1997 Annual Report stated: Stage experienced phenomenal growth during 1997. By successfully executing its aggressive small market growth strategy through new store openings and strategic acquisitions, the Company's store count during the year almost doubled, increasing from 315 stores in nineteen states last year to 607 stores in twenty-four states at the end of this year. . . . During the second half of the year, 130 of the acquired stores were converted, on schedule, to the Company's trade names and format. . . . Stage clearly demonstrated its ability to efficiently integrate and convert a large number of stores into its format and to significantly improve their financial performance. There are tremendous opportunities in existing and new small markets for future growth, and the Company is well positioned to capitalize on them through new store openings and strategic acquisitions. * * * Stage has developed a highly profitable small store format. . . . Consistency of execution is also main- tained by keeping shelves stocked with a broad range and selection of moderately priced branded apparel. Stage sources its merchandise from over 2,000 vendors, and varies the mix by store based upon the store's location and demographic profile. The Company has the ability to replenish each store daily through its automated, approximately 450,000 square foot distribution center. Stage utilizes a sophisticated merchandise allocation and transfer system that is designed to maximize in-stock positions, increase sales and reduce markdowns. 103. On 5/7/98, Stage Stores reported its lstO F1998 sales in a release stating: Carl E. Tooker, chairman, president and chief executive officer, stated, "We are pleased with our first quarter sales performance which reflects solid comparable store sales gains as well as above-plan sales posted by our converted C.R. Anthony stores. . . ." Tooker concluded, "With regard to new store openings and the conversion of the Anthony stores, we are progressing on schedule. During the first quarter, we opened 17 organic stores and completed the conversion of _ - - 69 - ;. t • - 29 69 Anthony locations to the company's trade names and format. The remaining 36 Anthony locations are scheduled to grand open next week, completing the conversion process. We are pleased with the performance of our new and converted stores . . . ." 104. On 5/7/98, Everen Securities issued a report on Stage Stores which was based on and reported information provided it by Tooker and Marcum. The report forecast F1998, F1999 and F2000 EPS of $1.85, $2.25 and $2.75, a 23% five-year EPS growth rate for Stage Stores and stated: We believe the converted CR Anthony stores continue to generate year-over-year sales increased [sic] of 15%-18% and a gross margin in line with company averages. * * * 1Q represents the most difficult quarter of the year with 69 CR Anthony stores being dark during a portion of the quarter. * * * In the first quarter, the company converted 69 CR Anthony stores and opened another 17 organic stores for a total of 616 stores. Similar to the previous quarter, we believe the CR Anthony converted stores continue to show sales increases of between 15%-18%. . . . We also believe the converted stores are generating gross margins in line with company averages of 31%-32%. 105. On 5/18/98, Everen Securities issued a report based on and repeating information provided Everen by Tooker and Marcum. The report again forecast F1998, F1999 and F2000 EPS of $1.85, $2.25 and $2.75, a 23% five-year EPS growth rate for Stage Stores and stated: We spoke to the company on Friday and reaffirmed that recent business conditions have continued into the month of May and the last of the converted CR Anthony stores opened last week without a hitch. * * *

_ - 70 - 2 8 With the conversion of the Anthony stores now complete, we believe management is looking to move on to the next project. The company continues to target 6 regional chains with a combined total store count of approximately 425 locations.

106. On 5/21/98, Stage Stores issued a release reporting "record" lstQ F1998 results: Net income for the first quarter increased 26.8% to $9.0 million as compared to $7.1 million a year ago. Earnings per share on a diluted basis was $0.32 this year versus $0.30 last year. * * * Carl E. Tooker, chairman, president and chief executive officer, stated, "We are pleased with our first quarter's results. Sales were ahead of plan and net income was up 26.8% over last year despite the impact of 105 Anthony locations which were going through liquida- tion and conversion process during the quarter." "Our newly opened and converted stores continued to post good results . . . ." Tooker concluded, "During the quarter, we success- fully executed an aggressive new store opening and Anthony store conversion schedule in which 17 organic stores were opened and 69 Anthony locations were converted." 107. On 5/21/98, subsequent to the release of its 1stQ F1998 results, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Stores shareholders to discuss Stage Stores' results, its business and its prospects. During the call -- and in follow-up conversa- tions with analysts -- Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony had been completed as planned. The conversion of C.R. Anthony stores to the Stage Stores' format was completed on schedule. The performance of the converted stores was exceeding Stage Stores' expectations. • The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998.

- 71 - 9 • Stage Stores' local store model was exceptionally profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding so well that Stage Stores was going to accelerate the number of new stores it opened during F1998 to 80+ stores. • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • Stage Stores' business was so strong it was increasing its forecasted F1998 EPS. As a result of the foregoing favorable factors, Stage Stores was forecasting F1998 quarterly EPS of: Q1 $ .32A Q2 .32- .33 Q3 .28- .30 Q4 .90- .93 Year $1.82-1.87 • As a result of the foregoing, Stage Stores was forecasting very strong EPS growth in F1998, F1999 and F2000 to $1.82-$1.87, $2.25+ and $2.75+ per share, respectively, with 15%-25% EPS growth on an ongoing basis. 108. On 5/21/98, PaineWebber issued a report on Stage Stores based on the conference call and follow-up conversations with Tooker or Marcum. The report increased the F1998 EPS forecast for Stage Stores to $1.82 and the F1999 forecasted EPS to $2.25 and stated: Stage's 1Q98 upside surprise largely benefited from above plan sales in the quarter. This is impressive given the level of downward pressure exerted by the

-72- • 2 6 conversion of the CR Anthony stores on gross margin and expenses in the quarter. We [are] raising our 1998 and 1999 EPS forecasts slightly to $1.82 and $2.25 respectively. . . . The conversion of the CR Anthony stores to the Stage format in its small markets has gone smoothly with sales meeting expectations thus far. With the conversions behind the company now, management has indicated that it would likely be more aggressive in building new stores in the second half of fiscal 1998 . . . [W]hich should be additive to our 1998 and 1999 EPS estimates. We are accordingly raising our 1998 EPS estimate slightly to $1.82 and raising our 1999 EPS estimate to $2.25, with the possibility of further upside. 109. On 5/22/98, Bear Stearns issued a report on Stage Stores which was based on and repeated information provided in the 5/21/98 conference call and follow-up conversations with Tooker or Marcum. The report forecast F1998 and F1999 EPS of $1.82 and $2.25, and the following quarterly F1998 EPS for Stage Stores: F1998 Ql $ .32A Q2 $ .32 Q3 $ .28 Q4 $ .90 Year $1.82 The report also stated: Stage Stores reported $0.32 . . . beating our $0.31 estimate . . . . Gross margins were 10 basis points higher than we estimated . . . . CR Anthony Stores Exceed Expectations . . . The converted CR Anthony stores are exceeding expectations and momentum has not waned for the initial group of stores that were converted in August 1997. The CR Anthony stores are running 15%-20% sales increases. . . . We expect future earnings to benefit from higher sales productivity and greater expense leverage as these stores mature and approach the Stage small market average. . . . Raising 1998 EPS Estimates, but Upside potential Given Additional Sources of Earnings We are raising our 1998 EPS estimates to $1.82 from $1.80 . . . and raising our $2.20 EPS estimate in 1999 to _ - 73 - 2 5 $2.25. Management indicated that they will provide additional guidance over the next few weeks to reflect an upwardly revised store opening plan for 1998. Stage originally intended to open 40-45 stores in 1998, but its financial flexibility could enable 80 new stores openings [sic] this year . . . . [T]hese additional earnings should be realized in 1999 and beyond. Stage is well-positioned to report significant net income growth for the remainder of 1998 and into 1999 due to 1.) faster ramp-up of the CR Anthony stores; 2.) increased new store openings . . . . Stage has been targeting six regional, privately-held department store chains totaling 425 stores. 110. On 5/22/98, Everen Securities issued a report on Stage Stores, which was based on and repeated information provided in the 5/21/98 conference call and follow-up conversations with Tooker or Marcum. The report forecast F1998, F1999 and F2000 EPS of $1.86, $2.25 and $2.75, respectively, and the following quarterly F1998 EPS for Stage Stores: F1998 Q1 $ .32A Q2 $ .33 Q 3 $ .30 Q4 $ .91 Year $1.86 • The report also stated: The company reported first quarter earnings . . . two pennies better than our estimate . . . . The quarter was strong across the board with the outperformance resulting from a combination of slightly higher sales, higher gross margins and lower expenses . . . .

* * * On the quarterly conference call, management did indicate they were in the process of upwardly revising their internal projections and would be sharing these with the Street in the next two weeks. . . . [T]he company is planning to increase the number of new organically opened stores for the remainder of the year • . . . In addition, the CR Anthony stores fare] continuing to perform well above expectations (15%+ year- over-year sales growth versus plan of 4%) . . . .

_ - 74 - 24 With the conversion of the CR Anthony stores now complete and the difficult first quarter behind the company, we would expect investors to once again begin focusing on the dramatic earnings growth expected throughout the rest of the year. Over the next nine months, we are looking for the company to increase earnings by an average of 54%. * * *

With the conversion of all 235 CR Anthony stores now complete, we expect to see an acceleration in earnings growth through the remainder of the year. . . . In the next two weeks, management is expected to revise the company's internal projections to incorporate higher new store growth than originally planned for the year. . . . 111. On 5/22/98, Johnson Rice issued a report on Stage Stores based onon dthe r conferencecall and follow-up conversations with increased the F1998 and F1999 EPS forecast for Stage Stores to $1.84 and $2.27 and forecast the following F1998 quarterly EPS for Stage Stores: 1stQ $ .32A 2nd0 $ .32 3rdQ $ .28 4thQ $ .92 Year $1.84 The report also stated: Over the next 2-3 years, we expect Stage to accelerate EPS growth from the CR Anthony acquisition, margin expansion and consolidation opportunities. In Q1, Stage delivered its seventh consecutive positive EPS surprise since going public. As a result, we are raising our EPS estimates . . . . * * * CR Anthony update. As of last week, the Company had converted and reopened all Anthony stores under the Stage concept. Converted stores are generating sales increases in the mid-teens, or better than the original 4% estimate. Gross margin is already similar to that of the core Stage Stores. * * *

-75- Raising estimates. We are raising our F98E and F99E EPS to $1.84 (from $1.82) and $2.27 (from $2.25) based on continued sales momentum. . . . Management indicated that May sales are trending on plan. . . . Given the success of the Anthony conversions and potential for accelerated openings, we expect further upside EPS surprises.

112. On 5/22/98, Everen Securities issued a report on Stage Stores based on the conference call and follow-up conversations with Tooker and Marcum. The report forecast F1998, F1999 and F2000 EPS of $1.86, $2.25 and $2.75, a 23% five-year EPS growth rate for Stage Stores and stated: • 1Q results . . . beat our estimate by two pennies.

• Strength in quarter was across the board with a combination of higher sales, higher gross margin and lower expenses than we had been projecting. • CR Anthony conversions now compete and earnings growth should again accelerate over next 3 quarters. • Company looking to raise internal projections in next couple of weeks. * * *

We are increasing our [F11998] estimate by a penny to $1.86 and maintaining our [FY1999] estimate of $2.25. . . . On the quarterly conference call, management did indicate they were in the process of upwardly revising their internal projections and would be sharing these with the Street in the next two weeks. . . . [T]he CR Anthony stores [are] continuing to perform well above expectations (15%+ year-over-year sales growth versus plan of 4%) . . . . * * * Outlook

With the conversion of all 235 CR Anthony stores now complete, we expect to see an acceleration in earnings growth through the remainder of the year. In the second fiscal quarter ending July 31, 1998, we are looking for the company to grow revenue, operating income and net income by 27.3%, 29.5% and 32.0%, respectively. . . .

-76- 22 In the next two weeks, management is expected to revise the company's internal projections to incorporate higher new store growth than originally planned for this year . . . . 113. Each of the statements made between 5/1/98-5/24/98 were false or misleading when issued. The true but concealed facts were: (a) Stage Stores' acquisition of the C.R. Anthony chain was extremely troubled. The C.R. Anthony stores acquired had been very run-down, unsuccessful and undesirable. It had cost Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and took much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing, as many of the converted C.R. Anthony stores were performing significantly below internally budgeted or forecasted levels and accumulating large amounts of slow-moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion through new store openings and acquisitions, its merchandise mix and inventory controls were not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling well and thus accumulating large amounts of over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage Stores refused to write down this inventory so that it could artificially inflated its reported EPS and gross margins and make its store model and its overall business appear significantly more successful and profitable than, in fact, it was;

_ - - 21 (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made. For instance, Stage Stores' chief merchandising officer had misordered millions of dollars worth of merchandise that was undesirable, slow moving and was not selling, which Stage Stores knew would require it to either take huge write-downs of over-valued inventory in the near future or sell off that inventory at greatly reduced prices, which would have a very adverse impact on Stage Stores' results from operations, profit margins and EPS; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business and its merchandise mix and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory; (f) Stage Stores was achieving its reported revenue growth and same store sales growth largely by increasing sales by sharply discounting the price of its merchandise; however, Stage Stores was inflating its reported margins by failing to write down or reserve for large amounts of inventory of similar merchandise to reflect those discounted prices; (g) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and (h) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the quarterly F1998 and F1998, F1999 and F2000 gross margins and EPS

-78- 20 being forecast by and for Stage Stores were known by defendants to be false when made as those results would be impossible to achieve. 114. On 6/15/98, Stage Stores held its First Annual Investor Meeting. During the analysts meeting, Tooker and Marcum stated: • Stage Stores' acquisition of C.R. Anthony had proceeded as planned. The conversion of C.R. Anthony stores to the Stage Stores' format had been completed on schedule. The performance of the converted stores was exceeding Stage Stores' expectations. • The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998. • Stage Stores' local store model was exceptionally profitable, due to Stage Stores' tight cost controls and the lack of significant competition from other retailers. • Stage Stores' state-of-the-art inventory and merchandise mix controls were extremely successful and enabled Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over-valued inventory. • While Stage Stores' inventories were increasing, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was succeeding so well that Stage Stores was going to accelerate the number of new stores it opened during F1998 to 80+ stores. • Stage Stores had an extremely competent and deep management team and its management team's depth extended to the regional and local levels. The experience and competence of this management team was one of the main factors in Stage Stores' successful profitable growth. • Stage Stores expected its EPS growth to accelerate in the final three quarters of F1998. • Stage Stores' same-store sales in 6/98 were trending flat, due to very hot weather. This was a temporary condition and Stage Stores would still achieve same store sales growth in the 2ndQ F1998.

- 79 - . 19 • As a result of the foregoing favorable factors, Stage Stores was forecasting F1998 quarterly EPS of: Q1 $ .32A Q2 .32 Q 3 .28 Q4 .92 Year $1.84 • As a result of the foregoing, Stage Stores was still forecasting very strong EPS growth in F1998, F1999 and F2000 to $1.84+, $2.20+ and $2.75+ per share, respectively. 115. On 6/19/98, Salomon Smith Barney issued a report on Stage Stores based on the presentation at the First Annual Stage Stores Investor Meeting and discussions with Tooker and Marcum. The report stated: We attended Stage Stores' first annual investor conference to review the company's current niche strategy and its growth opportunities. Presenters included Carl Tooker, CEO; Harry Brown, Chief Merchant; Jim Marcum, CFO; and other divisional heads. We offer below the following summary highlights. * Competitive Advantage of Small Store Format * * *

* Margins Second Highest in Industry SGE's operating margin structure, which at 9.3% for 1997, is second only to May Department Stores in the department store industry. These margins are driven by the inherent advantage of operating in lower cost small towns. * * *

* Company Growth Plans: 20% EPS Growth With 15% sales growth . . . company projections call for a 20% annual EPS growth rate . . . . 116. On 6/22/98, Stage Stores stock reached its all-time high of $53-3/4. However, Stage Stores stock fell sharply to $44-1/4 on 6/24/98.

- 80 - 18 117. On 6/24/98, PaineWebber issued a report on Stage Stores based on the and I'Iarcum. 17:::esstteodrF79:f8eraendc:17:9::77:i:::::k:: for Stage Stores and stated: Stage's stock price came off sharply . . . based on news that June comps are likely to be relatively flat. Management made note of that fact last Thursday during its analysts' meeting, indicating that the shift in the calendar (with Father's Day coming one week later) was a factor. Store traffic remained light through this past weekend however, with most customer interest in the promoted holiday categories. Most of the company's stores in the comp figures are located in• Texas, Oklahoma, Louisiana, and Arkansas, which have had significantly higher temperatures recently, and likely impacted customer traffic. . . . Our 2098 EPS estimate of $0.32E versus $0.25 last year is maintained largely because we believe profits in May were above plan . . . . ESTIMATED EPS GROWTH OF 20-25% IN 1999E & BEYOND * * *

Economics of new units are more favorable than company average which should result in an upward trend in corporate profitability. * * *

Sales growth: . . . 19.4% in 1998E, and 15.6% in 1999E. * * *

EPS growth: . . . 41.5% in 1998E, and 23.9% in 1999E. 118. On 6/24/98, Johnson Rice issued a report on Stage Stores which forecasted F1998 and F1999 EPS of $1.84 and $2.28 for Stage Stores and the following quarterly F1998 EPS: 1Q $ .32A 2Q $ .32 3Q $ .28 4Q $ .92 Year $1.84

- 81 - 1 7 The report also stated:

1=e11:raltnweakening past weekend. We believe that May comps were the 3% plan . . . . Management attributes the sales weakness to above-normal temperatures in the Southwest . . . . Anthony's stores going well. The converted Anthony's stores continue to generate solid revenue increases in the 15% range, vs. our 4% estimate. . . . We maintain our 02E EPS of $0.32. . . . The Anthony's outperformance is largely offsetting the negative impact of flat comps. 119. On 6/24/98, First Boston issued a report on Stage Stores after discussions with Tooker and Marcum which was based on and repeated information provided by them. The report forecast F1998 and F1999 EPS of $1.85 and $2.28, a 25% five-year EPS growth rate for Stage Stores and the following F1998 quarterly results for Stage Stores: EPS/F1998 QTR 1st: $ .32A 2nd: $ .32 3rd: $ .28 4th: $ .92 Year: $1.85 The report also stated: [C]omps are trending flat . . . . Due to the ongoing strength in the C.R. Anthony stores, management remains comfortable with our total sales figure for the quarter ($302.8 million) and our $0.32 versus $0.25 earnings estimate . . . . Our earnings estimates remain $1.85 and $2.28 and we continue to believe that ultimately those estimates will prove to be $2.00 and $2.50 to $2.60, respectively. There are several issues that bear explaining: . . . On the conference call . . . on June 15th • . . [m]anagement indicated that the comps were running flat but . . . Stage remained comfortable with a 3% comparable store sales estimate for the quarter.

-82- 1 6 * * *

We believe the slowdown in comps is a temporary issue related to traffic and weather. . . . • . . [M]anagement is comfortable with our total sales estimate of $302.8 million, flat comps, and $0.32 versus $0.25 per share for the quarter. . . . fW]e believe the comp shortfall is a short term i ssue.. Further, investors • . . bought the stock because they believed in the upside stemming from the C.R. Anthony stores • • . . Those parts of the story are still very much intact. The C.R. Anthony stores are continuing to run mid teens sales increases • . . we can continue to ultimately look for $2.00 in 1998 and $2.50 to $2.60 in 1999. * * *

rT]his is a temporary issue. The CR Anthony stores are continuing to perform at mid teens rates . . . and we continue to believe there is a lot of upside potential. . . . We maintain our $1.85 and $2.28 estimates . . . . 120. On 7/8/98, Stage Stores issued a release stating that its 2ndQ F1998 EPS would be $.27-$.30 compared to $.25 in the prior year and:

Carl E. Tooker, chairman, president and chief executive officer, stated, "The extremely hot and dry weather . • . has caused both comparable store sales and total sales to be below plan • . . • We believe that what we are experiencing is a temporary weather-related phenomenon . . • ."

121. On 7/8/98, Stage Stores held a conference call for analysts, money and portfolio managers, institutional investors and large Stage Stores shareholders to discuss Stage Stores' business and its prospects. During the call -- and in follow-up conver- sations with analysts -- Tooker and Marcum stated: • The performance of the converted C.R. Anthony stores was continuing to exceed Stage Stores' expectations. The C.R. Anthony acquisition was a success and would provide a strong boost to Stage Stores' EPS in F1998. The strength of the C.R. Anthony stores was helping overcome the adverse impact of the heat.

_ .. -83- ' 1 5 • Stage Stores' state-of-the-art inventory and merchandise mix controls remained extremely successful and were enabling Stage Stores to keep the right mix of merchandise in its stores and thus avoid the accumulation of slow-moving or over- valued inventory. • While Stage Stores' inventories had increased, this was due to Stage Stores' rapid expansion, and Stage Stores' inventories were under control and at the levels desired by management. • Stage Stores' rapid growth plan, including its new store opening plan, was still succeeding and intact. • Stage Stores still expected 2ndQ, 3rdQ and 4thQ F1998 EPS of $.27, $.28 and $.92. Stage Stores was still forecasting very strong EPS growth in F1998, F1999 and F2000 to $1.75+, $2.25+ and $2.75 per share, respectively, and 15%-25% EPS growth going forward. 122. On 7/9/98, Bear Stearns issued a report on Stage Stores which was based on and repeated information provided in conver- sations with Tooker or Marcum. The report forecast F1998 and F1999 EPS of $1.79 and $2.28, and the following quarterly F1998 EPS for Stage Stores: F1998 Q1 $ .32A Q2 $ .27 Q3 $ .28 Q4 $ .92 Year $1.79 The report also stated: *** Yesterday, Stage Stores pre-announced that 2Q- 98 EPS would fall short of expectations. We are lowering our 2Q-98 EPS estimate to $0.27 from $0.32 and our 1998 EPS estimate to $1.79 from $1.84. *** Management attributed the 2Q-98 EPS shortfall to be a function of warm weather which negatively impacted sales, but indicated confidence in its long-term business model.

123. On 7/31/98, Dow Jones News Service ran an item on Stage Stores, stating: Shares of Stage Stores Inc. sank to a 52-week low Friday in the wake of analysts' warnings that continued 14 -84- hot weather in the South has melted pennies away from the company's expected earnings per share in the second quarter, which ends Saturday. On Thursday, NationsBanc Montgomery Securities analyst Thomas Tashjian issued a warning that his earlier projection of 29 cents now has "one or two cents worth of risk." 124. Each of the statements made between 6/15/98-7/31/98 were false or misleading when issued. The true but concealed facts were:

(a) Stage Stores' acquisition of the C.R. Anthony chain was extremely troubled. It had cost Stage Stores significantly more than anticipated to convert the C.R. Anthony stores to the Stage Stores' format and took much longer to complete the conversion process than had been anticipated; (b) The performance of the converted C.R. Anthony stores was not nearly as strong as Stage Stores was representing, as many of the converted C.R. Anthony stores were performing significantly below internally budgeted or forecasted levels and accumulating large amounts of slow-moving, over-valued inventory; (c) Due to Stage Stores' overly rapid expansion through new store openings and acquisitions, its merchandise mix and inventory controls were not working properly. As a result, many stores were accumulating large amounts of merchandise that was not selling well and thus accumulating large amounts of over-valued inventory that would have to be liquidated at unprofitable prices or written down. Stage Stores refused to write down this inventory so that it could artificially inflated its reported EPS and gross margins and make its store model and its overall business appear significantly more successful and profitable than, in fact, it was;

40 - 85 - (d) Stage Stores' top management team was in disarray, had lost control of the business and was riddled with extreme dissention over serious mistakes which had been made. For instance, Stage Stores' chief merchandising officer had misordered millions of dollars worth of merchandise that was undesirable, slow-moving and was not selling, which Stage Stores knew would require it to either take huge write-downs of over-valued inventory in the near future or sell off that inventory at greatly reduced prices, which would have a very adverse impact on Stage Stores' results from operations, profit margins and EPS; (e) Due to Stage Stores' overly rapid expansion, its top managers had lost control of its business, and its merchandise mix and inventory controls were overwhelmed and thus ineffective, resulting in the accumulation of large amounts of over-valued inventory; (f) Stage Stores was achieving its reported revenue growth and same store sales growth, largely by increasing sales by sharply discounting the price of its merchandise; however, Stage Stores was inflating its reported margins by failing to write down or reserve for sales of inventory of similar merchandise at those discounted prices; (g) Because of the current condition of Stage Stores' business, its merchandise mix and the problems with its current C.R. Anthony acquisition, Stage Stores would not be able to make any more acquisitions for the foreseeable future; and (h) As a result of the foregoing negative conditions which were then adversely impacting Stage Stores' business, the quarterly F1998 and F1998, F1999 and F2000 gross margins and EPS

- 86 - 12 being forecast by and for Stage Stores were known by defendants to be false when made as those results would be impossible to achieve. 125. On 8/6/98, Stage Stores revealed a "disastrous" develop- ment -- a 5% decline in same-store sales in 7/98 -- claiming it was due to hot weather and admitting its 2ndQ EPS would be only $.02- $.05, well below the levels it had been forecasting, and Stage Stores would have weak 3rdQ EPS as well. Stage Stores' stock utterly collapsed on these revelations, falling from $23-5/8 on 8/5/98 to $9-7/8 on 8/6, a one-day decline of $13-3/4 or 58%, on volume of 5.3 million shares, placing the stock at its all-time low, the largest one-day absolute or percentage stock-price decline on the largest one-day volume in Stage Stores' history. Analysts, however, were immediately skeptical of the claim that this collapse was due just to hot weather. "The heat may have something to do with it, but they're not only in the Southwest," said one analyst. The stock's plunge "is a sign of a sudden drop of confidence in management," said another. Standard & Poor's immediately placed Stage Stores on "CreditWatch" with "negative implications." Stage Stores' subsequent F1998 results have been horrible. For the 2ndQ F1998, it reported net income of only $765,000 or $.03 per share, huge declines from the prior quarter and prior year comparable periods. For the 3rdQ F1998, Stage Stores again reported declining same store sales and a loss of $3.2 million, or $.11 per share, indicated it would sharply curtail its expansion program and that its Chief Merchandising Officer had resigned. Again, Stage Stores blamed hot weather, however analysts were skeptical -- "we can't help wonder if the merchandise mix and heavy promotional campaign over the last several months may also be contributing factors" --

-87- 11 and continued to slash the F1998 and F1999 EPS forecasts for Stage Stores as Stage Stores was now in danger of violating the financial covenants in its bank lending agreements. Then Stage Stores revealed a further decline in same-store sales in the 4thQ F1998 -- the largest quarterly decline yet -- an actual decline in quarterly sales year-over-year, a 4thQ F1998 loss of $2.9 million ($.10 per share), that it was virtually abandoning its expansion plan -- now to open just 10 stores in F1999, down from the 80-100 stores forecast during the Class Period -- and that it was not adding any square footage in F1999 and had to amend its bank lending agreements to avoid violation of its borrowing covenants. As one analyst noted, "Stage Stores' weather excuse has been worn out . . . rw]e have lost confidence in management's ability to achieve meaningful improvement over the near-to-intermediate term." Stage Stores stock fell to just $6-3/4, an all-time low price in 1/99. Analysts now forecast F1999 EPS of just $.50-$.60 and F2000 EPS of just $.70-$.80 -- massive reductions from the levels forecast by and for Stage Stores during the Class Period. 126. As Stage Stores reported horrible 3rdQ and 4thQ F1998 results, analysts challenged the "weather excuse" and discovered that poor merchandise mix control, problems with the C.R. Anthony acquisition, price-cutting to move inventory and increased competition were the real reasons for the apparent collapse of Stage Stores' business. Selected analysts' comments are set forth below: • [A]s 1998 progressed, the lack of merchandise execution became more prevalent. That, in turn, further negatively impacted sales, and set into motion the management changes and shift in merchandising direction that took place over the -88- 1 0 past six months. Stage Stores j ust did not have the capability to absorb the C.R. Anthony acquisition as easil y as it had expected. It proved to be a lot more difficult than just simply putting a range of merchandise into a new store (generally 30% greater than average), and fine- tuning that mix on an ongoing basis. • Merchandising. Management has instituted several believe the Company's merchandising miscues last year were tied to the siqnificant turnover in the merchant team, i.e. two chief merchants in two

A continuation of merchandisinq difficulties had a negative affect on SGE's performance.

Merchandisinq difficulties plagued the company

• Management attributes same-store sales declines to some merchandising misste ps and increased promotional activity (which resulted in lower average selling prices) to ensure the timely liquidation of seasonal merchandise. * * * To help reverse negative comp-store sales trends, the company is eliminating its value pricing program, improving management of receipt flows, and refining marketing/pricing plans. Stage is placing considerable focus on its overall merchandising strategy, broadening its assortments and adding new vendors. This strategy includes introducing better, higher-margin brands; focusing on a younger, more contemporary consumer; readjusting the dress and shoe categories; strengthening existing and building new vendor relationships; and launching a more focused, quality advertising strategy. • Management is attempting to shore up the business by bringing in some new brands, . . . eliminating the value pricing strategy, slowing store growth so it can focus on the business and improve cash flow, and controlling inventory so as to minimize markdown risk. . . . [W]e think it is too early to get excited and don't believe the business will turn before the second half of 1999.

, 9 - 89 -

• [W]e believe further initiatives must be taken in the areas of merchandise assortment and promotional strategy. These two areas are the core of any retailer and making changes to them can be a slow and difficult process. • [M]erchandise, promotional and competitive issues are the reasons for the relatively weak outlook. We believe it could take 12-18 months before meaningful progress is made. INSIDER SELLING 127. While Stage Stores' top insiders were issuing favorable and false statements about Stage Stores, Stage Stores sold 650,000 shares for $21.7 million; the Individual Defendants sold 293,901 shares of Stage Stores stock for more than $9.8 million and Bain Capital and Acadia sold 6.22 million shares for $208 million, profiting from the artificial inflation in Stage Stores' stock price.Notwithstanding their access to material non-public information and their duty to disclose same before trading in Stage Stores stock, they sold significant amounts of their Stage Stores stock at artificially inflated prices. Defendants' stock sales during the Class Period are detailed below:

Name Date Shares Price Proceeds

Hernandez, Rigo 03/17/98 3,789 $50.375 $ 190,870 Ivie, Jerry 08/27/97 7,600 $30.750 233,700 08/27/97 2,000 $30.875 61,750 08/27/97 400 $30.938 12,375 09/18/97 10,000 $38.000 380,000 20,000 687,825

Sledge, Charles 03/17/98 2,462 $49.000 120,638

Swartz, Joanne 04/03/98 3,500 $52.000 182,000

Westbrook, Don 03/17/98 2,842 $48.500 137,838 04/01/98 750 $35.308 26,481 3,592 164,319

Ward, Mel 09/02/97 3,259 $30.967 100,921 03/17/98 828 $48.124 39,847 04/06/98 2,520 $52.250 131,670 6,607 272,438418

Tooker, Carl 05/12/97 10,000 $22.250 222,500 05/13/97 30,000 $22.000 660,000

- 90 - 8

05/21/97 10,000 $21.625 216,250 07/07/97 10,000 $24.750 247,500 07/07/97 10,000 $24.875 248,750 07/08/97 3,000 $25.000 75,000 07/08/97 5,000 $25.125 125,625 07/08/97 5,000 $25.250 126,250 07/08/97 5,000 $25.375 126,875 07/08/97 5,000 $25.500 127,500 03/17/98 7,538 $49.000 369,362 03/17/98 5,000 $48.500 242,500 03/18/98 7,000 $48.125 336,875 03/19/98 5,472 $48.500 265,392 118,010 $ 3,390,379

Lovell, Steve 03/23/98 14,209 $50.000 $ 710,450

Bornstein, Sandra 03/17/98 600 $48.125 $ 28,875 03/23/98 3,751 $48.000 180,048 4,351 $ 208,923

Shulman, Mark 07/09/97 20,000 $25.750 $ 515,000 07/11/97 5,000 $26.875 134,375 08/05/97 5,000 $29.373 146,867 08/19/97 5,000 $30.248 151,241 35,000 $ 947,483

Cruse, Ernest 03/17/98 9,907 $47.895 $ 474,498 04/01/98 2,644 $51.620 136,483 12,551 $ 610,981

Mulvihill, Peter (1) 09/16/97 11,604 $33.400 $ 387,574 Kirsch, Adam 09/22/97 32,420 $33.400 $ 1,082,828

Bekenstein, Joshua (2) 09/22/97 37,410 $33.400 $ 1,249,494

Bain Capital (3) 09/22/97 3,517,829 $33.400 $117,495,489

Acadia Entities (4) 09/22/97 2,709,715 $33.400 $ 90,504,481

Stage Stores 09/22/97 650,000 $33.400 $ 21,710,000

TOTAL (5) 7,171,445 $239,528,598

(1) Mulvihill's shares sold are included in the 2,709,715 distributed and sold by Acadia.

(2) Sold throu9h the Joshua Bekenstein 1997 Charitable Remainder Unitrust.

(3) Includes 165,800 shares distributed to various organization to be sold in the Secondary Offering.

(4)Shares distributed to various Acadia partners to be sold in secondary offerii

(5) Totals exclude Mulvihill's shares sold as these amounts are included for Acadia. STATUTORY SAFE HARBOR 128. The safe harbor provided for forward-looking statements ("FLS") does not apply to the false FLS pleaded. The safe harbor does not apply to Stage Stores' allegedly false financial statements. None of the FLS pleaded herein were identified as - 91 - . 7 "forward-looking statements" when made, it was not stated that actual results "could differ materially from those projected," nor did meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the FLS accompany those FLS. None of the particular oral FLS in Stage Stores' 5/20/97, 8/27/97, 11/20/97, 3/12/98, 5/21/98 and 7/9/98 conference calls or other oral presentations pleaded at T176, 93 and 114, were so identified as required. The defendants are liable for the false FLS pleaded because, at the time each FLS was made, the speaker knew the FLS was false and the FLS was authorized and/or approved by an executive officer of Stage Stores who knew that the FLS was false. None of the historic or present- tense statements made by defendants were assumptions underlying or relating to any plan, projection or statement of future economic performance, as they were not stated to be such assumptions underlying or relating to any projection or statement of future economic performance when made nor were any of the projections or forecasts made by defendants expressly related to or stated to be dependent on those historic or present-tense statements when made. CLASS ACTION ALLEGATIONS 129. This is a class action on behalf of purchasers of Stage Stores stock between 5/7/97 and 8/6/98 (the "Class"). Class members are so numerous that joinder of them is impracticable. 130. Common questions of law and fact predominate and include whether defendants: (i) violated the 1934 Act; (ii) omitted and/or misrepresented material facts; (iii) knew or recklessly disregarded that their statements were false; (iv) artificially inflated Stage

- 92 - f Stores' stock price; and (v) the extent of and appropriate measure of damages.

131. Plaintiff's claims are typical of those of the Class. Prosecution of individual actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect the interests of the Class. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

CLAIM FOR RELIEF On Behalf Of The Class For Violations Of 510(b) And Rule 10b-5 Against All Defendants 132. Plaintiff incorporates 1[1[1-131. 133. Defendants violated §§10(b), 20(a) and Rule 10b-5 by: (a) Employing devices, schemes and artifices to defraud; (b) Making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) Engaging in acts, practices and a course of business that operated as a fraud or deceit upon the Class in connection with their purchases of Stage Stores stock. 134. Class members were damaged. In reliance on the integrity of the market, they paid artificially inflated prices for Stage Stores stock. BASIS OF ALLEGATIONS 135. The PSLRA, §21D(c) of the 1934 Act [15 U.S.C. §78u-4(c)], requires compliance with Rule 11. Plaintiff has alleged the foregoing based upon the investigation of his counsel, including a

- 93 - 5 review of Stage Stores' SEC filings, securities analysts' reports,

Stage Stores' press releases, media reports, and information obtained from consultants. Plaintiff believes that, after reasonable opportunity for discovery, substantial additional evidentiary support will likely exist for the allegations set forth at 114-6, 44-46, 65, 77, 87, 100, 113 and 124.

PRAYER

WHEREFORE, plaintiff prays for judgment as follows: declaring this action to be a proper class action; awarding damages, including interest; and such other relief as the Court may deem proper.

JURY DEMAND

Plaintiff demands a trial by jury.

DATED: March 30, 1999 Respectfully submitted,

/MOIL 13/-77.67005111:41.11/110 ROGER B. ---- ENBERG

Attorney-in-Charge State Bar No. 08390000 Federal I.D. No. 3932 12 Greenway Plaza, 10th Floor Houston, TX 77046 Telephone: 713/627-2720 713/627-7057 (fax)

Attorneys for Plaintiff OF COUNSEL:

DAVID E. SHARP State Bar No. 18115700 Federal I.D. No. 4636 GREENBERG, PEDEN, SIEGMYER & OSHMAN, P.C. 12 Greenway Plaza 10th Floor Houston, TX 77046 Telephone: 713/627-2720 713/627-7057 (fax)

- 94 - 4 WILLIAM S. LERACH ALAN SCHULMAN

MIIIII=TWE%TBBIETRSHAD HYNES & LERACH LLP 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

HOWARD D. FINKELSTEIN JEFFREY R. KRINSK FINKELSTEIN & KRINSK 501 West Broadway, Suite 1250 San Diego, CA 92101 Telephone: 619/238-1333 619/238-5425 (fax)

CASES\COMPLNTS\STAGESTR.CPT

- 95 - 3 _ . .

FINKCIArri01 6 MINSK 51/1 Woo Broadway, Ufa 1250 San Dim), CA 92101 (616) 2314 333

CERTIFICATION OP PLAINTIFF EXREVA1MALEEDEE6L19E 1-na RITIES a The undersigned declares, as to the claims asserted under the federal securities laws, that

1. The undersigned has reviewed the complaint and approves of its filing. 2. The undersigned did not purchase the security that is the subject of this action

at the direction of counsel or in order to participate in this lawsuit.

3. The undersigned is willing to serve as a representative party on behalf of the

class, including providing testimony at deposition and trial, if necessary.

4. The undersigned's transaction(s) in Stage Stores, Inc. ('Stage Stores") during the Class Period is/are as follows:

# of Share Itansaction Date(s) Purchase/Sale Price

125 August 3, 1998 $25.75 per share

S. During the three years prior to the date of this Certificate, the undersigned . has sought to serve or served as a rcpreseri tative party for a class in the following actions

tiled under the federal securities laws: None.

a

0A19‘

, 1. -• 2

,

6- The undersigned has sought to serve or served as a representative party for a class in the following actions filed subsequent to December 22, 1995: None, 7. The undersigned will not accept any payment for serving as a representative party on behalf of the class beyond the undersigned's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as ordered or approved by the court I declare under penalty of perjury that the foregoing is true and correct. Executed this ?gig: day of 44/Va-- 1999.

JOHN*: k.lfr .

°I\Crt e27

1