<PAGE>   1
                                  Exhibit (13)


                          Reports to securityholders --
                               1997 Annual Report


                                       69
<PAGE>   2
                                CORPORATE PROFILE

Richman Gordman 1/2 Price Stores, Inc. ("the Company"), headquartered in Omaha,
Nebraska, operates a chain of 31 off-price department stores located in eight
Midwestern states. The Company's stores trade under the name "1/2 Price Store".
The 1/2 Price Store concept is to offer top quality, name brand merchandise at
up to 50% off department and specialty store regular prices every day.

The Company is uniquely positioned vis-a-vis other off-price retailers, discount
store chains and traditional department stores, as it represents a synthesis of
many of the best elements of all three formats. The quality, timeliness and
composition of the merchandise of 1/2 Price Stores differentiates the Company
from many other off-price retailers which frequently offer a high percentage of
irregulars, overstocks, and out of season product.

The Company differentiates itself from discount stores in terms of the
merchandise content, presentation, and mix. The Company's merchandise is
predominantly comprised of department and specialty store brands. Additionally,
over two-thirds of the Company's sales are generated by apparel and
apparel-related merchandise, while non- apparel categories represent the
majority of most discount stores' revenue base.

A 1/2 Price Store is organized with clearly identifiable "shops" similar to a
department store. The merchandise presentation and visual displays of a 1/2
Price Store are significantly more appealing and easier to shop than a typical
off-price store, which tends to simply display merchandise by size on long
straight chrome racks.

The Company's origins date back to the early 1900's, when Russian immigrant Sam
Richman began a small retail clothing business in 1915. In 1936, his son-in-law,
Dan Gordman, joined him in the business, and Dan purchased Sam's interest in the
business twelve years later. Dan's sons Jerry and Nelson joined him in the early
1960's, and together built the business into a 15 store chain of moderately
priced department stores called Richman Gordman.

Dan Gordman started the 1/2 Price Stores in 1972, expanding it into a 15 store
chain by the early 1990s. In 1992 the Company underwent a reorganization,
focusing exclusively on the 1/2 Price Store concept.

The Company has been publicly owned since 1993, but the Gordman family retains a
majority interest in the Company and maintains an active role in its management.
Dan Gordman's grandson, Jeff Gordman, was named President and Chief Executive
Officer in 1996 and has been a member of the Board of Directors since 1993.
Dan's sons, Nelson and Jerry, are also Directors of the Company.

                                TABLE OF CONTENTS

Letter from the C.E.O. ...............................................    2
Progress Report ......................................................    4
Products and Services ................................................    7
Selected Financial Data ..............................................   16
Management's Discussion
   and Analysis ......................................................   17
Financial Statements .................................................   24
Shareholder Information ..............................................   39


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<PAGE>   3
TO OUR SHAREHOLDERS, EMPLOYEES, VENDORS AND FRIENDS:

I am pleased to report that our Company dramatically improved its bottom line
performance, cash flow from operations and asset productivity in 1997. This
improvement was achieved by maintaining a rigorous focus on the Company's
mission, which is based on a differentiated selling proposition of value that
was developed subsequent to the management changeover in mid-1996. Specifically,
our selling proposition is to offer our customers top quality brand name
merchandise at prices up to one half off department and specialty store regular
prices in visually appealing, well organized and easy to shop stores. In
addition, aggressive and disciplined management of merchandise inventories and
selling, general and administrative expenses has contributed to our enhanced
performance.

Prior to the change in direction in mid-1996, the Company faced several
fundamental problems, including a protracted deterioration in comparable store
sales, negative cash flow, significant operating losses and a lack of
credibility in our merchandise mix and pricing. To correct these deficiencies,
the Company implemented a set of strategic initiatives to:

         -        dramatically strengthen its portfolio of brand names;

         -        revise its marketing strategy to generate sales by focusing on
                  the inherent value of desirable name brands at up to 50% off
                  regular prices rather than by offering discounts off everyday
                  prices;

         -        significantly upgrade the quality of the in-store
                  presentation;

         -        refocus on ensuring that customer satisfaction is a top
                  priority among all store associates; and

         -        instill a high degree of discipline and control over
                  inventories and the cost structure.

The significant improvements in operating cash flow, earnings and comparable
store sales that were realized in 1997 validate the appropriateness of these
initiatives. Our Company almost tripled its operating cash flow last year,
improving from $3.2 million in 1996 to $8.7 million in 1997. This performance
was primarily attributable to an improvement in inventory turnover from 2.8
times in 1996 to 3.4 times in 1997. Average inventory levels in 1997 were 20%
below 1996 levels. In addition, liquidity was enhanced by improving the terms of
our line of credit with Congress Financial and by achieving improvements in
trade credit terms. As a result of these improvements, our average level of
unused availability on our line of credit was over $9 million in 1997, and never
fell below $5 million at any point throughout the year.
<PAGE>   4
We substantially reduced our net loss in 1997 to $1.0 million from a $5.6
million loss (before extraordinary item) in the previous year. The Company
produced a net income of $4.5 million in the second half of the year, which
represents nearly a seven-fold increase over the net income (before
extraordinary item) of $667,000 in fiscal 1996. This improvement for the year
was attributable to an increase in gross margin of 90 basis points from 34.5% in
1996 to 35.4% in 1997 and a reduction of 4%, or $3,186,000 in operating and
interest expenses. While we are not satisfied with reporting a loss for the
year, we are very encouraged by the underlying trends in our operating
performance, particularly in the second half of 1997, and are optimistic that we
will return to profitability in 1998.

In 1998 our Company will continue to focus on and refine its mission and
differentiated selling proposition. From a merchandising standpoint, we will
capitalize on a substantial growth opportunity in women's casual sportswear,
which is currently a very underdeveloped business for us. Other growth
opportunities include gifts, decorative home, and men's and women's activewear.
Our marketing effort will utilize preprint circulars as well as television
geared to both generate traffic as well as to position the Company in the minds
of potential customers as a viable shopping alternative to department and
specialty stores. Our store efforts will include a strong focus on our
Commitment to Customer Satisfaction initiative, the purpose of which is to
ensure that the customer is the number one priority of each and every associate
in the store. Since this program was implemented on August 1 of last year, the
Company's average sale transaction has increased by more than 3%.

We will also open a new store this year in the St. Louis market in time for the
back-to-school selling season. This store presents the Company with a unique
opportunity to develop a new prototype that reflects the quality and value of
our selling proposition, and that maximizes sales productivity and operational
efficiency.

Our Company has a fiduciary responsibility to meet and exceed the needs of four
important groups of stakeholders: our Associates, our Customers, the Communities
in which we operate and our Shareholders. By maintaining our tenacity of purpose
with respect to executing our mission, we will fulfill this responsibility, and
in turn plan to achieve a sustained and competitive level of profitability. We
would like to extend our sincere thanks to our vendors, shareholders, associates
and other friends for their continued support.


Jeffrey J. Gordman
President and Chief
Executive Officer


                                       72
<PAGE>   5
                     RICHMAN GORDMAN 1/2 PRICE STORES, INC.

                                 PROGRESS REPORT

Management is very encouraged by the results achieved in 1997, particularly the
positive trends evident the Company's performance. A summary of our progress, as
measured by our key performance indicators is provided below.

LIQUIDITY

Key Performance Indicators

<TABLE>
<CAPTION>
                                                         1997          1996         % Change
                                                     -----------    -----------     --------
<S>                                                  <C>            <C>             <C>
Cash flow from operations                            $ 8,693,000    $ 3,151,000       176%
Average unused availability on line of credit        $ 9,056,000    $ 6,757,000        34%
Unused availability at year-end                      $11,861,000    $ 8,423,000        41%
Average borrowings on line of credit                 $11,730,000    $14,051,000       -17%
Borrowings on line of credit at year end             $ 2,947,000    $ 7,282,000       -60%
</TABLE>

The Company generated $8.7 million in operating cash flow, which represented a
176% increase over last year. This dramatic improvement was primarily
attributable to the reduction in inventory of 20.4% from the previous year, an
improvement in inventory turnover, improved trade credit terms and the improved
operating results

The Company maintains a line of credit with Congress Financial Corporation
(Central). The line provides for maximum borrowings of $27.5 million, subject to
inventory levels, carries interest at 1% over prime and extends through October,
1999. The agreement contains no covenants relative to income, cash flow, net
worth, working capital or related financial measures, nor does it contain an
annual clean down provision. Our unused availability was strong throughout 1997,
never falling below $5 million. Our financial projections indicate that we will
continue to have adequate availability through 1998.

COMPARABLE STORE SALES

Key Performance Indicators

<TABLE>
<CAPTION>
                                           1997             1996
                                           ----             ----
Comparable store sales changes
<S>                                        <C>              <C>
First Quarter                              (12%)            (13%)
Second Quarter                              (4%)            (14%)
Third Quarter                                1%             (10%)
Fourth Quarter                              10%              (9%)
Full Year                                    0%             (10%)
</TABLE>


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<PAGE>   6
Comparable store sales are improving, as evidenced by increases in 5 of the 6
months during the second half of 1997, including a 10% increase during the
holiday season. During the first half of fiscal 1997, the Company anticipated a
large portion of the comparable store sales decrease due to a strategic
marketing shift from promotional pricing to every day low pricing on desirable
name brand merchandise as a vehicle to drive sales.

For fiscal 1997, four out of eight merchandise divisions - women's, juniors,
women's accessories and intimate apparel experienced annual comparable store
sales increases in excess of 9%. Two other divisions - men's and home - had
comparable store decreases for the year as a whole, but improved noticeably
during the course of the year and actually posted comparable store increases
during the second half of 1997. The children's apparel division experienced
sales decreases during the year, but achieved a comparable store sales increase
during the fourth quarter. Our eighth division, shoes, experienced sales
decreases throughout the first three quarters and was leased out beginning in
the fourth quarter. Since leasing the department, sales of shoes have increased
6% compared to sales level for fiscal 1996.

The Company leased its footwear business to a leading shoe licensor in November
1997. Under the licensing agreement, the Company sold its existing shoe
inventory and fixtures to the licensor and will receive a percentage of all
ongoing shoe sales.

PROFITABILITY

Key Performance Indicators

<TABLE>
<CAPTION>
                                                            1997               1996            Change
                                                       -------------       ------------        ------
<S>                                                    <C>                 <C>                 <C>
Gross margin percentage                                        35.4%               34.5%        0.9
Operating and interest expenses                         $70,389,000         $73,575,000          (4%)
Operating and interest expenses, % of sales                    36.4%               37.3        (0.9)
Operating income(loss)                                  $ 1,752,000        ($ 1,944,000)        190%
Net income (loss), before extraordinary item
         First half of year                            ($ 5,535,000)       ($ 6,220,000)         11%
         Second half of year                            $ 4,511,000         $   667,000         576%
         Full year                                     ($ 1,024,000)       ($ 5,553,000)         82%
</TABLE>

Significant progress toward profitability was made in fiscal 1997. For the
second half of the year, the Company generated net income of $4,511,000 compared
to $667,000 (before extraordinary item) in the previous year. For the 1997
fiscal year, the net loss (before extraordinary item) was $4,529,000 less than
fiscal 1996, or $1,024,000.

The Company's strong improvement in gross margins was attributable to (1) a
strategic decision to use everyday low prices instead of promoting off price to
drive business, (2) an improved correlation between merchandise receipts and
sales and (3) a more timely and effective use of markdowns.

Aggressive and proactive management of expenses and inventory levels resulted in
a reduction in total operating and interest expenses by 4%, or $3,186,000 for
the year. Personnel reductions at the


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<PAGE>   7
end of 1997 in conjunction with a sublease arrangement on excess distribution
center space should further reduce operating costs in 1998.

ASSET MANAGEMENT

Key Performance Indicators

<TABLE>
<CAPTION>
                                                               1997                    1996          % Change
                                                         -----------------      -----------------    --------
<S>                                                      <C>                    <C>                  <C>
Inventory turnover                                               3.4 times              2.8 times       21%
Gross margin return on inventory investment (GMROI)              2.1 times              1.7 times       24%
Average investment in inventory, at retail               $56,106,000            $70,465,000            (20%)
</TABLE>

The Company's largest asset is merchandise inventory, representing on average
well over half of the Company's asset base. A disciplined, rigorous and
systematic approach to inventory management translated into a significant
improvement in both inventory turnover and GMROI, which increased 21% and 24%
respectively. These indicators represent the best performance in the Company's
recent history, and were primarily the result of better correlating receipts to
sales and more timely markdown management. In addition, the average age of our
inventory basis decreased by 30% over the course of the year. This improvement
in inventory management was a significant factor behind the dramatic improvement
in sales and profitability in the second half of the year.

CREDITOR OBLIGATION STATUS

Key Performance Indicators

<TABLE>
<CAPTION>
                                                           1997                1996
                                                        ----------          ----------
<S>                                                     <C>                 <C>
Cash paid to prepetition unsecured creditors            $1,967,000          $        0
Remaining obligation to unsecured creditors             $1,800,000          $3,593,728
Cash paid to prepetition secured creditors              $  426,555          $  804,000
Remaining obligation to secured creditors               $        0          $  426,555
</TABLE>

The Company made a $1,967,000 payment to unsecured creditors in 1997. The
remaining $1.8 million obligation is scheduled to be paid in fiscal 1998.


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<PAGE>   8
                              PRODUCTS AND SERVICES

                                 COMPANY MISSION

The Company's mission is to exceed its customers' expectations through an
exciting shopping experience offering top quality name brands at half price.
This mission revolves around a differentiated selling proposition of value,
comprised of three critical elements:

              1.  QUALITY -- defined as instantly recognizable brand names;

              2.  PRICE -- up to one-half of department and specialty store
                  regular prices, every day; and

              3.  SHOPPING EXPERIENCE -- a store that is visually appealing,
                  well organized, and has strong clarity of offer.

                                  MERCHANDISING

The Company's merchandise strategy is to procure highly recognizable department
and specialty store brands at up to 50% off department and specialty store
regular prices every day. To consistently accomplish this mission, The Company's
staff of 21 buyers employs a variety of opportunistic buying strategies that
require a high degree of creativity, negotiating ability and entrepreneurial
ability. These strategies include taking advantage of vendor excess inventory
positions, canceled orders from other retailers, close-outs and in-line product.
The Company's ability to effectively execute its merchandising strategy is
enhanced by building and maintaining strong vendor partnerships based on a high
level of trust and integrity.

The 1/2 Price Stores have seven merchandise divisions with apparel representing
the majority of the business. An eighth division, shoes, is now leased. The Home
Furnishings division includes decorative home products, bedding and bath,
housewares for the kitchen, luggage, rugs, picture frames, crystal, silver and
framed art. The following table reflects the percentage mix of sales by
merchandise division for Fiscal Year 1997:

<TABLE>
<CAPTION>
MERCHANDISE DIVISION                 1997
---------------------               -----
<S>                                 <C>
Men's                                17.5%
Children's                            9.4
Women's Accessories                  12.4
Misses                               16.6
Juniors                               8.6
Intimate Apparel                      3.2
Home Furnishings                     26.5
Shoes                                 5.8
                                    -----
   Total                            100.0%
                                    =====
</TABLE>


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<PAGE>   9
Maintaining a high percentage of recognizable department/specialty store brands
in all product categories is the number one critical success factor to driving
the business as well as maintaining the integrity of the mission. The Company's
effort to both upgrade and expand the breadth of trusted brands is ongoing.

The following tables give examples of the national brands featured in each
merchandise division:

MEN'S                 CHILDREN'S           ACCESSORIES

Guess                Izod                  Liz Claiborne
Calvin Klein         Calvin Klein          Monet
Izod                 Buster Brown          Anne Klein II
Bugle Boy            Adidas                Aris-Isotoner
Nike                 Bugle Boy             Guess
Adidas               Levis                 Christian Dior
Chaps                Lee Rider             Totes
Arrow                Pacific Trail         Gold Toe
Levi's               Osh Kosh B'Gosh       Elizabeth Arden
Union Bay            Mickey and Co.        Esprit
Pacific Trail        Reebok                Revlon
Haggar               My Michelle           Coty
Dockers              Fila                  Timex
Fila                 Guess                 Armitron

   MISSES               JUNIORS            INTIMATE APPAREL       HOME

Sag Harbor           Calvin Klein          Playtex              Samsonite
Nike                 Union Bay             Olga                 Rubbermaid
Erika Classics       Esprit                Wonderbra            Mikasa
Counterparts         Guess                 Rene Rofe            Springs
Fritzi               Big Flirt             Lilyette             Anchor-Hocking
Bill Blass           Wrappers              Warner's             Fieldcrest
Bugle Boy            Mickey and Co.        Joe Boxer            Mattel (Barbie)
Gloria               My Michelle           Bali                 Hasbro
  Vanderbilt         All That Jazz                              Burlington
Donnkenny            Generation X                               Dan River
Pacifica Trail                                                  Pfaltzgraff
Fila                                                            Cannon
Reebok                                                          Playskool


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<PAGE>   10
                                   FACILITIES

The Company's physical facilities consist of a corporate headquarters building
of 98,700 square feet, a Distribution Center of 267,000 square feet (excluding
internal mezzanine space of 111,400 square feet), and 31 1/2 Price Stores
averaging 80,000 gross square feet and 62,000 square feet of selling space. The
Company owns 103,700 square feet of the Distribution Center. The other 163,300
square feet, composed of two additions to the Distribution Center, are leased
from entities owned by members of the Gordman family. Approximately one-third of
the distribution center has been subleased to an unrelated third party effective
in fiscal 1998. All other facilities are leased from third parties. The stores
are primarily located in strip shopping centers, and are open seven days each
week from 9:00 a.m. to 9:30 p.m., with extended hours during the Christmas
selling season. The following table reflects the number of stores by state and
market:

STATE                        STORES            STATE                      STORES

COLORADO                                       IOWA

     Denver area               3                   Des Moines                3
                                                   Sioux City                1
                                                   Council Bluffs            1
                                                   Waterloo                  1
                                                                          ------
                                                                             6

ILLINOIS                                       KANSAS

     Fairview Heights          1                   Kansas City area          2
                                                   Topeka                    1
                                                   Lawrence                  1
                                                   Wichita                   2
                                                                          ------
                                                                             5

MISSOURI                                       NEBRASKA

     Kansas City area          3                   Omaha                     4
     Springfield               1                   Lincoln                   1
     St. Louis area            2                   Fremont                   1
                             ----                  Hastings                  1
                               6                   Grand Island              1
                                                                          ------
                                                                             8

OKLAHOMA                                       SOUTH DAKOTA

     Tulsa                     1                   Sioux Falls               1


                                    TOTAL 31
                                          ==

                                       78
<PAGE>   11
                         MARKET POSITION AND COMPETITION

1/2 Price Stores is uniquely positioned vis-a-vis traditional department stores,
discount chains and other off-price concepts, as it represents a synthesis of
many of the best elements of all three formats. The quality, timeliness and
composition of the merchandise of the Company differentiates it from many other
off-price retailers which frequently offer a high percentage of irregulars,
overstocks, and out of season products. In addition, a typical 1/2 Price Store
is two to four times larger than most off-price stores, averaging over 62,000
selling square feet, and therefore can offer a much broader assortment of
merchandise.

The Company differentiates itself from discount stores with respect to
merchandise assortment, presentation and brands. The Company's merchandise is
predominantly comprised of department and specialty store brands not carried by
discounters. Additionally, over 70% of the Company's sales are generated by
apparel and apparel-related merchandise, while the strength of most discount
stores is non-apparel.

Each store is organized with clearly identifiable "shops" similar to a
department store. A racetrack traffic aisle adjacent to the perimeter of the
store provides easy visual and physical access to all departments. An updated
store design and fixture system contributes to the contemporary department store
atmosphere.

Approximately 80% of the Company's merchandise mix is comprised of department
store and specialty store brands, with the remainder comprised primarily of
highly recognizable discount store brands.

Consumer acceptance of the 1/2 Price Stores is demonstrated in the 1996 Omaha
World-Herald Consumer Preference Survey which ranks the Company ahead of many
national retailers with respect to market share. The average household income
and education levels of a 1/2 Price Store customer are similar to that of a
traditional department store shopper.

The 1/2 Price Stores compete, to some degree, against all other retail formats:
traditional department stores such as Dillards, Younkers and Kohl's; national
chains such as J.C. Penney and Sears; off-price concepts such as Marshalls and
T. J. Maxx and discounters such as Target and Shopko. The following page
reflects 1/2 Price Stores' competitors by market.


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<PAGE>   12
STATE/CITY                 1/2 PRICE STORE COMPETITORS BY MARKET

    COLORADO

    Denver area            K-Mart, Target, Wal-Mart, Mervyn's, Sears, Ross,
                           Marshall's, T.J. Maxx, JC Penney, Foley's, Joslins,
                           Burlington Coat, Montgomery Ward, Stein Mart,
                           Dillards, Nordstrom, Super K-Mart and Super Wal-Mart

    IOWA

    Des Moines             Burlington Coat, JC Penney, K-Mart, Kohl's,
                           Montgomery Ward, Sears, Target, T.J. Maxx, Venture,
                           Von Maur, Wal-Mart and Younkers

    Sioux City             JC Penney, K-Mart, Sears, Shopko, Target, Wal-Mart,
                           Younkers and T.J. Maxx

    Waterloo               Herberger's, JC Penney, K-Mart, Sears, Target,
                           Venture, Von Maur, Wal-Mart and Younkers

    ILLINOIS

    Fairview               Dillards, Famous Barr, Grandpa's, JC Penney,
    Heights                Burlington Coat, K-Mart, Sears, Target, Venture,
                           Wal-Mart, T.J. Maxx, and Value City

    KANSAS

    Topeka                 Dillards, JC Penney, Jones Store, K-Mart, Montgomery
                           Ward, Sears, Target, T.J. Maxx, Venture, Wal-Mart,
                           Kohl's and Stein Mart

    Wichita                Burlington Coat, Dillards, JC Penney, K-Mart,
                           Montgomery Ward, Sears, Target, T.J. Maxx, Venture,
                           Wal-Mart and Kohl's

    MISSOURI

    Kansas City area       Burlington Coat, Dillards, Halls, JC Penney, Jones
                           Store, K-Mart, Target, Marshall's, Montgomery Ward,
                           Sears, Stein Mart, T.J. Maxx, Venture, Wal-Mart,
                           Kohl's, and Jacobsons

    Springfield            Dillards, Famous Barr, JC Penney, K-Mart, Montgomery
                           Ward, Sears, T.J. Maxx, Venture, Wal-Mart, Target and
                           Kohl's

    St. Louis area         Famous Barr, Dillards, JC Penney, Sears, K-Mart,
                           Venture, Target, Wal-Mart, Grandpa's, T.J. Maxx,
                           Marshalls and Burlington Coat, Value City and Outlet
                           Mall


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<PAGE>   13
    NEBRASKA

    Omaha/Council
    Bluffs                 Burlington Coat, Dillards, JC Penney, K-Mart,
                           Marshall's, Outlet Mall, Sears, Shopko, Target, T.J.
                           Maxx, Wal-Mart,, Younkers, Von Maur and Kohl's

    Lincoln                Dillards, JC Penney, K-Mart, Montgomery Ward, Sears,
                           Shopko, Target, T.J. Maxx, Wal-Mart, Younkers, Stein
                           Mart and Kohl's

    Fremont                Alco, JC Penney, Schweser's and Wal-Mart

    Hastings               Herberger's, K-Mart, Allen's, Shopko and Wal-Mart

    Grand Island           Dillards, JC Penney, K-Mart, Schweser's, Sears,
                           Shopko, Wal-Mart, Younkers and Target

    OKLAHOMA

    Tulsa                  Anthonys, Dillards, Foley's, K-Mart, JC Penney,
                           Marshalls, Mervyn's, Sears, Target, Venture,
                           Wal-Mart, Beall's, Burlington Coat, T.J. Maxx, Stein
                           Mart

    SOUTH DAKOTA

    Sioux Falls            Dayton's, JC Penney, K-Mart, Kohl's, Sears, Shopko,
                           Target, T.J. Maxx, Wal-Mart and Younkers

                                    EXPANSION

In 1995, the Company opened four new stores in Lakewood and Thornton (both in
the Denver area), Colorado; Bridgeton (in the St. Louis area), Missouri; and Des
Moines, Iowa. In March, 1996, the Company opened one new store in St. Charles
(in the St. Louis area), Missouri. The Company did not open any new stores in
fiscal 1997. A single- market store in Lawrence, Kansas, was closed at the end
of fiscal 1997. In 1998 the Company will open a fourth store in the St. Louis
market.

                                    SUPPLIERS

The total number of suppliers is approximately 1,500. The largest suppliers,
based on Fiscal Year 1997 purchases are Currants, Levis, Nike, Bugle Boy, Common
Scents, Fundamental Things, Sag Harbor, Rubbermaid, Gibson Greeting Cards, ACI,
Miss Erika and Sovereign Sales. As a group, these suppliers accounted for less
than 15% of total goods purchased by the 1/2 Price Stores in Fiscal Year 1997,
although none individually accounted for more than 1.8%. The Company considers
its supplier relations to be excellent.


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<PAGE>   14
                                  DISTRIBUTION

The Company's stores are served by a 267,000 square-foot Distribution Center
located in Omaha (excluding internal mezzanine space of 111,400 square feet). In
addition, the Company owns land adjacent to the Distribution Center which could
provide for an additional 76,000 square feet of high cubic storage. In January
1998, the Company subleased approximately 81,000 square feet of the distribution
center facility for a five year term. Management believes that the current
storage and processing capacity of the Center can support the Company's planned
store expansion for several years.

Virtually all of the 1/2 Price Stores' inventory purchases flow through the
Distribution Center, with only seasonal candy and greeting cards shipped
directly to the stores. Distribution Center personnel receive and ticket all
merchandise, perform warehousing and order picking functions, and make
deliveries to all stores. The Distribution Center has automated materials
handling systems and on-line information systems.

The Distribution Center processed approximately 28.5 million pieces in Fiscal
Year 1997. Merchandise is processed through the Distribution Center in an
average of 4.3 working days, and is subsequently delivered to the stores two to
three times per week, depending on the current activity and volume of the
stores. Deliveries to stores are made with a combination of the Company's fleet
of leased tractors and owned trailers as well as contracted carriers.

                          INFORMATION TECHNOLOGY (I.T.)

Recognizing the value of advanced systems as a competitive tool, Company
management has been a strong advocate of management information system
development. The Company has previously upgraded its data processing equipment
on a consistent basis in accordance with substantial information system
planning.

Having replaced former batch systems with the latest generation of efficient,
on-line, fully integrated database systems, the Company has available to it all
application programs found in most major retail companies. In a great number of
these applications, data can be accessed on-line at any of over 200 terminals
throughout the Company's stores, corporate offices and the Distribution Center.
I.T. provides the Company with sophisticated on-line merchandise and executive
information systems, as well as an array of merchandise, financial, inventory
and other reports. Management is determined to make critical information
available to anyone requiring it.


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<PAGE>   15
Since 1974, the Company has been 100% electronic point of sale (POS) installed
and uses IBM terminals. The Company currently operates on an IBM 9672-R12 CMOS
mainframe. Additionally, local area networks (LANs) are set up to off-load
non-critical processing from the mainframe. Personal desktop and notebook
computers support users of information with graphical user interfaces and
various "client-server" protocols. Also, a wide area network (WAN) capability is
implemented using frame relay protocols.

The Company is addressing the information technology issues surrounding the year
2000. At present, the Company has reviewed all programs for potential year 2000
issues and has compiled an inventory and assessment of those programs affected.
Approximately 15% of the Company's programs require some level of modification
to become compliant with the year 2000. During fiscal 1998, the Company will
complete the process of changing or replacing affected programs and fully
testing the revised versions. This process will include replacing the Company's
mainframe financial software with year 2000 compliant client server based
financial system. Management does not expect the costs of complying with year
2000 issues to be material (these costs are being expensed as incurred) to the
Company nor does it expect the year 2000 issue to adversely impact the Company's
operations. However, failure to remediate the year 2000 issues could have a
significant impact on the Company's operations.

                                    MARKETING

The Company's marketing strategy employs a comprehensive and integrated
communications program focused on broadening its customer base in conjunction
with maximizing the value of existing customers.

The foundation of the communications strategy is the Sunday newspaper preprint.
Sunday preprints are the consumer's primary reference library for choosing where
to shop, and is the best medium for generating overall store traffic and sales.
Preprints also serve as a catalog to showcase the depth and breadth of the
Company's merchandise mix. Television is the primary medium to maximize consumer
awareness and gain new customers due to its wide reach, and is designed to
clearly position the stores in the marketplace. A new television campaign was
initiated in 1997 to develop a clearly defined, unique position for the 1/2
Price Stores as a viable alternative to department and specialty stores.

An outside agency is utilized for executing the broadcast media activity. The
Company's advertising department is responsible for all other creative and
marketing services, including the design, development and production of all
print- related activity, which includes newspaper ads, newspaper inserts
(preprints), direct mail and in-store signing. The department's in-house
capabilities include creative concept and design, copywriting, photography,
MacIntosh desktop publishing, marketing research and print media buying.


                                       83
<PAGE>   16
                            MANAGEMENT AND EMPLOYEES

The Company has no unions or collective bargaining agreements and has
experienced no work stoppages at any time in its history. The Company currently
employs approximately 900 full-time and 1,500 part-time associates. The Company
offers to its employees a wide range of benefits which are competitive with
those offered by other major retailers. For all management and full-time hourly
personnel, the Company funds a major portion of the insurance program, which
includes health insurance and major medical, dental assistance, and life
insurance, as well as short and long-term disability. Various performance
incentives and a 401(k) Plan are also provided to all employees.


                                       84
<PAGE>   17
SELECTED FINANCIAL DATA

The following table contains certain selected financial data for the Company for
each of the last five Fiscal Years through January 31, 1998, and should be read
in conjunction with the consolidated financial statements, including the related
notes thereto, included elsewhere in this document and with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

<TABLE>
<CAPTION>
                                                                           FISCAL YEARS ENDED
                                              ---------------------------------------------------------------------------
                                              JANUARY 31,      FEBRUARY 1,     FEBRUARY 3,     JANUARY 28,     JANUARY 29,
                                                 1998             1997            1996           1995            1994
                                              ----------       ----------      ----------      ----------      ---------
                                                     (in thousands, except per share and selected operating data)
Income Statement Data:
<S>                                            <C>             <C>             <C>             <C>             <C>
Net sales                                      $ 193,284       $ 197,024       $ 206,520       $ 191,148       $167,638

Gross margin                                        35.4%           34.5%           32.7%           35.6%          34.7%

Income (loss) from operations                      1,752          (1,944)         (2,001)          5,351          4,109

Income (loss)  before extra-
 ordinary item                                    (1,024)         (5,552)         (5,775)          1,419            667

Net income (loss) (1)                             (1,024)      $  (3,429)      $     775       $   1,419       $ 15,867

Basic and diluted weighted
average shares outstanding                        26,895          27,300          27,720          27,000         26,400

Basic and diluted income (loss) per share:

 Income (loss)  before
  extraordinary item                           $    (.04)      $    (.20)      $    (.19)      $     .05       $    .02

 Extraordinary item (1)                             --              (.08)            .22            --              .51
                                               ---------       ---------       ---------       ---------       --------
 Net income (loss) per share                   $    (.04)      $    (.12)      $     .03       $     .05       $    .53
                                               =========       =========       =========       =========       ========

Dividends paid on  common stock                     --              --              --              --             --

Selected Operating Data:

Stores open at  end of year                           31              32              31              27             23
Change in comparable
 store sales                                           0%            (10)%            (6)%            (5)%            2%

Balance Sheet Data: (end of period)

Total assets                                      37,260          42,849          52,009          57,861         57,846
Long term debt (less current portion)               --              --             4,592           7,763         17,086
Capital lease
  obligations (less current portion)               7,986           9,259          10,594          11,824         13,022
</TABLE>


 (1) The extraordinary item included in net income(loss) is an adjustment to the
estimated liability to prepetition creditors made subsequent to approval of the
Plan of Reorganization. These extraordinary items did not involve the receipt or
payment of cash.


                                       85
<PAGE>   18
                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                           OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

                              RESULTS OF OPERATIONS

The following table sets forth for the years indicated summary information from
the Company's Statements of Operations expressed as a percentage of net sales
and the percentage change in the dollar amount of such items compared to the
prior period.

<TABLE>
<CAPTION>
                                                                              PERCENTAGE
                                                                           INCREASE (DECREASE)
                                           PERCENTAGE OF SALES            ---------------------
                                               FISCAL YEARS                 FROM         FROM
                                    --------------------------------       1996 TO      1995 TO
                                     1997         1996         1995         1997         1996
                                    ------       ------       ------       -------      -------
<S>                                 <C>          <C>          <C>          <C>          <C>
Net Sales                            100.0%       100.0%       100.0%        (1.9)%       (4.6)%
Cost of Sales                         64.6         65.5         67.3         (3.2)        (7.1)
                                    ------       ------       ------       ------       ------
Gross Profit                          35.4         34.5         32.7          0.6          0.1

Operating and Administrative
  Expenses                            35.0         35.5         33.7         (3.4)         0.5
Unusual Items                         (0.3)        --           --          100.0         --
License Fees                          (0.2)        --           --          100.0         --
                                    ------       ------       ------       ------       ------
Income (loss) from Operations          0.9         (1.0)        (1.0)       190.1          2.8

Interest Expense                       1.4          1.8          1.8        (23.1)        (0.4)
                                    ------       ------       ------       ------       ------

Loss  Before Extraordinary Item       (0.5)        (2.8)        (2.8)        86.1         --
Extraordinary  Item-Gain on
 Debt Forgiveness                     --            1.1          3.2       (100.0)       (67.6)
                                    ------       ------       ------       ------       ------

Net Income (loss)                     (0.5)%       (1.7)%        0.4%        70.1%      (542.3)%
                                    ======       ======       ======       ======       ======
</TABLE>



                            FISCAL YEAR 1997 COMPARED
                               TO FISCAL YEAR 1996

Net Sales for fiscal 1997 decreased approximately $3,740,000, or 2%, compared to
net sales for fiscal 1996. The decrease was primarily the result of the Company
leasing its shoe division during the fourth quarter of 1997. On a comparable
store basis, sales were flat compared to last year. Comparable store sales
decreased by 8% in the first half of fiscal 1997 and increased by 6% during the
second half of fiscal 1997.


                                       86
<PAGE>   19
Approximately half of the decrease in sales for the first six months of the year
was the result of the Company's strategic shift in its marketing and
merchandising strategy of emphasizing the inherent value of its desirable brand
name merchandise at everyday prices well below department and specialty store
regular prices. During comparable periods of fiscal 1996, the Company was
driving sales through a promotional and advertising plan that offered discounts
off everyday prices. That practice was changed during July, 1996, and thus had
no effect on the second half of fiscal 1997. The remainder of the decrease
during the first half was due primarily to weak sales in the shoe and home
divisions.

The increase in net sales during the second half of fiscal 1997 was the result
of continued strong sales increases in the women's, juniors, intimate apparel
and accessories divisions, coupled with improvements in sales in the men's and
home divisions. Second half sales were positively impacted by an increased flow
of inventory receipts.

Gross Profit increased by approximately $438,000 or 1% for fiscal 1997 compared
to the fiscal 1996. Gross margin percentage increased to 35.4% in fiscal 1997
compared to 34.5% for fiscal 1996. The increases in gross margin percentage was
the result of the Company's strategy described above which reduced the amount of
promotional discounting in prices.

Operating and Administrative Expenses decreased approximately $2,354,000, or 3%,
during fiscal 1997 compared to fiscal 1996. As a percentage of net sales,
operating and administrative expenses were 35.0% in 1997 versus 35.5% in 1996.
The decrease in expenses was the result of lower payroll and other costs at the
corporate office and distribution center, severance expense of $1.4 million
related to former executives during 1996 and lower depreciation expense.

Unusual Items provided a net benefit of $490,000 to the fiscal 1997 results.
Unusual items consist of a $723,000 gain on the sale of a store lease, a $15,000
gain on the bulk sale of shoe inventory in conjunction with leasing the shoe
department, and a $248,000 charge for severance and workforce reduction in 1997.

License Fees contributed $414,000 in fiscal 1997. These represent the Company's
commission on shoe sales in its stores. The shoe department was leased effective
in November 1997. Shoe sales after leasing the department are no longer included
in sales or comparable store sales.

Interest Expense decreased by approximately $832,000 for fiscal 1997 compared to
fiscal 1996. The decrease in interest expense was primarily the result of
decreases in borrowings on the Company's revolving line of credit.


                                       87
<PAGE>   20
No income tax expense was recorded in Fiscal Years 1997 and 1996 due to the fact
that a taxable loss was incurred, which increased the Company's net operating
loss carryforward.

Net Loss Before Extraordinary Items for fiscal 1997 was $1,024,000 compared to a
loss of $5,553,000 for fiscal 1996, an improvement of $4,529,000.


                            FISCAL YEAR 1996 COMPARED
                               TO FISCAL YEAR 1995

Net sales in 1996 of $197.0 million decreased $9.5 million, or 4.6%, versus net
sales for 1995 of $206.5 million. However, excluding 1995's 53rd week, the sales
decrease would have been 3.8%. Comparable store sales decreased $19.2 million,
or 10.4% to 1995. Sales were negatively impacted by a shift in the Company's
advertising strategy from driving business by offering discounts off every day
prices to marketing desirable name brands at the Company's every day prices,
which are substantially below department and specialty store regular prices.

Notwithstanding the decline in comparable store sales on an annual basis during
1996, the rate of this decline moderated from the first half to the second half
of the year. The Company attributed this improvement to a better selection of
recognizable department and specialty store name brands, as well as a smoother
flow of merchandise receipts.

Gross profit - The 1996 gross margin percentage of 34.5% was up versus 32.7% in
1995. This improvement translated into a slight increase of $418,000, or 0.6%,
in gross margin dollars to $68.0 million despite a 4.6% decrease in sales. The
entire gross margin percentage improvement over the previous year occurred in
the second half, which increased 3.0 percentage points to 34.5% compared to
31.5% in the second half of 1995.

The gross margin percentage improvement was primarily attributable to a reduced
level of markdowns compared to the previous year and a LIFO credit of $753,000
in 1996 versus a $371,000 LIFO provision in fiscal 1995. Markdowns were lower
due to a combination of not discounting off regular prices as a vehicle to drive
business, as discussed previously, and a more controlled approach to inventory
management. In conjunction with improved inventory controls, fourth quarter
average inventories decreased by 13% compared to the previous year. The gross
margin improvement was also due to a higher initial markup in the second half of
0.7 percentage points. The LIFO credit in 1996 was the result of reduced
inventory levels.


                                       88
<PAGE>   21
These positive trends in gross margin profitability and comparable store sales
in the second half were attributable in part to the implementation of a set of
strategic initiatives that addressed merchandising, marketing and stores at the
end of the first half of the year. The core initiative was the intensification
of recognizable department and specialty store brands within the Company's
merchandise mix. The marketing initiatives focused on generating sales by
communicating the Company's selling proposition of value as defined by desirable
name brands at half of department store prices, rather than by offering
discounts off everyday low prices. Store initiatives included the implementation
of standards to improve the merchandise presentation as well as the visual
appeal and organization of the stores.

Operating and administrative expenses in 1996 were $70.0 million and $69.6
million in 1995, an increase of 0.5%. As a percentage of net sales, operating
and administrative expenses were 35.5% and 33.7% in 1996 and 1995 respectively.
The increase in operating and administrative expenses as a percentage of net
sales was primarily the net result of an increase in advertising expense, offset
by payroll reductions. However, the Company recorded severance expense of
approximately $1.4 million during Fiscal Year 1996 in connection with the
resignations of two of the Company's executive officers.

Income (loss) from operations - During Fiscal Year 1996, the Company incurred a
net loss from operations of approximately $1.9 million versus an operating loss
of $2.0 million in 1995. Excluding the non-recurring severance expenses
referenced above, the net loss from operations incurred in 1996 would have been
$0.5 million, an improvement of approximately 72.8% compared to 1995. The
Company's net income from operations during the second half of $2.7 million
represents a major improvement compared to $347,000 for the same period in the
previous year. Again, the Company attributes these favorable second half
operating results in part to the strategic initiatives described previously.

Interest expense decreased from $3.9 million in Fiscal Year 1995 to $3.6 million
in Fiscal Year 1996, a decrease of $0.3 million. The decrease consists of an
increase of $0.5 million in interest and costs resulting from increased
borrowings on the Company's credit line, a decrease of $0.7 million in interest
on the pre-petition debt to the Company's unsecured creditors due to principal
payments and an decrease of $0.1 million of interest on capital leases.

No income tax expense was recorded in Fiscal Years 1996 and 1995 due to the fact
that a taxable loss was incurred, which increased the Company's net operating
loss carryforward.

In Fiscal Years 1996 and 1995, the Company recorded extraordinary gains of $2.1
million and $6.5 million, respectively, as a result of revising the estimate of
amounts to be paid to the Company's unsecured creditors


                                       89
<PAGE>   22
                         LIQUIDITY AND CAPITAL RESOURCES

The Company's liquidity, as defined by line of credit borrowings and excess
availability on the line, has strengthened considerably, when compared to fiscal
1996:

         -        The Company generated positive cash flow from operations of
                  $8.7 in fiscal 1997 compared to $3.2 million in fiscal 1996.

         -        The Company's average excess borrowing capacity for fiscal
                  1997 was $9.1 million an increase of 34% compared to fiscal
                  1996.

         -        The Company's average borrowings for fiscal 1997 were $11.7
                  million, a decrease of 17% versus fiscal 1996.

These results are primarily attributable to the following:

     1.   During fiscal 1997, average inventories were 20% less than in fiscal
          1996. This improvement was achieved by better correlating receipt flow
          to sales, taking markdowns on a timely basis and using system and
          managerial control to maintain desired inventory levels. At year end,
          merchandise inventories were lower than last year by $3,953,000 or
          16%. Inventory turnover and gross margin return on inventory (GMROI)
          improved significantly during fiscal 1997. Inventory turned 3.4 times
          in fiscal 1997 compared to 2.8 times in fiscal 1996, a 21%
          improvement. GMROI increased to 2.1 times in fiscal 1997 from 1.7
          times in fiscal 1996, an increase of 24%.

     2.   The Company negotiated amendments to its financing agreement with its
          primary lender, Congress Financial Corporation (Central) during 1996
          and early 1997, which provided for additional borrowings and cash
          availability. The current loan agreement extends to October 1999, and
          provides a maximum line of $27.5 million. The interest rate is prime
          plus 1%. The agreement with Congress does not have a clean down
          provision nor any covenants specifying the Company's earnings, working
          capital, net worth, or cash flow levels.

During Fiscal Year 1997, the weighted average short-term borrowings were $11.7
million against the Company's lines of credit and peak short-term borrowings
were $18.9 million. These borrowings compare with weighted average short-term
borrowings against the Company's lines of credit of $14.1 million and $8.9
million, respectively, during fiscal years 1996 and 1995, and peak short-term
borrowings of $20.5 million and $19.6 million, respectively, during fiscal years
1996 and 1995. At the end of Fiscal Year 1997, there were short-term borrowings
of $2.9 million, and at the end of Fiscal Years 1996 and 1995 there were
short-term borrowings $7.3 million and $7.7, respectively. At the end of Fiscal
Year 1997, the Company had unused availability on its line of $11.9 million, and
at the end of Fiscal Years 1996 there was unused availability under the line of
$8.4 million.

In January, 1997, the Creditors' Committee agreed to defer the $1.9 million
payment due then (the 1997 Payment) under the Plan for one year. In January,
1998, the Company escrowed the 1997


                                       90
<PAGE>   23
Payment in full and disbursed that amount to its prepetition creditors on March
18, 1998. The Creditors' Committee agreed to defer $1.8 million of the 1998
Payment as well. The Company had the cash availability under its line of credit
to make the entire payment in January 1998; however, the Company sought the
partial deferral in an effort to maximize its financial flexibility during
fiscal 1998. The remaining $1.8 million obligation must be paid in increments of
$200,000 at the end of April, July and October of 1998 with the remaining $1.2
million scheduled for payment on January 31, 1999. The remaining obligation is
collateralized by an interest in a portion of the Company's distribution center,
and will bear interest at a rate of 12%.

The Company's primary ongoing cash requirements are for operating expenses,
inventory and remaining payments to the Company's creditors (pursuant to the
Plan). The Company's primary sources of funds for its business activities are
cash from operations and borrowings under its revolving credit facility with
Congress Financial Corporation (Central). In addition, short term trade credit
(normally for 30-day periods) represents a significant source of financing for
merchandise inventories. During fiscal 1997 approximately 28% of the Company's
purchases, were prepaid because the vendor or its factor would not extend normal
credit terms to the Company. The percentage of prepayments decreased in the
second half of fiscal 1997 as the Company continued to seek improved credit
arrangements with vendors and factors. Management believes the percentage of
prepayments will continue to decrease over the next year.

During fiscal 1997, 1996 and 1995 capital expenditures were approximately $1.5
million, $.6 million and $2.8 million, respectively . The Company anticipates
capital expenditures will be approximately $1.5 million in fiscal 1998.

The Company recognizes that it has a high level of indebtedness, primarily in
the form of line of credit borrowings, creditor debt and capital lease
obligations. Its projections take this fact into account, and the Company
believes that future cash flows will be sufficient to cover this level of
indebtedness. Management believes that with its present operating plan and
continued focus on liquidity, cash flow from operations and the existing credit
facility will be sufficient to fund capital expenditures, working capital
requirements (including prepayments to vendors not extending terms), creditor
and other obligations.


                                       91
<PAGE>   24
SEASONALITY AND INFLATION

The company's business is seasonal, with the back-to-school season (primarily
August) historically contributing approximately 10% of annual sales and the
Christmas season (November and December) accounting for approximately 28% of
annual sales. Sales and income are also affected by the timing of new store
openings. Although the Company's operations are influenced by general economic
conditions and inflationary pressures, the Company does not believe that
inflation has had a material effect on operations during the past 3 to 5 years.

RISKS

Throughout this Annual Report to Shareholders, particularly the Letter to
Shareholders, the Progress Report and Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company and persons acting on
its behalf have made certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). These
forward-looking statements are identified as including terms such as "may,"
"will," "should," "anticipates," "expects," "plans," "intends" or similar
language. Such statements are made in good faith by the Company and such persons
pursuant to the safe-harbor provisions of the 1995 Act. In connection with these
safe-harbor provisions, the Company has identified herein important factors
which could cause actual results to differ materially from those contained in
any forward-looking statement made by or on behalf of the Company. The Company
further cautions that the factors identified herein are not exhaustive or
exclusive. The Company does not undertake to update any forward-looking
statement which may be made from time to time by or on behalf of the Company.

With respect to those forward-looking statements included in the annual report,
some of the factors which may impact the Company's future results and financial
condition include the following: (i) the continued availability of trade credit
from the Company's suppliers; (ii) the ability to achieve expected cash flow
from operations; and (iii) the Company's high level of indebtedness.


                                       92
<PAGE>   25
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
 of Richman Gordman 1/2 Price Stores, Inc.

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Richman Gordman
1/2 Price Stores, Inc. and subsidiary as of January 31, 1998 and February 1,
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended January
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Richman Gordman 1/2 Price Stores,
Inc. and subsidiary as of January 31, 1998 and February 1, 1997 and the results
of their operations and their cash flows for each of the three years in the
period ended January 31, 1998 in conformity with generally accepted accounting
principles.

As discussed in Note A to the consolidated financial statements, on October 20,
1993 the Company emerged from Chapter 11 bankruptcy pursuant to a confirmed Plan
of Reorganization. Under the Plan of Reorganization, the Company is required to
comply with certain terms and conditions as more fully described in Note A.



DELOITTE & TOUCHE LLP

March 27, 1998
Omaha, Nebraska


                                       93
<PAGE>   26
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                             YEARS ENDED
                                                   -----------------------------------------------------------
                                                     JANUARY 31,             FEBRUARY 1,           FEBRUARY 3,
                                                        1998                    1997                  1996
<S>                                                <C>                    <C>                    <C>          
NET SALES                                          $ 193,284,204          $ 197,023,821          $ 206,520,255

COST OF SALES                                       (124,823,501)          (129,000,923)          (138,915,561)
                                                   -------------          -------------          -------------
           Gross Profit                               68,460,703             68,022,898             67,604,694

OPERATING AND ADMINISTRATIVE EXPENSES                (67,613,052)           (69,967,273)           (69,605,046)

UNUSUAL ITEMS (Note I)                                   490,349                   --                     --

LICENSE FEES                                             414,376                   --                     --
                                                   -------------          -------------          -------------
           Income (loss) from operations               1,752,376             (1,944,375)            (2,000,352)

INTEREST EXPENSE                                      (2,775,885)            (3,608,220)            (3,774,423)
                                                   -------------          -------------          -------------
LOSS BEFORE PROVISION FOR INCOME
  TAXES AND EXTRAORDINARY ITEM                        (1,023,509)            (5,552,595)            (5,774,775)

PROVISION FOR INCOME TAXES (Note H)                         --                     --                     --
                                                   -------------          -------------          -------------
LOSS BEFORE EXTRAORDINARY ITEM                        (1,023,509)            (5,552,595)            (5,774,775)

EXTRAORDINARY ITEM - GAIN ON DEBT
  FORGIVENESS (Note A)                                      --                2,123,096              6,550,230
                                                   -------------          -------------          -------------
NET INCOME (LOSS)                                  $  (1,023,509)         $  (3,429,499)         $     775,455
                                                   -------------          -------------          -------------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
  Income (loss) before extraordinary item          $       (0.04)         $       (0.20)         $       (0.21)
  Extraordinary item                                        --                     0.08                   0.24
                                                   -------------          -------------          -------------
NET INCOME (LOSS) PER SHARE                        $       (0.04)         $       (0.12)         $        0.03
                                                   -------------          -------------          -------------
</TABLE>


See notes to consolidated financial statements.


                                       94
<PAGE>   27
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                               JANUARY 31,            FEBRUARY 1,
ASSETS                                                                                            1998                   1997
<S>                                                                                           <C>                    <C>         
CURRENT ASSETS:
  Cash                                                                                        $    453,830           $    388,267
  Accounts receivable, less allowance for doubtful accounts of $708,909 and $587,150             1,172,613                782,312
  Merchandise inventories (Note C)                                                              21,361,381             25,314,919
  Prepaid expenses and other current assets                                                      1,500,062              1,883,490
                                                                                              ------------           ------------
           Total current assets                                                                 24,487,886             28,368,988

PROPERTY, BUILDINGS AND EQUIPMENT, net (Notes D and F)                                          12,698,277             14,267,207

OTHER ASSETS                                                                                        74,124                212,904
                                                                                              ------------           ------------
                                                                                              $ 37,260,287           $ 42,849,099
                                                                                              ============           ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Line of credit borrowings (Note F)                                                          $  2,946,658           $  7,281,732
  Accounts payable                                                                               9,478,564              7,038,664
  Accrued expenses (Note E)                                                                      8,163,890              6,998,440
  Notes payable (Note F)                                                                         2,100,201              4,537,056
  Current maturities of capital lease obligations (Note G)                                       1,273,386              1,335,379
                                                                                              ------------           ------------
           Total current liabilities                                                            23,962,699             27,191,271

CAPITAL LEASE OBLIGATIONS, net of current portion (Note G)                                       7,985,563              9,258,949

OTHER LONG-TERM LIABILITIES                                                                        450,011                513,356

COMMITMENTS AND CONTINGENCIES (Notes G, H and J)

STOCKHOLDERS' EQUITY:
  Common stock (Note K):
    Series A common stock, $.01 par value; 19,800,000 shares authorized; 19,260,000
      shares outstanding                                                                           192,600                192,600
    Series B common stock, $.01 par value; 10,200,000 shares
      authorized, issued and outstanding                                                           102,000                102,000
  Paid-in capital                                                                                4,562,886              4,562,886
  Retained earnings                                                                                230,248              1,253,757
  Less: Treasury stock, at cost, 2,565,000 shares                                                 (225,720)              (225,720)
                                                                                              ------------           ------------
           Total stockholders' equity                                                            4,862,014              5,885,523
                                                                                              ------------           ------------
                                                                                              $ 37,260,287           $ 42,849,099
                                                                                              ============           ============
</TABLE>

See notes to consolidated financial statements 


                                       95
<PAGE>   28
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                          COMMON STOCK                       
                                      --------------------    ADDITIONAL   
                                       SERIES      SERIES      PAID-IN       RETAINED        TREASURY
                                         A           B         CAPITAL       EARNINGS          STOCK         TOTAL


<S>                                   <C>         <C>         <C>           <C>             <C>           <C>        
BALANCE, January 28, 1995             $169,200    $102,000    $4,238,238    $ 3,907,801     $    --       $ 8,417,239

  Issuance of 720,000 new Series
    A shares to executive officers
    under the Reorganization Plan        7,200        --         198,288           --            --           205,488

  Net income                              --          --            --          775,455          --           775,455
                                      --------    --------    ----------    -----------     ---------     -----------
BALANCE, February 3, 1996              176,400     102,000     4,436,526      4,683,256          --         9,398,182

  Purchase of Treasury Stock              --          --            --             --        (225,720)       (225,720)

  Issuance of 1,620,000 new Series
    A shares to executive officers
    under the Reorganization Plan       16,200        --         126,360           --            --           142,560

  Net loss                                --          --            --       (3,429,499)         --        (3,429,499)
                                      --------    --------    ----------    -----------     ---------     -----------
BALANCE, February 1, 1997              192,600     102,000     4,562,886      1,253,757      (225,720)      5,885,523

  Net loss                                --          --            --       (1,023,509)         --        (1,023,509)
                                      --------    --------    ----------    -----------     ---------     -----------
BALANCE, January 31, 1998             $192,600    $102,000    $4,562,886    $   230,248     $(225,720)    $ 4,862,014
                                      --------    --------    ----------    -----------     ---------     -----------
</TABLE>

See notes to consolidated financial statements.


                                       96
<PAGE>   29
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                YEARS ENDED
                                                              -------------------------------------------------
                                                              JANUARY 31,        FEBRUARY 1,        FEBRUARY 3,
                                                                 1998                1997               1996
<S>                                                           <C>                <C>                <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                           $(1,023,509)       $(3,429,499)       $   775,455
  Adjustments to reconcile net income (loss) to net
    cash flows from operating activities:
      Extraordinary item-gain on debt forgiveness                    --           (2,123,096)        (6,550,230)
      Depreciation and amortization                             2,120,935          3,073,376          3,050,338
      LIFO (credit) provision                                  (1,563,897)          (753,229)           370,602
      Loss (gain) on sale of property                              18,542           (166,029)              --
    Net changes in assets and liabilities:
      Accounts receivable                                        (390,301)           146,480            349,919
      Merchandise inventories                                   5,517,435          6,224,669            717,923
      Prepaid expenses and other current assets                   383,428            261,747         (1,353,341)
      Other assets                                                 88,780            606,974           (584,623)
      Accounts payable                                          2,439,900           (914,360)        (3,222,027)
      Accrued expenses and other liabilities                    1,102,105            223,864            (77,146)
                                                              -----------        -----------        -----------
           Net cash flows from operating activities             8,693,418          3,150,897         (6,523,130)
                                                              -----------        -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (1,456,046)          (592,326)        (2,820,309)
  Proceeds from sale of land and equipment                        935,499            250,261               --
  Other                                                              --                8,181              4,572
                                                              -----------        -----------        -----------
           Net cash flows from investing activities              (520,547)          (333,884)        (2,815,737)
                                                              -----------        -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (payments on) proceeds from line of
    credit borrowings                                          (4,335,074)          (409,191)         7,690,923
  Payments on obligations under capitalized leases             (1,335,379)        (1,229,819)        (1,206,320)
  Payment to prepetition secured creditors                       (426,555)          (778,426)          (804,000)
  Principal payments to prepetition unsecured creditors        (1,793,728)          (273,602)        (2,461,200)
  Payments on other debt obligations                             (216,572)              --                 --
  Purchase of treasury stock                                         --             (225,720)              --
                                                              -----------        -----------        -----------
           Net cash flows from financing activities            (8,107,308)        (2,916,758)         3,219,403
                                                              -----------        -----------        -----------
INCREASE (DECREASE) IN CASH                                        65,563            (99,745)        (6,119,464)

CASH, Beginning of year                                           388,267            488,012          6,607,476
                                                              -----------        -----------        -----------
CASH, End of year                                             $   453,830        $   388,267        $   488,012
                                                              -----------        -----------        -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash payments for interest                                  $ 2,823,527        $ 3,278,245        $ 3,764,040
                                                              -----------        -----------        -----------
</TABLE>


See notes to consolidated financial statements.


                                       97
<PAGE>   30
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, FEBRUARY 1, 1997 AND FEBRUARY 3, 1996

A.    REORGANIZATION, BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL
      STATEMENTS AND RECENT DEVELOPMENTS

      On June 17, 1992, Richman Gordman Stores, Inc. and its two wholly owned
      subsidiaries, Richman Gordman Department Stores, Inc. and 1/2 Price
      Stores, Inc. (collectively the "Company") filed a voluntary petition for
      reorganization under Chapter 11 of Title 11 of the United States
      Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for
      the District of Nebraska. Under Chapter 11, certain claims against the
      Company were stayed while the Company continued business operations as a
      debtor-in-possession. These claims, which totaled $72,399,717 at January
      30, 1993, were reflected as "Liabilities Subject to Compromise" as
      required under Statement of Position 90-7, Financial Reporting by Entities
      in Reorganization under the Bankruptcy Code.

      On October 20, 1993 (the "Effective Date"), the Company emerged from
      Chapter 11 pursuant to a confirmed Plan of Reorganization (the "Plan"). As
      part of the Plan, Richman Gordman Stores, Inc. and its two wholly-owned
      subsidiaries, Richman Gordman Department Stores, Inc. and 1/2 Price
      Stores, Inc. merged and now operate as Richman Gordman 1/2 Price Stores,
      Inc. (a Delaware corporation). P.H. of Florida, Inc. was retained as a
      subsidiary of the Company. The Plan provided for, among other things, the
      cancellation of all prepetition ownership interests of the Company; the
      issuance of 54% of the new authorized common stock of the Company to
      certain prepetition owners; the issuance of 34% of the new authorized
      common stock of the Company to the unsecured creditors (estimated fair
      value at the time of issuance was $3,308,000); cash payments over a period
      of five years to the prepetition unsecured creditors (see Note F); cash
      payments of priority claims; and the assumption or rejection of unexpired
      leases. The Plan also required the Company to maintain minimum levels of
      annual cumulative earnings before interest, taxes, depreciation and
      amortization, but this requirement was waived in April of 1996 for the
      remainder of the Plan term. The present value of amounts expected to be
      paid to the unsecured creditors were accrued at January 29, 1994.

      During fiscal 1995 and 1996, the Company lowered its estimate of the
      amounts expected to be repaid to the unsecured creditors under the Plan
      based on revised estimates of future earnings, cash flow and net operating
      loss tax benefits. As a result, extraordinary gains of $6,550,230 and
      $2,123,096 were recorded in fiscal 1995 and 1996, respectively, to reflect
      the change in this estimated liability to be paid to the unsecured
      creditors. During fiscal 1996 and 1997, the Company also obtained waivers
      to extend the due dates of portions of the cash payments required to be
      paid to the unsecured creditors.

      As a result of poor operating performance in fiscal 1995 and the first
      half of fiscal 1996, the Company had a change in senior management in June
      1996 and then initiated changes in its strategic and tactical approach to
      operations. The changes have impacted most aspects of the Company, while
      the key changes included re-establishing the integrity of the pricing,
      increasing the offerings of desirable brand name merchandise, upgrading
      store presentation and environment and changing the marketing approach.
      Subsequent to change in senior management, the Company has generated
      positive operating cash flow and has maintained excess borrowing capacity
      on its line of credit. Management's financial plan for fiscal 1998
      indicates the Company will have adequate financing for inventory purchases
      and operations for the entire year given its existing levels of financing
      from its line of credit and vendors.


                                       98
<PAGE>   31
B.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      DESCRIPTION OF BUSINESS - Richman Gordman 1/2 Stores, Inc. operates 31 1/2
      Price Stores in eight states. The 1/2 Price store concept is to offer
      instantly recognizable brand name products at prices up to one-half off
      department and specialty store regular prices through a visually appealing
      and well organized store environment that presents strong clarity of
      offer.

      CONSOLIDATION - The consolidated financial statements include the accounts
      of Richman Gordman 1/2 Price Stores, Inc. and its wholly-owned subsidiary,
      P.H. of Florida. All material intercompany accounts and transactions have
      been eliminated in consolidation.

      FISCAL YEAR - Fiscal years are designated in the financial statements and
      notes by the calendar year in which the fiscal year commences.
      Accordingly, results for fiscal years 1997 and 1996 represent the
      fifty-two week periods ended January 31, 1998 and February 1, 1997,
      respectively, and fiscal year 1995 represents the fifty-three week period
      ended February 3, 1996.

      REVENUE RECOGNITION - The Company operates on a cash and carry basis.
      Revenue is recognized at the time of sale and merchandise returns are
      estimated and accrued at the end of each period.

      MERCHANDISE INVENTORIES - Merchandise inventories are stated at the lower
      of cost or market, using the last-in, first-out (LIFO) method.

      PROPERTY, BUILDINGS AND EQUIPMENT - Property, buildings and equipment are
      recorded at cost and are depreciated for financial reporting purposes
      using the straight-line method over their estimated useful lives.
      Leasehold improvements are depreciated over their related lease terms or
      useful life, generally two to 40 years while furniture, fixtures and
      equipment are depreciated over a period of two to 10 years. Buildings and
      equipment recorded under capital leases are amortized using the
      straight-line method over the shorter of the related lease terms or useful
      life of the assets, generally two to 32 years.

      During fiscal 1997, the Company evaluated the useful lives of certain of
      its equipment, fixtures and leaseholds and adjusted the useful lives where
      deemed appropriate. These changes in estimates reduced depreciation
      expense by approximately $644,000 compared to what depreciation expense
      would have been under the previous useful lives.

      DEFERRED FINANCING CHARGES - Deferred financing charges are amortized
      using the straight-line method over the term of the related financing
      agreement.

      PRE-OPENING COSTS - Costs associated with the opening of new stores are
      expensed during the fiscal year the stores are opened.

      STOCK-BASED COMPENSATION - The Company accounts for its stock-based
      compensation under the provisions of Accounting Principles Board Opinion
      No. 25, Accounting for Stock Issued to Employees (APB 25).

      ADVERTISING COSTS - Advertising costs are expensed as incurred and
      amounted to $8,539,000, $9,065,300 and $8,104,000 for fiscal years 1997,
      1996 and 1995, respectively.


                                       99
<PAGE>   32
      FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK - Financial
      instruments which potentially subject the Company to concentrations of
      credit risk are primarily cash and accounts receivable. The Company places
      cash in highly rated financial institutions and in very short term
      investments. Concentration of credit risk with respect to accounts
      receivable are limited due to the large number of customer balances and
      the ability to affect receivables from vendors against payables to the
      same vendor.

      EARNINGS PER SHARE - The Financial Accounting Standards Board (FASB)
      issued Statement No. 128, Earnings Per Share, which is effective for 1997
      financial statements. FASB No. 128 requires dual presentation of Basic and
      Diluted earnings per share for all periods for which an income statement
      is presented. Basic earnings per share are based on the weighted average
      outstanding common shares during the period. Diluted earnings per share
      are based on the weighted average outstanding common shares and the
      effects of all dilutive potential common shares, such as stock options.
      All prior periods earnings per share have been restated in accordance with
      FASB No. 128.

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

      RECLASSIFICATIONS - Certain reclassifications have been made to prior
      years' financial statements to conform to the current year presentation.

      ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB issued Statement No.
      131, Disclosure About Segments of an Enterprise and Related Information,
      which will be effective in 1998. FASB No. 131 establishes standards for
      the way public enterprises report information about operating segments.
      The Company currently complies with most provisions of this statement and
      any incremental disclosure required by that statement is expected to be
      minimal.

C.    INVENTORY

      The Company accounts for its inventories using the LIFO method. Total
      inventories (and working capital and stockholders' equity) would have been
      higher by $6,298,851 and $7,862,748 at January 31, 1998 and February 1,
      1997, respectively, had the Company used the FIFO (first-in, first-out)
      method for determining inventory costs. During fiscal years 1997, 1996 and
      1995 inventory quantities were reduced resulting in a liquidation of
      certain LIFO layers carried at costs which were lower than the costs of
      current purchases, the effect of which decreased the cost of sales by
      approximately $674,000, $647,000 and $89,000, respectively.

      Included in inventory is $2,224,725 and $2,150,981 of prepaid inventory at
      January 31, 1998 and February 1, 1997, respectively.


                                      100
<PAGE>   33
D.    PROPERTY, BUILDINGS AND EQUIPMENT

      Property, buildings and equipment consist of:


<TABLE>
<CAPTION>
                                            JANUARY 31,            FEBRUARY 1,
                                               1998                    1997
<S>                                        <C>                    <C>
Land                                       $    627,018           $  1,406,060
Leasehold improvements                       10,460,255              9,874,626
Furniture, fixtures and equipment            16,747,379             16,051,961
Capitalized leases                           19,531,569             19,531,569
                                           ------------           ------------
                                             47,366,221             46,864,216
Less accumulated depreciation               (34,667,944)           (32,597,009)
                                           ------------           ------------
                                           $ 12,698,277           $ 14,267,207
                                           ============           ============
</TABLE>

E.    ACCRUED EXPENSES

      Accrued expenses consist of the following:

                                   JANUARY 31,                 FEBRUARY 1,
                                      1998                        1997

Taxes accrued and withheld         $2,607,020                  $1,991,390
Store operating expenses            3,609,788                   2,885,302
Employee compensation               1,897,458                   2,016,882
Interest                               49,624                     104,866
                                   ----------                  ----------

                                   $8,163,890                  $6,998,440
                                   ==========                  ==========

F.    FINANCING AGREEMENTS

      The Company has a financing agreement with Congress Financial Corporation
      (Central) which provides for revolving credit borrowings and letters of
      credit of up to $27.5 million. Borrowings under this agreement bear
      interest at a rate which is 1% over prime. The term of the financing
      agreement extends to October 1999. The amounts the Company is permitted to
      borrow under the agreement are determined by a formula based upon eligible
      inventory. Excess availability under this agreement at January 31, 1998
      and February 1, 1997 totalled $11,861,000 and $8,423,000, respectively. At
      the end of fiscal 1997 and 1996 borrowings were $2,946,658 and $7,281,732,
      respectively, and the Company had outstanding letters of credit totaling
      approximately $355,000 and $256,000, respectively. The maximum amount of
      revolving credit borrowings during fiscal year 1997, 1996 and 1995 was
      $18,916,000, $20,515,000 and $19,587,000, respectively. The weighted
      average amount of revolving credit borrowings for fiscal years 1997, 1996
      and 1995 was $11,730,000, $14,051,000 and $8,868,000, respectively, with
      related weighted average interest rates of 9.5%, 9.8% and 10.5% in fiscal
      1997, 1996 and 1995, respectively. The average excess availability under
      the line was $9,056,000, $6,757,000, and $11,883,000 for fiscal years
      1997, 1996 and 1995, respectively. Borrowings are secured by substantially
      all of the current assets of the Company and general intangibles. A
      non-use fee of .5% per annum is payable monthly on the unused portion of
      the facility, and a servicing fee is payable quarterly during the term of
      the agreement. Additional fees are due upon early termination of the
      agreement.

      The current financing agreement contains certain restrictions, including
      limitations on annual cumulative capital expenditures and additional
      borrowings and prohibition from paying dividends.


                                      101
<PAGE>   34
      The agreement does not contain any covenants regarding net income, net
      worth, working capital or cash flow nor does it require the Company to
      reduce borrowings to zero during the year.

      Notes payable consists of:

<TABLE>
<CAPTION>
                                                           JANUARY 31,   FEBRUARY 1,
                                                              1998          1997   
<S>                                                        <C>           <C>       
Payments to be made to prepetition unsecured creditors$     1,800,000    $3,593,728
Secured term note, interest at 7%                                  --       426,555
Other notes payable, due in 1998                              300,201       516,773
                                                           ----------    ----------

                                                           $2,100,201    $4,537,056
                                                           ==========    ==========
</TABLE>


      Under the Plan, and subsequent agreements between the Company and its
      Creditor Committee, the Company escrowed principal and interest of
      $1,967,000 in fiscal 1997 and disbursed that amount to its unsecured
      creditors in March 1998. The remaining obligation is payable in $200,000
      installments at the end of April, July and October 1998 and a final
      payment of $1,200,000 on January 31, 1999. The unpaid balances bear
      interest at 12%. This obligation is secured by an interest in the
      Company's distribution center.

G.    LEASES

      The Company has entered into numerous long-term lease agreements
      classified as both capital and operating leases. These leases relate to
      retail store locations, the distribution center, corporate headquarters,
      and furniture, fixtures and equipment. The leases expire on various dates
      through the year 2016 with most of the leases containing renewal options.
      Certain retail store leases contain provisions for additional rent based
      on varying percentages of sales.

      Total rental expense related to all operating leases (including those with
      terms less than one year) is as follows:

<TABLE>
<CAPTION>
                                                     YEARS ENDED
                                    --------------------------------------------
                                    JANUARY 31,      FEBRUARY 1,      FEBRUARY 3,
                                       1998             1997             1996
<S>                                 <C>              <C>              <C>       
Minimum rentals                     $9,416,881       $9,432,296       $8,583,986
Contingent rentals                          --           20,088           18,201
                                    ----------       ----------       ----------

                                    $9,416,881       $9,452,384       $8,602,187
                                    ==========       ==========       ==========
</TABLE>


                                      102
<PAGE>   35
      Following is a summary of capitalized leased assets included in property,
      buildings and equipment:

<TABLE>
<CAPTION>
                                                 JANUARY 31,        FEBRUARY 1,
                                                    1998               1997     
<S>                                             <C>                <C>         
Buildings and improvements                      $ 19,280,119       $ 19,280,119
Furniture, fixtures and equipment                    251,450            251,450
                                                ------------       ------------
                                                  19,531,569         19,531,569
Less accumulated depreciation                    (14,828,992)       (14,122,614)
                                                ------------       ------------

                                                $  4,702,577       $  5,408,955
                                                ============       ============
</TABLE>


      Future minimum lease payments under capitalized and operating leases with
      rental terms of more than one year as of January 31, 1998, are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR                                               CAPITAL        OPERATING   
<S>                                                    <C>              <C>         
1998                                                   $  2,384,027     $  7,257,712
1999                                                      2,017,708        6,537,203
2000                                                      1,965,814        5,949,886
2001                                                      1,920,439        5,370,848
2002                                                      1,781,689        5,345,291
After 2003                                                6,817,009       27,404,014
                                                       ------------     ------------

Total minimum lease payments                             16,886,686     $ 57,864,954
                                                                        ============
Less estimated executory costs                             (238,150)
                                                       ------------

Net minimum lease payments under capitalized leases      16,648,536
Less amount representing interest                        (7,389,587)
                                                       ------------

Present value of net minimum lease payments               9,258,949
Less current portion                                      1,273,386
                                                       ------------

Long-term obligation                                   $  7,985,563
                                                       ============
</TABLE>


      Minimum payments have not been reduced by minimum sublease rentals of
      $2,040,385 due in the future under non-cancelable subleases.

      The Company currently leases five of its retail store locations, its
      corporate headquarters and two additions to its distribution center from
      organizations owned in whole or in part by certain stockholders of the
      Company. During fiscal years 1997, 1996 and 1995 the Company paid
      $3,120,920, $3,109,862 and $2,915,243, respectively, to these related
      organizations under the terms of the leases.


                                      103
<PAGE>   36
H.    INCOME TAXES

      In fiscal 1997, 1996 and 1995 taxable losses were incurred which increased
      the Company's net operating loss carryforwards. No tax benefit for these
      losses were recorded due to the uncertainty of the realization of such
      benefit.

      Deferred income taxes reflect the net tax effects of (a) temporary
      differences between the carrying amounts of assets and liabilities for
      financial reporting purposes and the amounts reported for income tax
      purposes, and (b) operating loss and tax credit carryforwards. The tax
      effects of significant items comprising the Company's net deferred tax
      position as of January 31, 1998 and February 1, 1997 are as follows:

<TABLE>
<CAPTION>
                                                    JANUARY 31,      FEBRUARY 1,
                                                       1998             1997    
<S>                                                <C>              <C>         
Accruals and other reserves                        $    689,558     $    677,502
Rejected leases                                         157,294          269,114
Capitalized inventory costs                             544,000          719,335
Fixed assets                                            (52,508)        (108,508)
Capital leases                                        1,923,148        1,797,589
Net operating loss and tax credit carryforwards       9,679,231        9,188,942
Valuation reserve                                   (12,940,723)     (12,543,974)
                                                   ------------     ------------

Net deferred asset                                 $         --     $         --
                                                   ============     ============
</TABLE>


      On January 31, 1998 the Company has net operating loss carryforwards of
      approximately $28,468,000 which expire through 2012. The valuation reserve
      provided will be recorded as a reduction in income tax expense in future
      periods if realization of the future deductions becomes more likely than
      not.

I.    UNUSUAL ITEMS

      Unusual items are comprised of the following:

<TABLE>
<S>                                                                   <C>      
Gain on sale of store leasehold, net                                  $ 723,000
Gain on bulk sale of shoe inventory, net                                 15,501
Severance and workforce reduction costs                                (248,152)
                                                                      ---------

           Net gain                                                   $ 490,349
                                                                      =========
</TABLE>


      During fiscal 1997, the Company sold the leasehold on its Lawrence, Kansas
      store to another retailer. The lease on the store was an operating lease.
      The gain on the sale represents the cash received of $850,000, less the
      direct costs of closing the store.

      During the fourth quarter of fiscal 1997, the Company entered into an
      agreement to lease its shoe business to a third party. Under the
      agreement, the third party purchased all of the shoe inventory and
      fixtures, assumed responsibility for all shoe department employees and
      will pay the Company a percentage of all ongoing shoe sales. The fees
      received under the agreement are reflected as license fees in the
      statement of operations. The term of the agreement is three years with
      mutual options to renew. The gain on the bulk sale of shoes and fixtures
      represents cash received of $2,348,470 less


                                      104
<PAGE>   37
      the LIFO cost of the shoes and the cost of fixtures. Had the Company
      accounted for inventory on the FIFO method, the bulk sale of the shoe
      inventory would have resulted in a loss of $694,499.

      During fiscal 1997, the Company reduced its workforce at its Corporate
      office and distribution center. All of the costs associated with the
      reduction were either paid or accrued at year end.

J.    EMPLOYMENT BENEFITS AND CONTRACTS

      The Company offers a 401(k) thrift savings plan that allows employees to
      defer a percentage of their income by making pretax contributions to the
      savings plan. Matching contributions made by the Company are determined by
      the Board of Directors in accordance with plan provisions. During fiscal
      years 1997 and 1996, $104,709 and $91,409, respectively, was contributed
      to the plan, while no contributions were made to the plan in fiscal year
      1995.

      As part of the Plan of Reorganization, the Company entered into a
      non-compete agreement with a former President (who is currently a member
      of the Board of Directors) requiring the Company to pay him $125,000
      annually through October, 1998.

K.    STOCKHOLDERS' EQUITY

      Under the approved Plan, all shares of existing common stock and existing
      preferred stock were canceled in fiscal year 1993. The Company filed a
      restated certificate of incorporation which authorized the issuance of
      30,000,000 shares of $.01 par value common stock. Under the Plan, the
      Company issued 10,200,000 new shares to the unsecured creditors and
      16,200,000 new shares to the former preferred shareholder. The former
      common shareholders' interests in the Company were canceled and they
      received no distribution under the Plan.

      During fiscal year 1994 and in order to clarify for the marketplace the
      purchase option for common stock issued to unsecured creditors under the
      Plan, the Company's Board of Directors designated the Company's common
      stock into two series. The Series A common stock consists of the
      19,260,000 shares of the Company's common stock that are not subject to
      the option to repurchase (issued only to pre-reorganization shareholders
      and management). The Series B option common stock (issued to unsecured
      creditors) consists of the 10,200,000 shares that are subject to the
      option to repurchase, which is discussed in the second succeeding
      paragraph that follows.

      Employment agreements with certain members of management allowed them to
      receive up to 3,600,000 new Series A shares if certain cash flow goals
      were achieved, of which 3,060,000 shares were issued. During 1996 the
      management members covered by these employment agreements resigned. In
      connection with the resignation of one of these management members, the
      Company purchased 2,565,000 shares of the executive's stock at its
      estimated fair value of $225,720.

      Should the Company fulfill its minimum obligation to the unsecured
      creditors under the Plan, the Company and the former preferred
      shareholder's designee has the option to purchase all or a portion of the
      Series B option common stock, issued to unsecured creditors, at fair value
      of the stock on the date the final creditor obligation is paid, less the
      amount of any excess cash that has been paid to the unsecured creditors
      during the term of the Plan. As of January 31, 1998 there is no excess
      cash paid to the unsecured creditors.


                                      105
<PAGE>   38
      STOCK OPTION PLANS - Stock option plans established in 1997 provide for
      granting up to 1,900,000 options to employees for purchase of Series A
      Common Stock at prices equal to fair market value at the date of the
      grant. Options become exercisable 20% per year for some employees, or one
      year after grant for other employees, and expire ten years from date of
      grant or upon termination of employment. The changes in outstanding stock
      options are summarized below:

<TABLE>
<CAPTION>
                                                         GRANT          AVERAGE
                                                         PRICE         REMAINING
                                        OPTIONS        PER SHARE         LIFE     
<S>                                     <C>            <C>             <C>      
Balance, February 1, 1997                     --           --

Granted                                 $869,000         0.051
Exercised                                     --           --
Forfeited                               $ 85,000         0.051
                                        --------         -----

Balance, January 31, 1998               $784,000         0.051         9.5 years
                                        ========         =====         =========
</TABLE>

      No compensation expense has been recorded for the Company's stock option
      plans. Had compensation expense been determined based on the fair value at
      the grant dates consistent with the method of FASB Statement No. 123,
      Accounting for Stock-Based Compensation, the Company's net loss and net
      loss per share would have been the same as is currently reported.

      For purposes of FASB No. 123, the fair value of the options are estimated
      on the grant date using the Black-Scholes pricing model with the following
      assumptions: risk-free interest rate of 6%, expected lives of five years;
      no expected dividends or volatility.

      EARNINGS PER SHARE - The following table provides a reconciliation between
      basic and diluted weighted average shares outstanding:

<TABLE>
<CAPTION>
                                         1997            1996            1995
<S>                                   <C>             <C>             <C>       
Weighted average shares
  outstanding - basic                 26,895,000      27,300,000      27,720,000
Common share equivalents                      --              --              --
                                      ----------      ----------      ----------
Weighted average shares
  outstanding - diluted               26,895,000      27,300,000      27,720,000
                                      ==========      ==========      ==========
</TABLE>


                                      106
<PAGE>   39
L.    QUARTERLY FINANCIAL DATA (UNAUDITED)

      Summarized quarterly financial information for fiscal 1997 and 1996 is as
      follows (in thousands, except percentages and per share amounts):

<TABLE>
<CAPTION>
                                                               QUARTER                               
                                 --------------------------------------------------------------------
FISCAL 1997                         FIRST         SECOND         THIRD         FOURTH        TOTAL  
<S>                              <C>            <C>            <C>           <C>           <C>      
Net sales                        $  36,603      $  43,448      $  51,123     $  62,110     $ 193,284
Gross profit                     $  12,648      $  15,411      $  18,303     $  22,099     $  68,461
Gross profit percent                  34.6%          35.5%          35.8%         35.6%         35.4%
Income (loss) from operations    $  (3,042)     $    (986)     $     881     $   4,899     $   1,752
Income (loss) before
  extraordinary item             $  (3,787)     $  (1,748)     $     137     $   4,374     $  (1,024)
Net income (loss)                $  (3,787)     $  (1,748)     $     137     $   4,374     $  (1,024)

Basic and diluted income
  (loss) per share               $   (0.14)     $   (0.07)     $    0.01     $    0.16     $   (0.04)

Comparable store sales                 (12)%           (4)%            1%           10%            0%
</TABLE>


      Fourth quarter fiscal 1997 income was positively impacted in the amount of
      $606,232 as a result of the year end calculation of the LIFO credit
      exceeding estimates made at the end of the third quarter.

Fourth quarter fiscal 1996 income was positively impacted by a LIFO credit
recorded in the amount of $1,222,229 related to the year end calculation of
LIFO. Through the first three quarters, the Company had projected a LIFO expense
would be recorded. In addition, during the fourth quarter of fiscal 1996 the
Company recorded an extraordinary benefit for a change in estimate of the
liability due to the creditors of $2,123,096.


                                      107
<PAGE>   40
SHAREHOLDER INFORMATION

STOCK TRANSFER AGENT

Boston EquiServe (c/o BankBoston, Boston EquiServe, P.O. Box 8040, Boston, MA
02266-8040) serves as transfer agent and registrar for both series of the
Company's common stock. Certificates to be transferred should be mailed directly
to the transfer agent, preferably by registered mail.

SHAREHOLDERS

The Company's sole class of equity securities, common stock, consists of
30,000,000 shares on a fully diluted basis and is divided into two series, the
Series A Common Stock and the Series B Option Common Stock. As of March 30,
1998, 19,080,000 shares of Series A Common Stock were issued, of which
16,515,000 were outstanding and held of record by a single shareholder, and
10,200,000 shares of Series B Option Common Stock were issued and outstanding
and held of record by 790 shareholders.

DIVIDENDS

The Company has never paid a cash dividend and intends to retain earnings, if
any, and does not presently intend to pay any cash dividends on either series of
the Common Stock. However, holders of both series of the Common Stock are
entitled to such dividends as may be declared from time to time by the Company's
Board of Directors.

MARKET PRICES

No established public trading market exists with respect to either series of the
Company's Common Stock.


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