FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 4, 1995.
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.0-13076
-------
50-OFF STORES, INC.
DELAWARE 74-2640559
- ---------------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
8750 TESORO DRIVE, SAN ANTONIO, TEXAS 78217
- ---------------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
TELEPHONE: (210) 805-9300
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES: X NO:
--- ---
------------------------------------
12,200,915 SHARES OF THE REGISTRANT'S COMMON STOCK WERE OUTSTANDING AT AUGUST 4,
1995.
------------------------------------
THERE ARE 19 PAGES IN THE SEQUENTIALLY NUMBERED, MANUALLY SIGNED ORIGINAL. THE
EXHIBIT INDEX IS LOCATED ON PAGE 17.
--
-1-
FORM 10-Q INDEX
PAGE
PART I
ITEM 1. FINANCIAL STATEMENTS....................................................... 3
CONDENSED CONSOLIDATED BALANCE SHEETS, AUGUST 4, 1995 (UNAUDITED),
FEBRUARY 3, 1995 AND JULY 29, 1994 (UNAUDITED)............................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, THIRTEEN AND TWENTY-SIX
WEEKS ENDED AUGUST 4, 1995 (UNAUDITED), AND THIRTEEN AND TWENTY-SIX
WEEKS ENDED JULY 29, 1994 (UNAUDITED)...................................... 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS,
TWENTY-SIX WEEKS ENDED AUGUST 4, 1995 (UNAUDITED), AND TWENTY-SIX
WEEKS ENDED JULY 29, 1994 (UNAUDITED)...................................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)........... 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................ 10
PART II
ITEM 1. LEGAL PROCEEDINGS.......................................................... 15
ITEM 2. CHANGES IN SECURITIES...................................................... 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................ 15
ITEM 5. OTHER INFORMATION.......................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................... 15
SIGNATURES................................................................. 16
EXHIBIT INDEX.............................................................. 17
-2-
PART I
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 4, 1995 FEBRUARY 3, 1995 JULY 29, 1994
-------------- ---------------- -------------
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 2,932,822 $ 2,062,676 $ 2,212,504
ACCOUNTS RECEIVABLE 3,380,276 1,645,303 4,034,629
MERCHANDISE INVENTORIES 34,859,992 31,679,738 35,748,710
PREPAID AND OTHER CURRENT 1,579,697 717,561 2,754,917
ASSETS ----------- ----------- -----------
TOTAL CURRENT ASSETS 42,752,787 36,105,278 44,750,760
PROPERTY AND
EQUIPMENT-NET 25,928,586 25,320,606 26,856,463
OTHER ASSETS 1,078,657 1,250,043 1,153,164
TOTAL ASSETS $69,760,030 $62,675,927 $72,760,387
=========== =========== ===========
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
FEBRUARY 3,
AUGUST 4, 1995 1995 JULY 29, 1994
-------------- ----------- -------------
CURRENT LIABILITIES:
NOTES PAYABLE-BANK $13,887,458 $ 6,955,025 $ 9,492,318
ACCOUNTS PAYABLE-TRADE 13,251,777 10,011,812 14,662,606
ACCOUNTS PAYABLE-OTHER 4,377,462 4,896,033 3,661,583
ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES 2,923,411 3,147,679 3,432,746
CURRENT PORTION OF CLOSED
STORE COSTS 760,040 747,502 -
CURRENT PORTION OF LONG-TERM
DEBT 1,366,059 1,303,691 1,259,826
----------- ----------- -----------
TOTAL CURRENT
LIABILITIES 36,566,207 27,061,742 32,509,079
LONG-TERM DEBT 4,454,344 5,069,201 5,732,315
CLOSED STORE COSTS 1,420,000 1,987,692 -
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK 121,884 121,884 103,784
ADDITIONAL PAID-IN CAPITAL 36,022,389 36,022,389 31,188,915
SUBSCRIPTION RECEIVABLE (3,991,050) (3,991,050) -
RETAINED (DEFICIT) EARNINGS (4,833,744) (3,595,931) 3,226,294
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 27,319,479 28,557,292 34,518,993
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $69,760,030 $62,675,927 $72,760,387
=========== =========== ===========
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-4-
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------- ------------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
1995 1994 1995 1994
----------- ----------- ----------- -----------
NET SALES $41,947,203 $44,718,647 $87,006,477 $90,538,870
COST OF SALES 27,727,578 30,239,305 57,438,128 60,577,488
----------- ----------- ----------- -----------
GROSS PROFIT 14,219,625 14,479,342 29,568,349 29,961,382
----------- ----------- ----------- -----------
OPERATING EXPENSES:
SELLING, ADVERTISING, GENERAL
AND ADMINISTRATIVE 13,591,083 14,214,471 28,548,901 29,395,866
DEPRECIATION AND AMORTIZATION 989,239 905,556 1,963,327 1,816,875
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 14,580,322 15,120,027 30,512,228 31,212,741
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME):
INTEREST INCOME (27,550) (29,755) (54,746) (53,387)
INTEREST EXPENSE 512,300 403,986 986,680 703,659
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE (INCOME) 484,750 374,281 931,934 650,272
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (845,447) (1,014,916) (1,875,813) (1,901,631)
BENEFIT FROM INCOME TAXES 290,000 346,800 638,000 699,800
----------- ----------- ----------- -----------
NET LOSS $ (555,447) $ (668,116) $(1,237,813) $(1,201,831)
=========== =========== =========== ===========
LOSS PER COMMON SHARE $ (.05) $ (.06) $ (.10) $ (.12)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES 12,200,915 10,378,165 12,200,915 10,378,291
=========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-5-
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
TWENTY-SIX WEEKS ENDED
-------------------------------
AUGUST 4, 1995 JULY 29, 1994
-------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET LOSS (1,237,813) $(1,201,831)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,963,327 1,816,875
DEFERRED INCOME TAX (638,000) (699,800)
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (1,734,973) (1,047,300)
MERCHANDISE INVENTORIES (3,180,254) (4,284,862)
PREPAID AND OTHER CURRENT ASSETS (224,136) (557,321)
OTHER ASSETS 164,504 266,068
ACCOUNTS PAYABLE-TRADE 3,239,965 (557,219)
ACCOUNTS PAYABLE-OTHER (518,871) (2,028,833)
ACCRUED EXPENSES AND OTHER
CURRENT LIABILITIES (224,268) 30,510
CLOSED STORE COSTS (555,154) -
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,945,373) (8,263,713)
---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
CAPITAL EXPENDITURES (2,564,425) (990,697)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,564,425) (990,697)
---------- -----------
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-6-
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
TWENTY-SIX WEEKS ENDED
-------------------------------
AUGUST 4, 1995 JULY 29, 1994
-------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
PROCEEDS FROM REVOLVING DEBT 28,648,015 34,204,895
PAYMENTS ON REVOLVING DEBT (21,715,582) (24,722,577)
PAYMENTS ON LONG-TERM DEBT (552,489) (604,027)
NET PROCEEDS FROM ISSUANCE OF COMMON STOCK - 38,035
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,379,944 8,916,326
------------- -------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 870,146 (338,084)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,062,676 2,550,588
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,932,822 $ 2,212,504
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
INTEREST $ 986,680 $ 652,982
INCOME TAXES - -
SEE ACCOMPANYING NOTES TO THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-7-
50-OFF STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: THE CONDENSED CONSOLIDATED BALANCE SHEET AT FEBRUARY 3, 1995
HAS BEEN CONDENSED FROM THE AUDITED CONSOLIDATED BALANCE SHEET AT
FEBRUARY 3, 1995.
THE CONDENSED CONSOLIDATED BALANCE SHEETS AT AUGUST 4, 1995 AND
JULY 29, 1994 AND THE CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND CASH FLOWS FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 4,
1995 AND THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 1994 HAVE
BEEN PREPARED BY THE COMPANY WITHOUT AUDIT. IN THE OPINION OF
MANAGEMENT, ALL ADJUSTMENTS NECESSARY TO PRESENT FAIRLY THE CONDENSED
CONSOLIDATED FINANCIAL POSITION, RESULTS OF OPERATIONS AND CASH FLOWS
HAVE BEEN MADE. SUCH ADJUSTMENTS ARE OF A NORMAL AND RECURRING
NATURE. THE RESULTS OF OPERATIONS FOR THE THIRTEEN AND TWENTY-SIX
WEEK PERIODS ENDED AUGUST 4, 1995 ARE NOT NECESSARILY INDICATIVE OF
THE OPERATING RESULTS FOR A FULL YEAR OR OF FUTURE OPERATIONS.
CERTAIN INFORMATION AND FOOTNOTE DISCLOSURES NORMALLY INCLUDED
IN FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES HAVE BEEN CONDENSED OR OMITTED. THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN
THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
FEBRUARY 3, 1995.
CERTAIN RECLASSIFICATIONS HAVE BEEN MADE TO THE FISCAL 1995
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TO CONFORM TO THE FISCAL
1996 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 2: IN ACCORDANCE WITH THE COMPANY'S STORE CONSOLIDATION PROGRAM
THE COMPANY CLOSED NINE STORES IN FISCAL 1994, SEVEN STORES IN FISCAL
1995 AND 12 STORES IN FISCAL 1996. THE STORE CONSOLIDATION PROGRAM
INVOLVED EXITING CERTAIN SMALLER MARKETS WHICH PROVED UNABLE TO
SUPPORT A STORE AND CERTAIN OTHER MARKETS IN WHICH IT WOULD HAVE BEEN
COST PROHIBITIVE TO OPEN THE NUMBER OF STORES REQUIRED TO EFFECTIVELY
DEVELOP SUCH MARKETS' POTENTIAL. STORE CLOSING COSTS FOR THE 12
STORES CLOSED IN FISCAL 1996 OF APPROXIMATELY $4,942,000 WERE CHARGED
TO FISCAL 1995 OPERATIONS. THE COMPANY HAD RECORDED APPROXIMATELY
$2,735,000 OF LIABILITY ASSOCIATED WITH ESTIMATED MONTHLY LEASE
PAYMENTS AND OTHER CLOSED STORE COSTS AS OF FEBRUARY 3, 1995.
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED AUGUST 4, 1995,
APPROXIMATELY $424,000 AND $555,000 OF LEASE PAYMENTS AND OTHER CLOSED
STORE COSTS WERE PAID AND CHARGED AGAINST THE LIABILITY, RESPECTIVELY.
THE REMAINING CLOSED STORE COSTS LIABILITY IS APPROXIMATELY $2,180,000
AS OF AUGUST 4, 1995 OF WHICH APPROXIMATELY $760,000, $530,000,
$170,000 AND $720,000 ARE TO BE USED IN FISCAL YEARS 1996, 1997, 1998
AND 1999, RESPECTIVELY.
-8-
THE 12 STORES CLOSED IN FISCAL 1996 CONTRIBUTED APPROXIMATELY
$379,000 AND $4,108,000 OF NET SALES, $45,000 OF OPERATING LOSS AND
$228,000 OF OPERATING INCOME DURING THE THIRTEEN AND TWENTY-SIX WEEKS
ENDED AUGUST 4, 1995, RESPECTIVELY, AND APPROXIMATELY $2,864,000 AND
$5,913,000 OF NET SALES AND $215,000 AND $382,000 OF OPERATING LOSSES
DURING THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 29, 1994,
RESPECTIVELY. FOR THE FIFTY-THREE WEEKS ENDED FEBRUARY 3, 1995, THE
12 STORES CLOSED IN FISCAL 1996 CONTRIBUTED APPROXIMATELY $13,954,000
OF NET SALES AND $1,422,000 OF OPERATING LOSSES.
NOTE 3: A LOAN AGREEMENT WITH A FINANCIAL INSTITUTION PROVIDES THE
COMPANY A LINE OF CREDIT THROUGH JANUARY 1997 OF UP TO $20,000,000
INCLUDING LETTERS OF CREDIT OF $4,000,000. BORROWINGS UNDER THE LINE
ARE LIMITED TO A BORROWING BASE EQUAL TO THE LESSER OF (I) 45% OF
ELIGIBLE INVENTORY OR (II) 80% OF LIQUIDATION VALUE OF INVENTORY, BOTH
MINUS A PERMANENT BLOCK OF $1,500,000. INTEREST UNDER THE LINE IS
CHARGED ON FUNDS BORROWED AT THE LENDER'S PRIME RATE PLUS 1.75%. THE
LENDER'S PRIME RATE AT AUGUST 4, 1995 WAS 9.0%. THE AGREEMENT
CONTAINS VARIOUS RESTRICTIONS ON THE COMPANY, INCLUDING PROHIBITIONS
ON THE PAYMENT OF COMMON STOCK DIVIDENDS WITHOUT LENDER'S PERMISSION.
THE AGREEMENT CONTAINS MINIMUM TANGIBLE NET WORTH, MINIMUM WORKING
CAPITAL AND MINIMUM PRE-TAX PROFIT FINANCIAL COVENANTS. THE LINE OF
CREDIT IS SECURED BY INVENTORY, CERTAIN ACCOUNTS RECEIVABLE AND OTHER
ASSETS. AT AUGUST 4, 1995, $13,887,458 WAS OUTSTANDING UNDER THE LINE
OF CREDIT, AND APPROXIMATELY $346,000 IN IMPORT LETTERS OF CREDIT WERE
OUTSTANDING AND APPROXIMATELY $828,000 WAS AVAILABLE UNDER THE LINE.
NOTE 4: IN NOVEMBER 1994, THE COMPANY RECEIVED SUBSCRIPTIONS TO
APPROXIMATELY 1,810,000 SHARES OF COMMON STOCK IN A REGULATION S
OFFERING TO QUALIFIED INVESTORS. THE COMPANY RECEIVED NET PROCEEDS OF
APPROXIMATELY $861,000 FROM THE PURCHASE OF 310,000 SHARES AND HAS A
PURCHASE AGREEMENT FOR 1,500,000 SHARES FOR WHICH PROCEEDS HAVE NOT
BEEN RECEIVED.
ON FEBRUARY 21, 1995, THE COMPANY FILED A LAWSUIT [50-OFF STORES, INC.
--------------------
V. BANQUE PARIBAS (SUISSE) S.A. BETAFID, S.A., YANNI KOUTSOUBOS,
----------------------------------------------------------------
ANDALUCIAN VILLAS (FORTY EIGHT) LIMITED, ARNASS LIMITED, BROCIMAST
------------------------------------------------------------------
ENTERPRISES LTD., DENNIS MORRIS, HOWARD WHITE, AND MORRIS &
-----------------------------------------------------------
ASSOCIATES, CASE NO. SA-95-CA-0159] IN UNITED STATES DISTRICT COURT IN
----------
SAN ANTONIO, TEXAS AGAINST DEFAULTING FOREIGN PURCHASERS IN AN
INTERNATIONAL OFFERING BY THE COMPANY UNDER REGULATION S UNDER THE
SECURITIES ACT OF 1933. A REGULATION S OFFERING OF UP TO 2,000,000
SHARES OF COMMON STOCK WAS COMMENCED BY THE COMPANY IN OCTOBER 1994
WITH THE ASSISTANCE OF JEFFERIES INTERNATIONAL, LTD. AS ITS SELLING
AGENT. TWO NON-DEFAULTING FOREIGN INSTITUTIONAL INVESTORS DID
PURCHASE AN AGGREGATE OF 310,000 SHARES IN SUCH OFFERING IN NOVEMBER
1994. THE COMPANY FILED THE LAWSUIT AGAINST BANQUE PARIBAS (SUISSE)
S.A., BETAFID, S.A., THREE OFFSHORE PURCHASER ENTITIES AND CERTAIN
AFFILIATED INDIVIDUALS IN CONNECTION WITH THE BREACH BY CERTAIN OF THE
DEFENDANTS OF THEIR CONTRACTUAL OBLIGATION TO PURCHASE AN AGGREGATE OF
1,500,000 SHARES OF THE COMPANY'S COMMON STOCK AT $3.65 PER SHARE
PURSUANT TO NOVEMBER 1994 SIGNED PURCHASE AGREEMENTS. THE LAWSUIT
ALSO INCLUDES SECURITIES FRAUD, FRAUD AND CONVERSION CLAIMS. THE
CONVERSION CLAIM RELATES TO ACTIONS OF THE DEFENDANTS IN
MISAPPROPRIATING AND REMOVING THE SHARES FROM AN ESCROW ACCOUNT WITH
THE PURCHASERS' TORONTO ATTORNEY, MORRIS & ASSOCIATES, EVEN THOUGH THE
DEFENDANTS HAVE NEVER PAID FOR SUCH SHARES. THE SHARES HAD BEEN
ISSUED INTO SUCH ESCROW ACCOUNT FOR THE PURPOSES OF AUTHENTICATION BY
CHASE MANHATTAN BANK, N.A. ON BEHALF OF THE PURCHASERS AND EVENTUAL
RELEASE TO THE PURCHASERS UPON RECEIPT BY MORRIS & ASSOCIATES
-9-
PAGE>
OF THE PROCEEDS FOR THE SHARES ON BEHALF OF THE COMPANY. THE
DEFENDANTS TO DATE HAVE NOT RESPONDED TO THE COMPANY'S DEMANDS FOR
EITHER THE RETURN OF SUCH SHARES OR THE AGREED UPON PROCEEDS. THE
COMPANY INTENDS TO VIGOROUSLY PROSECUTE SUCH MATTER AND TO PURSUE ALL
AVAILABLE AVENUES TO OBTAIN ALL APPROPRIATE REMEDIES, INCLUDING EITHER
THE AGREED UPON PROCEEDS FOR THE SHARES, OR THE SHARES THEMSELVES, AS
WELL AS THE COMPANY'S ACTUAL AND PUNITIVE DAMAGES. THE COMPANY, BASED
UPON ADVICE OF COUNSEL, BELIEVES THAT IT WILL OBTAIN A JUDGMENT
AGAINST ONE OR MORE DEFENDANTS IN THIS CASE, HOWEVER, THE
COLLECTIBILITY OF ANY SUCH JUDGMENT IS UNCERTAIN AT THIS TIME. UNTIL
THE MATTER HAS BEEN RESOLVED, THE COMPANY WILL TREAT THE 1,500,000
SHARES OF COMMON STOCK AS OUTSTANDING WITH NO PROCEEDS RECOGNIZED FROM
THEIR SALE. IF THE COMPANY IS UNABLE TO COLLECT AMOUNTS DUE AND THE
SHARES ARE NOT ULTIMATELY RETURNED, AN EXTRAORDINARY NON-CASH CHARGE
TO EARNINGS FOR THE AMOUNT OF THE UNCOLLECTED SUBSCRIPTION RECEIVABLE
WILL BE RECORDED IN THE CONSOLIDATED FINANCIAL STATEMENTS. DAMAGES
AWARDED TO THE COMPANY IN EXCESS OF PROCEEDS ULTIMATELY RECEIVED FOR
THE ISSUANCE OF THESE SHARES WOULD BE CREDITED TO EARNINGS.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
- --------
FOUR STORES WERE CLOSED DURING THE SECOND FISCAL QUARTER IN: DALLAS,
TEXAS; SAINT ANN, MISSOURI, DAYTONA BEACH, FLORIDA AND CLARKSVILLE, INDIANA. IN
AUGUST 1995, THE COMPANY CLOSED ITS LOUISVILLE, KENTUCKY STORE. THE NUMBER OF
STORES IN OPERATION AT THE END OF THE LISTED FISCAL QUARTERS AND THE CHANGES
FROM PERIOD TO PERIOD ARE AS FOLLOWS:
NUMBER OF STORES
------------------------------
FISCAL 1996* FISCAL 1995
------------ ----------
BEGINNING OF YEAR 109 111
FIRST QUARTER ADDITIONS 5 3
FIRST QUARTER CLOSINGS (7) (1)
SECOND QUARTER ADDITIONS - -
SECOND QUARTER CLOSINGS (4) (3)
THIRD QUARTER ADDITIONS - 1
THIRD QUARTER CLOSINGS (1) (1)
FOURTH QUARTER ADDITIONS - 1
FOURTH QUARTER CLOSINGS - (2)
--- ---
END OF YEAR 102 109
- --------
* THROUGH AUGUST 28, 1995.
THE WEIGHTED AVERAGE NUMBER OF STORES OPEN DURING THE FISCAL 1996 TWENTY-
SIX WEEK PERIOD WAS 106.6 COMPARED TO 112.8 DURING THE COMPARABLE FISCAL 1995
PERIOD, A 5.5% DECREASE.
-10-
RESULTS OF OPERATIONS
- ---------------------
THE FOLLOWING TABLES SET FORTH (I) CERTAIN ITEMS IN THE CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AS A PERCENTAGE OF NET SALES FOR THE
PERIODS INDICATED, AND (II) THE PERCENTAGE CHANGE IN SUCH ITEMS FROM THE
COMPARABLE PERIOD OF THE PRIOR YEAR.
PERCENTAGE OF SALES
---------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 4, JULY 29, AUGUST 4, JULY 29,
1995 1994 1995 1994
--------- -------- --------- ---------
NET SALES........................... 100.0% 100.0% 100.0% 100.0%
COST OF SALES....................... 66.1 67.6 66.0 66.9
SELLING, ADVERTISING, GENERAL AND
ADMINISTRATIVE.................... 32.4 31.8 32.8 32.5
DEPRECIATION AND AMORTIZATION....... 2.4 2.1 2.3 2.0
----- ----- ----- -----
TOTAL............................ 100.9 101.5 101.1 101.4
OTHER EXPENSE, NET.................. 1.1 0.8 1.1 0.7
----- ----- ----- -----
TOTAL EXPENSES...................... 102.0 102.3 102.2 102.1
----- ----- ----- -----
LOSS BEFORE INCOME TAXES............ (2.0) (2.3) (2.2) (2.1)
BENEFIT FROM INCOME TAXES........... 0.7 0.8 0.8 0.8
----- ----- ----- -----
NET LOSS............................ (1.3)% (1.5)% (1.4)% (1.3)%
===== ===== ===== =====
PERCENTAGE CHANGE
----------------------------------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 4, 1995 COMPARED AUGUST 4, 1995 COMPARED
TO THIRTEEN WEEKS ENDED TO TWENTY-SIX WEEKS ENDED
JULY 29, 1994 JULY 29, 1994
-----------------------------------------------------
NET SALES............................ (6.2)% (3.9)%
COST OF SALES........................ (8.3) (5.2)
SELLING, ADVERTISING, GENERAL
AND ADMINISTRATIVE................ (4.4) (2.9)
DEPRECIATION AND AMORTIZATION........ 9.2 8.1
OTHER EXPENSE, NET................... 29.5 43.3
LOSS BEFORE INCOME TAXES............. (16.7) (1.4)
BENEFIT FROM INCOME TAXES............ (16.4) (8.8)
NET LOSS............................. (16.9)% 3.0%
-11-
THIRTEEN WEEKS ENDED AUGUST 4, 1995 COMPARED TO THIRTEEN WEEKS ENDED JULY 29,
- -----------------------------------------------------------------------------
1994:
- -----
THE NET SALES DECREASE OF 6.2% FOR THE THIRTEEN WEEKS ENDED AUGUST 4, 1995
COMPARED TO THE THIRTEEN WEEKS ENDED JULY 29, 1994 IS ATTRIBUTABLE TO A 7.8%
DECREASE IN THE WEIGHTED AVERAGE NUMBER OF STORES IN OPERATION AND A 1.3%
DECREASE IN COMPARABLE STORE SALES (STORES CLOSED DURING THE PERIOD ARE NOT
INCLUDED IN COMPARABLE STORE NET SALES). EXCLUDING THE COMPANY'S 13 TEXAS/MEXICO
BORDER STORES (WHICH HAVE BEEN ADVERSELY AFFECTED BY A PESO DEVALUATION SINCE
DECEMBER 1994), NET SALES ON A COMPARABLE STORE BASIS INCREASED 5.1% FOR THE
THIRTEEN WEEKS ENDED AUGUST 4, 1995.
COST OF SALES AS A PERCENTAGE OF NET SALES DECREASED FROM 67.6% FOR THE
THIRTEEN WEEKS ENDED JULY 29, 1994 TO 66.1% FOR THE THIRTEEN WEEKS ENDED AUGUST
4, 1995, DUE PRIMARILY TO A HIGHER INITIAL MARK-UP ON MERCHANDISE AND LOWER
MARKDOWNS AS A PERCENTAGE OF NET SALES AS COMPARED TO THE COMPARABLE PERIOD OF
THE PRIOR YEAR.
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES INCREASED FROM
31.8% OF NET SALES FOR THE THIRTEEN WEEKS ENDED JULY 29, 1994 TO 32.4% OF NET
SALES FOR THE THIRTEEN WEEKS ENDED AUGUST 4, 1995. THE PERCENTAGE DECREASE OF
4.4% WAS COMPARABLE TO THE 7.8% DECREASE IN THE WEIGHTED AVERAGE NUMBER OF
STORES OPEN GIVEN THE NORMAL COST INCREASES ASSOCIATED WITH INCREASED SALARIES
AND OTHER EXPENSES.
DEPRECIATION AND AMORTIZATION INCREASED BY 9.2% IN THE THIRTEEN WEEKS ENDED
AUGUST 4, 1995 COMPARED TO THE COMPARABLE PERIOD OF THE PRIOR YEAR, DUE
PRIMARILY TO THE INCREASED NUMBER OF THE COMPANY'S STORES HAVING A FULL QUARTER
OF DEPRECIATION IN THE FISCAL 1996 THIRTEEN WEEK PERIOD AS COMPARED TO THE
COMPARABLE PERIOD OF THE PRIOR YEAR.
OTHER EXPENSE, NET INCREASED TO APPROXIMATELY $485,000 IN THE THIRTEEN
WEEKS ENDED AUGUST 4, 1995 COMPARED TO APPROXIMATELY $374,000 IN THE COMPARABLE
PERIOD OF THE PRIOR YEAR, DUE PRIMARILY TO INCREASED INTEREST EXPENSE
ATTRIBUTABLE TO A HIGHER INTEREST RATE AND INCREASED BORROWINGS UNDER THE
COMPANY'S LINE OF CREDIT.
THE DECREASE IN THE COMPANY'S LOSS BEFORE INCOME TAXES FOR THE THIRTEEN
WEEKS ENDED AUGUST 4, 1995 COMPARED TO THE THIRTEEN WEEKS ENDED JULY 29, 1994 IS
PRIMARILY DUE TO THE COMPANY'S HIGHER GROSS MARGINS AND A DECREASE IN SELLING,
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES (OFFSET, IN PART BY A DECREASE
IN NET SALES AND INCREASED INTEREST EXPENSE).
-12-
TWENTY-SIX WEEKS ENDED AUGUST 4, 1995 COMPARED TO TWENTY-SIX WEEKS ENDED
- ------------------------------------------------------------------------
JULY 29, 1994:
- --------------
THE NET SALES DECREASE OF 3.9% FOR THE TWENTY-SIX WEEKS ENDED AUGUST 4,
1995 COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY 29, 1994 IS ATTRIBUTABLE TO A
5.5% DECREASE IN THE WEIGHTED AVERAGE NUMBER OF STORES IN OPERATION AND A 2.6%
DECREASE IN COMPARABLE STORE SALES (STORES CLOSED DURING THE PERIOD ARE NOT
INCLUDED IN COMPARABLE STORE NET SALES). THESE DECREASES WERE PARTIALLY OFFSET
BY INCREASED NET SALES PERTAINING TO LIQUIDATIONS OF INVENTORY AT TEN STORES IN
THE PROCESS OF CLOSING DURING THE THIRTEEN WEEKS ENDED MAY 5, 1995. EXCLUDING
THE COMPANY'S 13 TEXAS/MEXICO BORDER STORES (WHICH HAVE BEEN ADVERSELY AFFECTED
SINCE DECEMBER 1994 BY A PESO DEVALUATION), NET SALES ON A COMPARABLE STORE
BASIS INCREASED 4.2% FOR THE TWENTY-SIX WEEKS ENDED AUGUST 4, 1995.
COST OF SALES AS A PERCENTAGE OF NET SALES DECREASED FROM 66.9% FOR THE
TWENTY-SIX WEEKS ENDED JULY 29, 1994 TO 66.0% FOR THE TWENTY-SIX WEEKS ENDED
AUGUST 4, 1995, DUE PRIMARILY TO A HIGHER INITIAL MARK-UP ON MERCHANDISE.
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES INCREASED FROM
32.5% OF NET SALES FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 1994 TO 32.8% OF NET
SALES FOR THE TWENTY-SIX WEEKS ENDED AUGUST 4, 1995. THE PERCENTAGE DECREASE OF
2.9% WAS COMPARABLE TO THE 5.5% DECREASE IN THE WEIGHTED AVERAGE NUMBER OF
STORES OPEN GIVEN THE NORMAL COST INCREASES ASSOCIATED WITH INCREASED SALARIES
AND OTHER EXPENSES.
DEPRECIATION AND AMORTIZATION INCREASED BY 8.1% IN THE TWENTY-SIX WEEKS
ENDED AUGUST 4, 1995 COMPARED TO THE COMPARABLE PERIOD OF THE PRIOR YEAR, DUE
PRIMARILY TO THE INCREASED NUMBER OF THE COMPANY'S STORES HAVING A FULL HALF
YEAR OF DEPRECIATION IN THE FISCAL 1996 TWENTY-SIX WEEK PERIOD AS COMPARED TO
THE COMPARABLE PERIOD OF THE PRIOR YEAR.
OTHER EXPENSE, NET INCREASED TO APPROXIMATELY $932,000 IN THE TWENTY-SIX
WEEKS ENDED AUGUST 4, 1995 COMPARED TO APPROXIMATELY $650,000 IN THE COMPARABLE
PERIOD OF THE PRIOR YEAR, DUE PRIMARILY TO INCREASED INTEREST EXPENSE
ATTRIBUTABLE TO A HIGHER INTEREST RATE AND INCREASED BORROWINGS UNDER THE
COMPANY'S LINE OF CREDIT.
THE DECREASE IN THE COMPANY'S LOSS BEFORE INCOME TAXES FOR THE TWENTY-SIX
WEEKS ENDED AUGUST 4, 1995 COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY 29, 1994
IS PRIMARILY DUE TO THE COMPANY'S HIGHER GROSS MARGINS AND A DECREASE IN
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES (OFFSET, IN PART BY A
DECREASE IN NET SALES AND INCREASED INTEREST EXPENSE).
-13-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
THE COMPANY'S CASH ON HAND AND BORROWINGS UNDER ITS LINE OF CREDIT PROVIDED
FUNDS USED FOR OPERATING ACTIVITIES OF APPROXIMATELY $2,945,000, RESPESENTING
PRIMARILY AN INCREASE IN INVENTORIES NECESSARY FOR THE BACK-TO-SCHOOL SEASON AND
MERCHANDISE FOR FIVE NEW STORES OPENED DURING THE PERIOD AND APPROXIMATELY
$2,564,000 FOR FUNDING OF CAPITAL EXPENDITURES RELATED PRIMARILY TO SUCH FIVE
NEW STORES. AS OF AUGUST 4, 1995, THE COMPANY HAD APPROXIMATELY $828,000
AVAILABLE FOR USE UNDER ITS LINE OF CREDIT. SEE NOTE 3 TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
THERE ARE NO OTHER STORE OPENINGS PLANNED FOR FISCAL 1996. ONE STORE IS
SCHEDULED TO OPEN IN APRIL 1996 (FISCAL 1997) IN ATLANTA, GEORGIA, AN EXISTING
MARKET.
CLOSED STORE COSTS LIABILITY OF APPROXIMATELY $2,180,000 PERTAINS TO THE
TWELVE STORES CLOSED IN FISCAL 1996 AND INCLUDES PRIMARILY ESTIMATED LEASE
PAYMENTS TO BE DISBURSED OVER AN ESTIMATED FOUR YEAR PERIOD: APPROXIMATELY
$760,000, $530,000, $170,000 AND $720,000 IN FISCAL 1996, 1997, 1998 AND 1999,
RESPECTIVELY.
AS DISCUSSED IN ITEM 1, PART II OF THIS FORM 10-Q, THE COMPANY HAS FILED A
LAWSUIT RELATED TO CERTAIN PARTIES' BREACHES OF CONTRACTUAL OBLIGATIONS TO
PURCHASE 1,500,000 SHARES OF THE COMPANY'S COMMON STOCK AND ACTIONS IN
MISAPPROPRIATING AND REMOVING THESE SHARES FROM AN ESCROW ACCOUNT WITHOUT
EFFECTING PAYMENT FOR SUCH SHARES. THE COMPANY INTENDS TO VIGOROUSLY PROSECUTE
THIS MATTER AND TO PURSUE ALL AVAILABLE AVENUES TO EFFECT EITHER THE RECEIPT OF
PAYMENT FOR SUCH SHARES OR THE RETURN OF THE SHARES THEMSELVES, PLUS ACTUAL AND
PUNITIVE DAMAGES. THE COMPANY, BASED UPON ADVICE OF COUNSEL, BELIEVES THAT IT
WILL OBTAIN A JUDGMENT AGAINST ONE OR MORE DEFENDANTS IN THIS CASE; HOWEVER, THE
COLLECTIBILITY OF ANY SUCH JUDGMENT IS UNCERTAIN AT THIS TIME.
THE COMPANY BELIEVES ITS OPERATING CASH FLOW, ITS LINE OF CREDIT AND ITS
CASH ON HAND WILL BE ADEQUATE TO FINANCE ITS OPERATIONS THROUGH FISCAL 1996.
-14-
PART II
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
SEE NOTE 4 TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS REGARDING
LAWSUIT FILED IN FEBRUARY 1995. SUCH LAWSUIT WAS ALSO REPORTED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1995. THERE
HAVE BEEN NO MATERIAL DEVELOPMENTS WITH REGARD TO THE LAWSUIT SINCE THE FILING
OF THOSE REPORTS.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
NOT APPLICABLE.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ------- -------------------------------
NOT APPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
NOT APPLICABLE.
ITEM 5. OTHER INFORMATION
- ------- -----------------
THE REGISTRANT REPORTS NO INFORMATION, NOT PREVIOUSLY REPORTED IN A REPORT
ON FORM 8-K, IN LIEU OF FILING A REPORT ON FORM 8-K WITH RESPECT TO SUCH
INFORMATION.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(A) EXHIBITS:
EXHIBIT 15 - REVIEW REPORT OF DELOITTE & TOUCHE LLP
NO OTHER EXHIBITS ARE REQUIRED TO BE FILED BY THE REGISTRANT UNDER ITEM 601
OF REGULATION S-K WITH THIS REPORT ON FORM 10-Q.
(B) REPORTS ON FORM 8-K
THERE WERE NO REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED AUGUST 4,
1995.
-15-
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED:
50-OFF STORES, INC.
BY: CHARLES M. SIEGEL
------------------------------------
CHARLES M. SIEGEL, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
BY: JAMES G. SCOGIN
------------------------------------
JAMES G. SCOGIN, CONTROLLER AND
CHIEF ACCOUNTING OFFICER
-16-
EXHIBIT INDEX
PAGE
Exhibit 15................................................................. 18
-17-