50 OFF STORES INC, 10-K, 1995-04-28

50 OFF STORES INC
10-K, 1995-04-28
VARIETY STORES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 3, 1995
Commission File Number 0-13076

50-OFF STORES, INC.
(Exact name of registrant as specified in its charter)

Delaware 74-2640559
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

8750 Tesoro Drive
San Antonio, Texas 78217-0555
(Address of principal executive offices, including ZIP Code)

Registrant's telephone number, including area code:
(210) 805-9300

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
NONE NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

TITLE OF EACH CLASS
-------------------
COMMON STOCK, $0.01 PAR VALUE

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:
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 15, 1995, the aggregate market value of the voting stock held
by nonaffiliates of the Registrant, based on the closing sale price of the
Common Stock of the Registrant as quoted on the National Association of
Securities Dealers Automated Quotation System was $23,473,732 (for purposes of
calculating this amount only, directors, officers, and beneficial owners of 5%
or more of the common stock of Registrant have been deemed affiliates).

The number of shares of the Common Stock of the Registrant outstanding as
of March 15, 1995 was 12,188,415.

There are 60 pages in the sequentially numbered, manually signed original.
--
The exhibit index is located on page 44.
--
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FORM 10-K INDEX

PART I
PAGE
----
ITEM 1 BUSINESS...................................................... 3

ITEM 2 PROPERTIES.................................................... 10

ITEM 3 LEGAL PROCEEDINGS............................................. 12

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 12

PART II

ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS............................... 13

ITEM 6 SELECTED FINANCIAL DATA....................................... 14

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................... 16

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 22

ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................... 22

PART III

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 22

ITEM 11 EXECUTIVE COMPENSATION........................................ 22

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT................................................ 22

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 22

PART IV

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K....................................... 23

2
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PART I

ITEM 1. BUSINESS

50-OFF Stores, Inc. is a regional chain of 109 off-price retail stores
located in 14 states in the southern and southwestern United States. The
Company's targeted customer is a value and fashion-conscious shopper with low-
to-moderate income and with significantly greater sensitivity to price than
customers of full-price department stores or most other off-price retailers.

50-OFF stores primarily offer moderately priced, regionally and nationally
advertised merchandise, including apparel for men, women and children as well as
non-apparel goods such as housewares and giftware, domestics, toys and health
and beauty aids. The Company's merchandise strategy is to offer a mix of
products that may fluctuate by category based on customer needs and buying
trends. In response to recent shifts in consumer demand, the Company has
increased its emphasis on non-apparel merchandise. As a result, non-apparel
merchandise sales have increased from 23.1% of merchandise sales in fiscal 1991
to 36.9% of merchandise sales in fiscal 1995. In addition, increased sales of
non-apparel items have contributed to higher gross margins for the Company; non-
apparel items are less subject to markdowns as a percentage of sales than
apparel items. The Company's gross margin has improved from 32.5% in fiscal
1991 to 33.3% in fiscal 1995 (excluding approximately $1,129,000 of inventory
liquidation write-downs booked in fiscal 1995 for fiscal 1995 and 1996 store
closings).

The Company's stores operate under the name "50-OFF," which describes the
Company's distinctive marketing concept. Merchandise in 50-OFF stores is
ticketed to show the approximate non-discounted retail price normally charged by
full-price department stores. The ticket also shows the "you pay" price for
customer convenience. When a customer reaches the centralized check-out area,
each item is scanned into the register at the full non-discounted price. Once
the purchase has been totaled, the cashier pushes a discount key that reduces
the total amount by 50% to emphasize the 50-OFF price and tells the customer
their approximate savings by shopping at 50-OFF, thereby providing dramatic
evidence of the value offered by the Company.

The Company buys merchandise from vendors and manufacturers at lower than
regular wholesale prices as a result of its knowledge of, and reputation in, the
market and its willingness to purchase in large quantities, in special
situations, in odd lots and for immediate delivery. The Company's distribution
system generally allows for merchandise delivery to its stores as quickly as one
week after placing an order and provides the Company with the flexibility to
purchase and deliver merchandise for all or a small number of its stores. This
buying expertise, distribution system and merchandising approach are intended to
enable the Company to reduce inventory costs, minimize fashion risk and offer to
its customers the right mix of products at the right time at substantial
savings.

HISTORICAL AND RECENT DEVELOPMENTS

The Company achieved strong growth in store sales and earnings from its
development of the 50-OFF store concept in fiscal 1987 through fiscal 1992.
Beginning in fiscal 1993, the Company experienced significant declines in
comparable store sales and operating results, and management undertook a
complete evaluation of the Company and its business to determine the causes of
the downturn. The downturn was determined to be due primarily to: (i) factors
related to the Company's rapid expansion (the addition of 74 new stores) in
fiscal years 1992 through 1994, including overhead expenses, merchandising
problems (which included the purchase of less recognizable merchandise to fill
the rapidly expanding store base and the lack of proper evaluation of the ethnic
and cultural preferences of its customers in certain new markets) and the
opening of certain stores that despite attractive lease terms were located in
smaller markets which proved unable to support a store; (ii) a change in, and
stricter enforcement of, Mexican import duty laws which adversely affected sales
at the Company's then 15 border stores; and (iii) a sluggish economy for apparel
sales.

To reverse the adverse trend in comparable store sales and operating
results, management, after completing its evaluation, made significant changes
to the Company's operations and business strategy beginning in mid fiscal 1994.
In particular, the Company:

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. made significant changes in merchandising management;

. took extensive markdowns, which reduced inventory levels and permitted an
increase in recognizable, quality goods as well as in merchandise better
suited to customer demographics and consumer buying trends;

. increased the assortment, space allocation and inventory of non-apparel
goods in response to shifts in consumer demand;

. relocated the Company's freight consolidation activities to locations more
appropriate to the geographical mix of its stores to achieve incremental
time and costs savings;

. engaged a new advertising and marketing agency and implemented a new
advertising program;

. began a store consolidation program, closing nine stores during fiscal 1994
and seven stores during fiscal 1995 (related store closing costs of
approximately $723,000 and $1,206,000, including approximately $294,000 for
related inventory liquidation write-downs in fiscal 1995, were charged to
operating results for fiscal 1994 and 1995, respectively); and

. limited new store openings for foreseeable future to existing markets.

As a result of the foregoing, the Company's financial performance improved
significantly during the first 39 weeks of fiscal 1995 compared to the same
period in fiscal 1994:

. net sales increased 3.8%;

. merchandise sales per comparable store increased 7.1%;

. non-apparel sales increased to 35% of merchandise sales from 28.6% of such
sales;

. gross margin increased to 33.8% from 31.5%, principally due to the change
in merchandise mix and a decrease in markdowns to 6.9% of merchandise sales
from 9.1% of such sales in fiscal 1994; and

. selling, advertising, general and administrative expenses, including pre-
opening store costs, decreased to 32.5% of net sales from 35.4% due to a
significant reduction in new store openings and related costs.

During the last 13 weeks of fiscal 1995 compared to the same period in
fiscal 1994, external factors negatively affected sales:

. warm weather in the areas of Company operations during the fourth quarter
of fiscal 1995 contributed to a 4.8% comparable store sales decrease, and,
combined with a decrease in the number of stores in operation, a decline in
sales; and

. the Mexican Government devalued the peso and subsequently released it for
free exchange just prior to Christmas, and the Company's ten border stores
most dependent upon Mexican nationals for their sales experienced
approximately a $731,000 (20%) drop in sales for the last seven weeks of
fiscal 1995 compared to the same period in fiscal 1994.

The Company has taken the following affirmative steps to achieve a more
disciplined cost structure, to attain profitability and to lessen vulnerability
to external factors:

. completed its store consolidation program by committing to close 12 stores
in fiscal 1996 located primarily in smaller markets unable to support a
store or markets in which it would be cost prohibitive to open the number
of stores required to effectively develop such market's potential at this
time (anticipated fiscal 1996 store closing costs totaling approximately
$4,942,000, including approximately $835,000 for related inventory
liquidation write-downs, were charged to operating results for fiscal
1995);

. hired a new Vice President - Transportation and Distribution to add
management experience in that area;

. hired a new Vice President - Store Operations to concentrate on the
development of the Company's maturing store base;

. stopped new store openings, except for existing commitments and moving of
stores within a market;

4
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. realigned management and staff responsibilities and substantially reduced
related compensation, relatively and absolutely, to achieve permanent
efficiencies without compromising performance;

. implemented cost and personnel reductions, including a 25% reduction in
corporate personnel, a 19% reduction in wages and benefits and an overall
$1 million decrease in fixed costs at corporate headquarters; and

. negotiated the amendment of the financial covenants of the Company's line
of credit and long-term debt agreements.

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 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended (see Item 3. of Part I in the 10-K).

BUSINESS STRATEGY

50-OFF's mission is to create a shopping experience that surpasses
customers' expectations as it seeks to be a leading off-price retailer to
low-to-moderate income customers in the markets it serves. The major elements of
the Company's strategy include:

Value Leadership: 50-OFF offers its customers a broad selection of quality
merchandise that maintains the credibility and integrity of the Company's
pricing structure while providing a pleasant and convenient shopping experience.

Distinctive Marketing: The Company differentiates itself from other retail
stores through the pricing and ticketing practices embodied in the 50-OFF name.

Purchasing at Discount Prices: The Company purchases its merchandise at
lower than regular wholesale prices as a result of its buyers' knowledge of, and
reputation among, manufacturers and vendors and its willingness to purchase in
large quantities, in special situations, in odd lots and for immediate delivery.

Emphasis on Low Operating Costs: The Company focuses on maintaining low
operating costs through its cost-effective, drop-ship distribution system, its
approach to store leases (traditionally in strip centers) and its particularly
low store operating expenses.

Expansion: The Company's long-term development plan is to expand its
regional presence in new and existing markets. For the foreseeable future,
however, store openings will be limited to existing market areas where the store
base is underdeveloped and will be based on an evaluation of the sales and
income performance of existing stores and the ability to obtain leases for
desirable locations.

Store Maturity: The Company will concentrate on developing existing stores
to full maturity and profitability.

5
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Store Development

Since the Company expanded rapidly in fiscal 1992, 1993 and 1994,
increasing its number of stores 43%, 48% and 13%, respectively, it has
historically operated with an immature store base; the average age of Company
stores has grown from 2.23 years at the end of fiscal 1991 to 2.87 and 3.71 at
the end of fiscal 1994 and 1995, respectively. With the slowdown in store
expansion, the Company's store base will mature more rapidly than it has in the
past, and a larger percentage of stores will have operated for more than two
years. Historical sales profiles for all 50-OFF stores opened by the Company
(excluding existing stores which were converted to 50-OFF stores during or prior
to fiscal 1988) indicate, on average, stores experience increases in sales as
they mature. Over time, the Company believes a store builds recognition and
customer loyalty as management adjusts the store's merchandise mix in response
to local consumer preferences.

<TABLE>
<CAPTION>
Full fiscal year after store opening (1)
-------------------------------------------------------------
First Second Third Fourth Fifth Sixth
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Merchandise sales per average store (in
thousands) (2) $1,631 $1,720 $1,771 $1,916 $1,993 $2,132

Number of stores in base (3) 103 75 48 25 12 8
</TABLE>

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

(1) The Company, since it began operating 50-OFF stores in fiscal 1987, had
opened 109 stores (excluding conversions) through the end of fiscal 1995.
Such stores, during their first partial fiscal year of operations, were
open an average of 7.6 months and had average merchandise sales during such
period of approximately $1,451,000. Generally, during the first partial
fiscal year of its operations (which has, in the Company's operating
history, always included a grand opening period and a Christmas season), a
new store achieves sales in excess of average sales for more mature stores.

(2) Each column presents the average merchandise sales attained during the
indicated fiscal year of its respective operations for each store which, as
of February 3, 1995, had been in operation for the indicated number of full
fiscal years. For example, the first column entry averages the merchandise
sales during their respective first full fiscal year of operations of each
of the Company's 103 stores which, at fiscal year end 1995, had operated
for one full fiscal year or more.

(3) Excludes 16 pre-existing stores which were converted to 50-OFF stores by
the end of fiscal 1988. The sales per store for such stores averaged
approximately $2,279,000 per year from fiscal 1991 to 1995.

As its store base matures, the Company expects to see this historical
pattern lead to improved operating results, although there can be no assurance
such historical pattern will be duplicated. Such historical pattern may not be
indicative of the year-to-year performance of any particular store.

MERCHANDISING

To respond to a sluggish economy for apparel sales, as consumers
concentrated more on home decor and improvement purchases, the Company in recent
periods has increasingly emphasized the merchandising of non-apparel products,
which generally have higher gross margins. The Company has also offered more
quality merchandise in its stores better suited to their individual markets and
demographics.

Merchandise in 50-OFF stores is ticketed at the approximate non-discounted
retail price normally charged by full-price department stores or specialty
retail stores. These ticketed prices are based upon a combination of factors
which include: the Company's buyers' familiarity with their markets; the
wholesale price paid for such merchandise by full-price department stores and
traditional department store markups; manufacturers' suggested retail prices;
locally and nationally advertised prices; and comparison shopping by the
Company's buyers and district, area and store managers. The customers are also
shown the "you pay" half price on the ticket for their convenience.

6
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In each store, apparel is neatly displayed on modern fixtures. Private
mirrored dressing rooms are provided. Other merchandise, including certain
prepackaged apparel items, is conveniently displayed on gondolas or tables
within easy reach of customers. The Company strives to make sales personnel
promptly available to customers desiring assistance. Purchases are made at cash
registers located at the front of each store near the entrance and exit doors.
Approximately 91% of net sales for fiscal 1995 were for cash and 9% were from
credit card charges. In order to give customers a payment alternative,
especially with respect to larger ticket items, the Company introduced a layaway
program in November 1993. Most of the stores now have layaway facilities to
serve those customers who wish to pay for merchandise up to a 60-day period.
Layaway sales accounted for approximately 5% of net sales in fiscal 1995, and
layaway fees are included in the Company's reported net sales.

ADVERTISING AND MARKETING

In August 1994, the Company engaged a new advertising and marketing agency
and has implemented a new advertising program. The Company's new program is
focusing on two key areas, advertising that offers substantive differentiation
from its competitors and the innovative and aggressive participation of store
level employees. The Company does not believe that this new advertising program
will increase advertising expenditures.

One key difference 50-OFF offers its customers is the 50% discount off
ticketed prices experienced at the cash register. The Company has developed a
new pricing statement which accentuates the low price image implied by the
Company's 50-OFF name but strategically avoids any confusion or resistance
evoked by the natural question, "50% off of what?" The new pricing statement,
"The 50-OFF Price Is Always The Low Price On Quality Merchandise," capitalizes
on the low price image while highlighting the quality merchandise benefit. The
pricing statement is now being communicated to customers through in-store
communication and print and electronic media.

Additionally, the Company's new advertising program includes television
commercials featuring an animated 50-OFF cash register with an exaggerated 50-
OFF button to underscore the excitement and innovation of the discount concept
and enhance the key differentiation, which invite customers to come in and
experience the "magic" of the 50-OFF cash register button. This new "star" of
50-OFF's advertising, the animated cash register, is being featured in
traditional price-item formats, as well as in brand building efforts, and is
being used in point-of-sale communication, as well as print and electronic
media.

The Company's employees are actively involved in preparing their stores to
meet and exceed the demands of today's informed customer. The "Time to Shine"
program, initiated in early August 1994, involves a videotape shot by the
manager of each store monthly featuring specified areas of the store as well as
innovative new displays and ideas created by such store's employees to better
serve the customer. The tapes are reviewed by a management committee, and a
master, edited version is distributed to the field featuring the "Shining Stars"
of 50-OFF. The "Time to Shine" program is functioning as a device to build
teamwork, morale and healthy competition at the store level, a training tool and
a means by which management can be assured that store level personnel are
executing the Company's business strategy properly.

Management believes the descriptiveness of its 50-OFF name provides a
significant promotional advantage.

PURCHASING

The Company's buyers purchase goods at lower than regular wholesale prices
from manufacturers and vendors. The following factors contribute to the
Company's ability to obtain quality merchandise at reduced wholesale prices:

. authority of its buyers to place orders for immediate delivery without
further review by management;

. manufacturers' overproduction;

. excess merchandise accumulated by vendors;

. cancellations of orders by other retailers;

7
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. merchandise which does not meet other retailers' delivery deadlines for
various reasons, including import delays;

. utilization of left-over piece goods available after production for
traditional department stores;

. merchandise not shipped to other retailers that have credit problems;

. increased availability of import purchases from the Far East in the form of
close-outs and in-stock lots of overproduction;

. ability to commit for categories of merchandise produced specifically for
the Company;

. ability of the Company to buy goods at a time closer to a target season,
or, in some cases, out of season, which is generally not the normal buying
pattern of most other retail stores; and

. ability of the Company to pay cash or accept abbreviated credit terms
(because of its reputation for prompt payment, the Company is often among
the first retailers approached by vendors or manufacturers with special
merchandise offers).

Appropriately missing from the above list are manufacturers' fashion and quality
mistakes; it is the Company's policy to offer quality merchandise.

The Company purchases merchandise from more than 1,300 vendors and
manufacturers. No single vendor or manufacturer supplied a significant
percentage of the Company's merchandise during the last fiscal year, or, in the
opinion of the Company, is material to its operations. The Company's financial
credibility and good relationships with vendors and manufacturers, generally,
are critical to its success.

INVENTORY MONITORING

The Company's computerized management information system, featuring bar-
code-scanning, point-of-sale cash registers in all of its stores and a
computerized perpetual inventory system, permits corporate management to review
each store's inventory on a daily basis. This system enables the Company to
closely monitor its inventory needs and coordinate its purchase orders. The
Company is installing a box bar-code-labeling system to label shipments at the
vendor to enable more accurate tracking of each store's merchandise from point
of pick-up to the store.

DISTRIBUTION SYSTEM

Substantially all of the Company's merchandise is shipped directly from
manufacturers or vendors to store locations through two freight consolidation
points. This distribution system generally allows merchandise delivery to the
Company's stores as quickly as one week after placing an order and, in addition,
gives the Company the flexibility to purchase merchandise for all or a small
number of its stores. While the Company's historical distribution system was
working, the Company has realized incremental time and cost savings as a result
of relocating its freight consolidation activities in fiscal 1995 to new
locations more appropriate to the current geographical mix of its stores.

STORE OPERATIONS

Substantially all merchandise decisions with respect to prices, markdowns
and advertising are made on an individual store basis by management at corporate
headquarters in San Antonio, Texas. The Company has district and area managers
who visit each of the Company's stores on a regular basis to review the
implementation of Company policy, monitor operations and review inventories and
the presentation of merchandise. Accounting and general financial functions for
the Company's stores are also conducted at corporate headquarters.

Each 50-OFF store has a manager responsible for supervision and overall
operations and one or more assistant managers. Store managers receive a fixed
salary and are eligible for bonuses primarily based on their control of
inventory and on their achieving a targeted increase in sales over budgeted
amounts.

8
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SERVICE MARKS AND PATENTS

The Company has registered its principal logos, which include the phrases
"The 50-OFF," "50-OFF, Why Pay More", "50-OFF Stores where you save as much as
you spend" and "50-OFF" as service marks in the principal register with the U.S.
Patent and Trademark Office. "The 50-OFF" mark is also registered in Mexico.

EMPLOYEES

At March 15,1995, the Company had approximately 1,201 full time employees,
84 corporate management, administrative and clerical personnel, 11 buyers, 53
distribution and transportation personnel, 1,053 store management and store
personnel and approximately 1,541 part-time store employees. Additional part-
time employees are usually hired during the Christmas, Easter and 'back-to-
school" seasons.

None of the Company's employees are represented by a union and employee
relations are considered satisfactory.

COMPETITION

The Company faces intense competition for customers, for access to quality
merchandise and for suitable store locations from regional and national off-
price retail chains, traditional department stores and specialty retailers.
Certain of the Company's competitors have greater financial and marketing
resources than the Company. In addition, in the recent past the Company has
experienced more direct price competition from certain department store chains
for limited time periods as a result of promotional pricing activity. The
Company may face similar periods of intense competition in the future, which
could have an adverse effect on its financial results.

IMPACT OF MEXICAN ECONOMIC CONDITIONS

Although the Company has in recent years significantly reduced its
dependence upon border store operations by expansion to other markets, the
Company's activities were historically dependent to a significant degree upon
its stores located in Texas cities along the Mexican border. During fiscal 1995,
approximately 17% of the Company's net sales were attributable to the Company's
then 15 border stores. Mexican peso devaluations and duty-free import
restrictions, and the enforcement thereof, have from time to time significantly
reduced purchases by Mexican nationals, who constitute a significant portion of
the Company's customers in certain of its border locations, and have resulted in
decreases in sales during such periods.

The Mexican Government devalued the peso and subsequently released it for
free exchange just prior to Christmas, and the Company's 10 border stores most
dependent upon Mexican nationals for their sales experienced a significant drop
of approximately $731,000 or 20% for the last seven weeks of fiscal 1995
compared to the same period in fiscal 1994. The Company currently expects a
significant sales decline from its 13 continuing border stores during fiscal
1996.

The United States, Mexico and Canada have entered into NAFTA, a trilateral
free trade agreement which is generally expected, among other things, to
stimulate significant long term growth and development of the Mexican economy.
Because NAFTA is in the early stages of implementation and the Mexican
government has recently devalued the peso, it is not possible to determine what
effect the agreement may have on the Company's operations. The potential
development of more competitive retail operations in Mexico may adversely affect
the performance of the Company's border stores; however, the Company believes
that its border stores have not been adversely affected by any increased Mexican
retail activity to date. The Company anticipates that the effect of NAFTA upon
its operations may, in fact, be favorable overall, because the Company's border
stores have historically operated most profitably during periods when the
Mexican economy has prospered.

The Company has discontinued exploring expansion opportunities in Mexico
through possible franchises or joint ventures until a more favorable and stable
economic and business climate exists in Mexico.

9
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ITEM 2. PROPERTIES

The Company's 109 existing stores are all leased and range in size from
10,000 to 50,000 square feet, with most containing at least 22,000 square feet.
The majority of the Company's stores are located in strip shopping centers or
malls. The Company's policy is to locate stores in areas where demographics
indicate that its targeted customers have easy access to the location and where
the targeted customer base is large enough to support a store. The Company
currently operates approximately 49% of its stores in the state of Texas. The
remainder of the Company's stores are located in 13 other states, primarily in
the southern and southwestern United States.

The Company opened a total of 32 stores in fiscal 1993, 22 stores in fiscal
1994 and five stores in fiscal 1995. The Company has opened two stores in fiscal
1996 and has no other lease commitments beyond the lease commitments for three
additional stores to be opened in existing markets in the first quarter of
fiscal 1996 and an additional store scheduled to open in an existing market in
April 1996. In connection with its consolidation plan, the Company closed nine
stores during fiscal 1994 and seven during fiscal 1995. The Company has
committed to close 12 stores by the end of fiscal 1996; two have been closed,
and eight additional stores will be closed in the first quarter and two at the
end of December. All appropriate store closing costs associated with fiscal 1995
and 1996 store closings were recorded in fiscal 1995.

In fiscal 1993, 1994 and 1995, the Company paid an average of $ .32, .33
and .33 per square foot, respectively, per month in rent for its leased store
facilities, including both minimum rent and percentage rent. Store leases
generally provide for yearly minimum rentals of between $3.00 and $4.00 per
square foot (paid in equal monthly installments) plus a pro-rata share of
increases from the initial lease year for other charges, including real estate
taxes, common area maintenance and property insurance. In addition, the majority
of store leases provide for percentage rental payments. During fiscal 1995, the
Company incurred and expensed an aggregate of approximately $10,278,000 in fixed
rent and an aggregate of approximately $484,000 as additional percentage rent.
Minimum rental commitments (excluding renewal options) under store leases
(excluding stores to be closed) having a term of more than one year at February
3, 1995 are approximately $8,978,000 for the fiscal year ending February 2,
1996.

In most of the Company's stores, a small portion of selling space is
subleased to an unaffiliated party operating shoe departments. Such subleases
generally provide for a percentage rent payable to the Company equal to 12% of
the net sales of such departments. The rental income from the subleases is
included in the Company's reported net sales figures.

Typical leases have primary terms of five to ten years with at least one
five-year renewal option. Some leases have provisions that allow the Company,
and in a few cases the landlord, to terminate the lease during the primary term
based on the Company's store not reaching predetermined sales levels. Most of
the Company's leases provide that the landlord will pay for the major portion of
leasehold improvements or allow the Company to recover its expenditures for such
improvements in the form of reduced rent.

The Company owns its equipment, furniture and fixtures which are well-
maintained and suitable for its present store requirements. The Company owns its
corporate headquarters in San Antonio, Texas.

For additional information, see Note 7 of Notes to Consolidated Financial
Statements for the fiscal year ended February 3, 1995.

10
<PAGE>

The following is a list of the Company's stores as of March 15, 1995 by state
and city.

ALABAMA (6) LOUISIANA (10) TENNESSEE (7)
Birmingham (2) Baton Rouge (2) Chattanooga
Gadsden Bossier City Memphis (5)
Huntsville Lafayette Nashville
Montgomery Lake Charles
Tuscaloosa Monroe TEXAS (53)
New Orleans (3) Abilene
ARKANSAS (1) Shreveport Amarillo
Little Rock Austin (2)
MISSOURI (2) Beaumont
FLORIDA (8) Saint Ann Brownsville (2)*
Daytona Beach Saint Charles Bryan
Jacksonville (3) Corpus Christi
Pensacola (2) NEW MEXICO (4) Dallas-Fort Worth (10)
Tampa (2) Albuquerque (2) Del Rio*
Farmington Eagle Pass*
GEORGIA (7) Las Cruces El Paso (3)*
Atlanta (3) Harlingen*
Marietta NORTH CAROLINA (3) Houston (10)
Smyrna Charlotte (3) Laredo (2)*
Albany Lubbock
Augusta OKLAHOMA (5) McAllen*
Lawton Midland
INDIANA (1) Oklahoma City (3) Odessa
Clarksville Tulsa Pharr*
Port Arthur
KENTUCKY (1) SOUTH CAROLINA (1) Roma*
Louisville Charleston San Angelo
San Antonio (7)
Waco

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

*Border stores (13)

11
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

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 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. 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 believed to be
controlled by them 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 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 lawsuit has only recently been filed, and
discovery has not commenced. 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.

The Company is a party to certain other legal proceedings arising in the
ordinary course of business, none of which are believed to be material.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's stockholders,
through solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1995.

12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading publicly on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") in July
of 1984 and was subsequently added to the NASDAQ National Market System
effective in September of 1989. The Nasdaq-NMS symbol is "FOFF."

The following table sets forth for the periods indicated the range of high
and low closing sale prices for the Common Stock as reported on the NASDAQ
National Market System.

RANGE OF SALE PRICES

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
For Fiscal Year Ended January 28, 1994:
Quarter ended April 30, 1993................................. $12.75 $7.25
Quarter ended July 30, 1993.................................. 9.63 5.63
Quarter ended October 28, 1993............................... 7.50 5.50
Quarter ended January 28, 1994............................... 9.63 6.38
For Fiscal Year Ended February 3, 1995:
Quarter ended April 29, 1994................................. 7.13 3.63
Quarter ended July 29, 1994.................................. 4.75 2.75
Quarter ended October 28, 1994............................... 5.50 3.75
Quarter ended February 3, 1995............................... 5.25 2.63
</TABLE>

The Company has never paid cash dividends on shares of Common Stock.
Management presently intends to retain cash for the operation and expansion of
the Company's business and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. In addition, the Company is precluded
from paying dividends on its Common Stock by the terms of its line of credit
agreement. See Note 5 of the Notes to Consolidated Financial Statements included
elsewhere herein.

As of March 15, 1995, the number of record holders of the Company's Common
Stock was 965.

On March 15, 1995, the last reported sale price of the Common Stock on the
NASDAQ National Market System was $2.00 per share.

13
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
and are qualified in their entirety by, the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Annual Report on Form 10K.

<TABLE>
<CAPTION>
Fiscal Years Ended
------------------------------------------------------------------------------
Feb. 3, Jan. 28, Jan. 29, Jan. 31, Feb. 1,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (dollars in thousands, except per share data)
Net sales............................... $201,543 $199,589 $181,035 $130,085 $78,123
Cost of sales........................... 135,560 137,784 120,184 86,242 52,715
------- ------- ------- ------- ------
Gross profit............................ 65,983 61,805 60,851 43,843 25,408
Selling, advertising, general and
administrative expenses (1)............ 63,827 65,477 46,029 30,371 18,801
(Loss) income before cumulative
effect of a change in
accounting principle (2) (9)........... (8,024) (5,512) 4,815 6,460 2,604
Cumulative effect of a change in
accounting principle, net of
income tax benefit (1)................. - (3,404) - - -
Net (loss) income applicable to
common stock........................... $ (8,024) $ (8,916) $ 4,815 $ 6,460 $ 2,604
Primary (loss) income per common
share before cumulative effect
of a change in accounting
principle (3).......................... $ (.76) $ (0.53) $ 0.45 $ 0.64 $ 0.37
Fully diluted (loss) income per
common share before cumulative
effect of a change in accounting
principle (3).......................... $ (.76) $ (0.53) $ 0.45 $ 0.63 $ 0.33
Fully diluted (loss) income per
common share (3)....................... $ (.76) $ (0.86) $ 0.45 $ 0.63 $ 0.33

Pro Forma Amounts: (4)
Net income.............................. $ 3,275 $ 5,578 $ 2,431
Primary income per common share......... $ 0.30 $ 0.55 $ 0.35
Fully diluted income per common
share.................................. $ 0.30 $ 0.54 $ 0.29

Other Data:
Stores open at beginning of period...... 111 98 66 46 34
New stores.............................. 5 22 32 20 12
Stores closed........................... 7 9 0 0 0
Stores open at end of period (10)....... 109 111 98 66 46
Average age of stores (yrs) (5)......... 3.71 2.87 2.47 2.44 2.23
Apparel sales as a percentage of
merchandise sales (6).................. 63.1% 69.2% 72.2% 75.0% 76.9%
Non-apparel sales as a percentage
of merchandise sales (6)............... 36.9% 30.8% 27.8% 25.0% 23.1%
Comparable store sales increase
(decrease) from prior period (7)....... 2.6% (9.5)% (1.2)% 20.7% 5.3%
Apparel merchandise gross margin........ 31.5% 28.8% 32.2% 32.3% 31.6%
Non-apparel merchandise gross
margin................................. 34.3% 33.2% 34.3% 35.0% 33.6%
Total gross margin (8).................. 32.7% 31.0% 33.6% 33.7% 32.5%
Markdowns as a percentage of
merchandise sales (6).................. 7.1% 9.0% 5.9% 5.3% 5.6%

Balance Sheet Data:
Working capital......................... $ 9,044 $ 12,909 $ 21,471 $ 25,469 $ 6.902
Total assets............................ 62,676 67,601 72,123 56,376 28,600
Long-term obligations, excluding
current maturities..................... 7,057 6,403 1,364 763 1,757
Stockholders' equity.................... $ 28,557 $ 35,683 $ 44,389 $ 38,280 $12,995
</TABLE>

14
<PAGE>

(1) Effective with the beginning of fiscal 1994, the Company changed its method
of accounting for pre-opening store costs to expense such costs as incurred
rather than capitalizing such costs and amortizing them over a period of 12
months from the store opening date. See Note 3 of Notes to Consolidated
Financial Statements. Amounts indicated for February 3, 1995 and January
28, 1994 include pre-opening expenses of $250,864 and $3,932,554,
respectively.

(2) Amounts indicated for February 3, 1995 and January 28, 1994 include closed
store costs of $5,018,593 and $722,534, respectively. See Note 2 of Notes
to Consolidated Financial Statements.

(3) Primary and fully diluted (loss) income per common share are calculated
after dividends paid on cumulative preferred stock. Preferred stock
dividends were $26,137 in fiscal 1992 and $212,620 in fiscal 1991. There
are currently no outstanding shares of preferred stock.

(4) The "Pro Forma Amounts" shown above assume the accounting method for pre-
opening store costs is applied retroactively.

(5) Calculated on the basis of the number of months each store was open.

(6) Merchandise sales are net sales less other revenues, principally layaway
fees and rental income from leased shoe departments.

(7) Comparable store data are calculated based on stores which have been open
over 24 months.

(8) Total gross margin represents gross profit calculated as a percentage of
net sales.

(9) In fiscal 1995, no income tax benefit was recorded in accordance with
Statement of Financial Accounting Standards (SFAS) 109 "Accounting for
Income Taxes."

(10) As discussed in Note 2 of Notes to Consolidated Financial Statements, the
Company will close 12 stores and open 5 stores during fiscal 1996.

No cash dividends with respect to the Company's Common Stock were paid during
any of the fiscal years referred to in the foregoing table.

15
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

. made significant changes in merchandising management;

. increased the assortment, space allocation and inventory of non-apparel
goods in response to shifts in consumer demand;

. relocated the Company's freight consolidation activities to locations more
appropriate to the geographical mix of its stores to achieve incremental
time and costs savings;

. engaged a new advertising and marketing agency and implemented a new
advertising program;

. limited new store openings for foreseeable future to existing markets.

As a result of the foregoing, the Company's financial performance improved
significantly during the first 39 weeks of fiscal 1995 compared to the same
period in fiscal 1994:

. net sales increased 3.8%;

. merchandise sales per comparable store increased 7.1%;

. non-apparel sales increased to 35% of merchandise sales from 28.6% of such
sales;

. gross margin increased to 33.8% from 31.5%, principally due to the change
in merchandise mix and a decrease in markdowns to 6.9% of merchandise sales
from 9.1% of such sales in fiscal 1994; and

During the last 13 weeks of fiscal 1995 compared to the same period in
fiscal 1994, external factors negatively affected sales:

16
<PAGE>

. the Mexican Government devalued the peso and subsequently released it
for free exchange just prior to Christmas, and the Company's ten
border stores most dependent upon Mexican nationals for their sales
experienced approximately a $731,000 (20%) drop in sales for the last
seven weeks of fiscal 1995 compared to the same period in fiscal 1994.

The Company has taken the following affirmative steps to achieve a more
disciplined cost structure, to attain profitability and to lessen vulnerability
to external factors:

. completed its store consolidation program by committing to close 12
stores in fiscal 1996 located primarily in smaller markets unable to
support a store or markets in which it would be cost prohibitive to
open the number of stores required to effectively develop such
market's potential at this time (anticipated fiscal 1996 store closing
costs totaling approximately $4,942,000, including approximately
$835,000 for related inventory liquidation write-downs, were charged
to operating results for fiscal 1995);

. hired a new Vice President - Transportation and Distribution to add
management experience in that area;

. hired a new Vice President - Store Operations to concentrate on the
development of the Company's maturing store base;

. stopped new store openings, except for existing commitments and moving
of stores within a market;

. realigned management and staff responsibilities and substantially
reduced related compensation, relatively and absolutely, to achieve
permanent efficiencies without compromising performance;

. implemented cost and personnel reductions, including a 25% reduction
in corporate personnel, a 19% reduction in wages and benefits and an
overall $1 million decrease in fixed costs at corporate headquarters;
and

. negotiated the amendment of the financial covenants of the Company's
line of credit and long-term debt agreements.

17
<PAGE>

RESULTS OF OPERATIONS

The following tables set forth (i) certain items in the consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated and (ii) the percentage change in certain items in the consolidated
statements of operations and in the weighted average number of stores from the
prior period.

<TABLE>
<CAPTION>
Percentage of Net Sales
--------------------------------------------
Fiscal Year Ended
--------------------------------------------
Feb. 3, 1995 Jan. 28, 1994 Jan. 29, 1993
------------ ------------- -------------
<S> <C> <C> <C>
Costs and Expenses:
Cost of sales........................... 67.3% 69.0% 66.4%
Selling, advertising, general and
administrative......................... 31.5 30.8 25.4
Pre-opening store costs................. .1 2.0 -
Amortization of pre-opening store
costs.................................. - - 2.9
Depreciation and amortization........... 1.9 1.7 1.3
Closed store costs...................... 2.5 .4 -
Interest (income) expense............... .7 0.3 (0.1)
----- ----- ----
Total expenses............................ 104.0 104.2 95.9
----- ----- ----
(Loss) income before income taxes and
cumulative effect of a change in
accounting principle.................... (4.0) (4.2) 4.1
Benefit from (provision for)
income taxes............................ - 1.5 (1.4)
Cumulative effect of a change in
accounting principle.................... - (1.7) -
----- ----- ----
Net (loss) income......................... (4.0)% (4.4)% 2.7%
===== ===== ====
</TABLE>

<TABLE>
<CAPTION>
Percentage Change
-----------------------------------------
Fiscal Year Ended Fiscal Year Ended
February 3, 1995 January 28, 1994
compared to compared to
Fiscal Year Ended Fiscal Year Ended
January 28, 1994 January 29, 1993
---------------- ----------------
<S> <C> <C>
Net sales................................................... 1.0% 10.2%
Cost of sales............................................... (1.6) 14.6
Operating Expenses
Selling, advertising, general and administrative.......... 3.3 35.3
Pre-opening store costs................................... (93.6) -
Depreciation and amortization............................. 7.3 48.2
Closed store costs........................................ 594.6 -
Interest income/expense................................... 162.0 (402.9)
Total operating expenses.................................... 5.4 31.1
Loss/income before income taxes and cumulative
effect of a change in accounting principle................ (5.0) (216.0)
Benefit from/provision for income taxes..................... - (219.1)
Net loss/income............................................. (10.0) (285.2)
Weighted average number of stores........................... 1.6% 29.9%
</TABLE>

18
<PAGE>

YEAR ENDED FEBRUARY 3, 1995 (53 WEEKS) COMPARED TO FISCAL YEAR ENDED JANUARY 28,
1994 (52 WEEKS)

The Company's relatively flat net sales for fiscal 1995 compared to fiscal
1994 resulted primarily from the lower sales experienced due to warm weather in
the winter apparel selling season (November and December), the devaluation of
the Mexican peso which negatively affected sales for the last seven weeks of
fiscal 1995 at the Company's border stores and fewer new store openings. Through
the first thirty-nine weeks of fiscal 1995, the Company had a comparable store
sales increase of 7.1% and a net sales increase of 3.8%. Although the Company's
comparable store sales for fiscal 1995 increased by 2.6%, in spite of the fourth
quarter's warm weather and peso devaluation, and the weighted average number of
stores increased by 1.6%, these percentage increases were offset by the effect
of sales of having only five new stores opened in fiscal 1995 as compared to 22
in fiscal 1994. Typically, new stores contribute significant sales during their
first three months of operations.

Cost of sales as a percentage of net sales decreased to 67.3% for fiscal
1995 compared to 69.0% for fiscal 1994 primarily due to lower markdowns
resulting from improved merchandise and inventory management. The decrease would
have been greater but for the fiscal 1995 inventory liquidation write-downs of
approximately $1,129,000 in connection with the closing of seven stores in
fiscal 1995 and the ten stores to be closed by the end of April 1995 (See Note 2
of Notes to Consolidated Financial Statements and store closing costs below).

Selling, advertising, general and administrative expenses increased to
31.5% of net sales for fiscal 1995 from 30.8% for fiscal 1994 primarily due to
disappointing fourth quarter net sales. Had expected sales been attained, such
expenses would have been spread over more sales dollars and represented a lower
percent of net sales.

The pre-opening store costs decreased from approximately $3,933,000 in
fiscal 1994 to approximately $251,000 in fiscal 1995. The Company opened only
five stores in fiscal 1995 compared to 22 in fiscal 1994 and has reduced costs
associated with store openings from in excess of $175,000 per store to less than
$60,000.

Store closing costs increased from approximately $723,000 for fiscal 1994
to approximately $5,019,000 (excluding $1,129,000 of inventory liquidation write
downs charged to cost of sales) for fiscal 1995 as a result of closing seven
stores in fiscal 1995 and recording the closing costs of 12 stores to be closed
in fiscal 1996. The amount of store closing costs associated with the 12 stores
to be closed in fiscal 1996 is approximately $4,107,000, excluding an associated
$835,000 inventory liquidation write-down charged to cost of sales (see Note 2
of Notes to Consolidated Financial Statements).

Depreciation and amortization increased by .2% of net sales, primarily due
to the increased number of stores having a full year of depreciation as compared
to fiscal 1994.

Net interest expense increased from .3% of net sales in fiscal 1994 to .7%
of net sales in fiscal 1995 primarily due to the greater utilization of the
Company's line of credit and higher interest rates.

The decrease in the loss before income taxes for fiscal 1995 from the
fiscal 1994 loss before income taxes and cumulative effect of a change in
accounting principle is primarily due to lower markdowns and pre-opening store
costs, although essentially offset by substantially higher store closing costs,
inventory liquidation write-downs and higher interest expense.

Income tax benefits due to the loss for the year were not recognized in
accordance with the guidelines of SFAS 109 (Accounting for Income Taxes); such
benefits are available for recognition in future years. In fiscal 1994, benefits
were recognized and refunds received.

FISCAL YEAR ENDED JANUARY 28, 1994 COMPARED TO FISCAL YEAR ENDED JANUARY 29,
1993

The net sales increase of 10.2% for fiscal 1994 compared to fiscal 1993 was
attributable to the 29.9% increase in the weighted average number of stores in
operation offset by a 9.5% decrease in comparable store sales.

19
<PAGE>

Sales levels were negatively affected at stores operating both along the
Texas/Mexico border and in other cities in Southwest Texas that traditionally
sell products to Mexican citizens. In late 1992, the duty free amount of
merchandise that Mexican citizens living beyond the 12 mile border zone were
allowed to purchase in the United States was reduced from $300 to $50 by the
Mexican Government. Such change has negatively impacted those stores' sales and
profitability since December 1992. Sales were also negatively impacted by
general economic conditions, including a sluggish economy (prompting increased
price competition among retailers), weak consumer confidence and a shift in
consumer spending away from apparel to durable goods.

To reverse the negative sales trends of the first two quarters of fiscal
1994, the Company, at mid year, began purchasing higher quality merchandise to
provide the customer with better values and, in the fourth quarter, began a new
advertising strategy which primarily utilized radio and direct mail pieces.
Comparable store sales trends suggest that these efforts had a positive effect;
comparable store sales for the fourth quarter of fiscal 1994 increased 1% from
the prior period, up from the 17.5% decrease in the 1994 first quarter, the
16.9% decrease in the 1994 second quarter and the 10.0% decrease in the 1994
third quarter compared to the comparable 1993 period in each case.

Cost of sales as a percentage of net sales increased from 66.4% in fiscal
1993 to 69.0% in fiscal 1994 primarily due to higher markdowns attributable to
lower than expected sales and to a lesser extent due to the excess amount of
inventory shrinkage in stores open less than two years.

Selling, advertising, general and administrative expenses as a percentage
of net sales increased to 31.2% in fiscal 1994 from 25.4% in fiscal 1993. Such
expenses as a percentage of net sales were higher than the prior year due to
lower than expected sales. The percentage change of 35.3% in expenses in fiscal
1994, as compared to the percentage change of 29.9% in the weighted average
number of stores, was higher as a result of the expense of closing nine stores,
normal yearly expense increases and reductions in corporate staff used in
connection with store expansion.

As discussed in Note 2 of Notes to Consolidated Financial Statements, the
Company changed its accounting policy regarding pre-opening store costs,
effective at the beginning of fiscal 1994. In prior years, costs for each store
were capitalized and amortized over the first twelve months after the store
opened. The cost of approximately $3,933,000 for the 22 new stores opened in
fiscal 1994 was slightly higher per store than the approximately $7,705,000
spent in fiscal 1993 during which 32 stores were opened (approximately
$1,300,000 of the fiscal 1993 expenditure was for fiscal 1994 openings and
approximately $647,000 of the fiscal 1992 expenditure was for fiscal 1993
openings). The cumulative effect of the change in accounting method resulted in
an after-tax charge in fiscal 1994 of approximately $3,404,000 to record the
unamortized pre-opening store costs at January 29, 1993.

Depreciation and amortization increased 48.2% in fiscal 1994 primarily due
to the purchase of equipment and fixtures for new stores and, to a lesser
extent, the refurbishing of existing stores.

In fiscal 1994, the Company incurred increased net interest expense
primarily due to the addition of approximately $6,800,000 in long term debt and
decreased interest income compared to fiscal 1993 as invested funds were used to
open new stores.

The net loss for fiscal 1994 compared to the net income in fiscal 1993 was
due primarily to lower than expected sales and the resultant higher costs due to
markdowns, to costs associated with the Company's reduction in corporate staff
used in connection with store expansion, to store closing costs, to higher
interest expense and to the cumulative effect of the change in accounting
principle relating to pre-opening store costs.

20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company began fiscal 1995 with cash of $2,550,588. During the year, the
Company increased borrowings by a net of $5,721,749, received $898,559 from the
sale of common stock, used $3,671,745 in operating activities, used $3,436,475
for capital expenditures in refurbishing existing stores and opening five stores
and ended the year with cash on hand of $2,062,676. The Company has a line of
credit loan facility for up to $20,000,000, obtained in January 1994, which
expires on January 12, 1997; permits loans up to the lesser of (i) 45% of
eligible inventory or (ii) 80% of liquidation value of inventory, both minus
$1,500,000, and bears interest at 1.75% over the prime rate. The line of credit
is secured by inventory and other assets of the Company and contains minimum
tangible net worth, minimum working capital and minimum pre-tax profit financial
covenants. The financial covenants have been amended for fiscal 1996. The
maximum amounts outstanding under the line of credit during fiscal 1995 and
fiscal 1994 were approximately $13,312,000 and $8,530,000, respectively. Peak
cash requirements have historically occurred in the late third and early fourth
fiscal quarters. As of February 3, 1995, the Company had approximately $296,000
in letters of credit and had approximately $5,077,000 available for use under
its line of credit.

In fiscal 1994, the Company borrowed approximately $4,000,000 and
$2,775,000 from an affiliate of an insurance company and pledged as security
certain store equipment, furniture and fixtures. The related promissory notes
provide for monthly principal and interest installments of $62,044 and $41,747
until February 2000 and July 2000, respectively. The notes bear interest at
7.85% and 6.92%, respectively. Financial covenant requirements are substantially
the same as for the Company's line of credit, plus a tangible net worth ratio
covenant as amended.

The Company opened five stores during fiscal 1995. The Company has opened
two stores in fiscal 1996 and has lease commitments for three additional stores
to be opened in existing markets prior to May 1995. There are no other planned
store openings except for a single store scheduled to open in an existing market
in April 1996. Further store openings will depend upon the sales and income
performance of existing stores and the Company's ability to obtain leases for
locations in existing markets where the targeted customer base is large enough
to support additional stores.

Store closing costs of approximately $4,942,000 for the 12 stores closed or
to be closed in fiscal 1996 include primarily estimated monthly lease payments
totaling approximately $2,735,000 to be disbursed over an estimated five year
period: approximately $748,000, $956,000, $699,000 $307,000 and $25,000 in
fiscal 1996, 1997, 1998, 1999 and 2000, respectively. Cash from the sales of the
inventory to be liquidated at stores to be closed in fiscal 1996 should more
than offset such cash requirement for fiscal 1996.

As discussed in note 9 of notes to consolidated financial statements, the
Company has filed a lawsuit related to certain parties' breach 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
prior to 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.

EFFECT OF INFLATION

As the costs of inventory and other expenses of the Company have increased,
the Company has generally been able to increase its selling prices; therefore,
in the view of management, inflation has not had a significant effect on gross
margins. In periods of high inflation, increased rent, construction and other
costs could adversely affect the Company's operations.

21
<PAGE>

SEASONALITY

Historically, the Company's business has been highly seasonal. A
significant portion of its sales and net income are generated in the first and
fourth quarters, due to the importance of the spring/Easter and winter/Christmas
selling seasons, and, to a lesser extent, in the "back to school" third quarter.
Accordingly, weather conditions or other factors during such seasons may
adversely affect results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information called for by this item is contained in a separate section
of this report. See "Index to Consolidated Financial Statements."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Part III of this Annual Report on Form 10-K is
incorporated by reference from the Registrant's Definitive Proxy Statement to be
filed pursuant to Regulation 14A not later than 120 days after the Registrant's
fiscal year end.

22
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) The following documents are being filed as part of this annual report on
Form 10-K:

1. Consolidated financial statements and independent auditors' report for
50-OFF Stores, Inc. and subsidiaries:

Independent auditors' report.

Consolidated balance sheets - February 3, 1995 and January 28, 1994.

Consolidated statements of operations - years ended February 3, 1995,
January 28, 1994 and January 29, 1993.

Consolidated statements of changes in stockholders' equity - years
ended February 3, 1995, January 28, 1994 and January 29, 1993.

Consolidated statements of cash flows - years ended February 3, 1995,
January 28, 1994 and January 29, 1993.

Notes to consolidated financial statements.

2. Consolidated financial statement schedules:

Schedules are omitted because they are not applicable or not
required, or because the required information is included in the
Consolidated Financial Statements or Notes thereto.

3. Exhibits:

3.1 Certificate of Incorporation of the Registrant. (A)

3.2 Bylaws of the Registrant. (A)

4.1 Form of Common Stock Certificate. (H)

10.1 Employment agreement between the Registrant and
Charles M. Siegel. (D)

10.3 Stock Option Plan of the Registrant. (A)

10.4 Loan Agreement with Congress Financial Corporation. (F)

10.6 Certificate of Corporate Resolution Adopting the Company 401K Profit
Sharing Plan and Trust. (C)

10.8 First Amendment to loan agreement with Congress Financial
Corporation. (H)

11. Computation of Per Share Earnings for fiscal years ended
February 3, 1995, January 28, 1994 and January 29, 1993. (H)

18. Change in Accounting Principles. (F)

21. Subsidiaries of the Registrant. (E)

23
<PAGE>

23. Consent of Deloitte & Touche LLP. (H)

25. Power of attorney of directors appointing Charles M. Siegel, Pat L.
Ross and Joseph Lehrman attorneys-in-fact appear after signature page
in this report on Form 10-K.

99. Petition filed in the matter of 50-OFF Stores, Inc., (Plaintiff) vs.
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, (Defendants). (G)

(A) Contained in exhibits to the Registrant's Registration Statement No.
33-48216 on Form S-4 filed with the Securities and Exchange
Commission on July 28, 1992.

(B) Contained in exhibits to the annual report on Form 10-K for the
fiscal year ended August 31,1984.

(D) Contained in exhibits to the annual report on Form 10-K for the
fiscal year ended January 31, 1992.

(E) Contained in exhibits to the annual report on Form 10-K for the
fiscal year ended January 29, 1993.

(F) Contained in exhibits to the Annual Report on Form 10-K for the
fiscal year ended January 28, 1994.

(G) Contained in exhibits to the current report on Form 8-K filed April
12, 1995.

(H) Filed herewith.

(B) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

24
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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

By: Pat L. Ross
--------------------------------
Pat L. Ross, Vice President and
Chief Financial Officer

By: JAMES G. SCOGIN
--------------------------------
James G. Scogin, Controller

Date: April 20, 1995

25
<PAGE>

POWER OF ATTORNEY

The undersigned directors and officers of 50-OFF Stores, Inc. hereby
constitute and appoint Charles M. Siegel, Pat L. Ross and Joseph Lehrman our
true and lawful attorneys-in-fact and agents, to execute in our name and behalf
in the capacities indicated below the annual report on Form 10-K for 50-OFF
Stores, Inc. and any amendments thereto with the Securities and Exchange
Commission and hereby ratify and confirm all such attorneys-in-fact and agents
shall lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, and in the capacities and on the dates indicated:

Signature Title Date
--------- ----- ----
<S> <C> <C>
CHARLES M. SIEGEL Chairman of the Board, April 20, 1995
- - ----------------------------- President, Chief Executive
Charles M. Siegel Officer and Director

JOSEPH LEHRMAN Secretary, Treasurer and April 20, 1995
- - ----------------------------- Director
Joseph Lehrman

PAT L. ROSS Vice President and April 20, 1995
- - ----------------------------- Chief Financial Officer
Pat L. Ross

CHARLES J. FUHRMANN II Director April 20, 1995
- - -----------------------------
Charles J. Fuhrmann II

MICHAEL MOFFITT Director April 20, 1995
- - -----------------------------
Michael Moffitt

JAMES M. RAINES Director April 20, 1995
- - -----------------------------
James M. Raines

CECIL SCHENKER Director April 20, 1995
- - -----------------------------
Cecil Schenker

RICHARD SHERMAN Director April 20, 1995
- - -----------------------------
Richard Sherman

STANLEY SPIGEL Director April 20, 1995
- - -----------------------------
Stanley Spigel
</TABLE>

26
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report....................................................................... F-2
Consolidated Balance Sheets - February 3, 1995 and January 28, 1994................................ F-3
Consolidated Statements of Operations - Years ended February 3, 1995, January 28, 1994
and January 29, 1993............................................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity - Years ended February 3, 1995,
January 28, 1994 and January 29, 1993........................................................... F-5
Consolidated Statements of Cash Flows - Years ended February 3, 1995, January 28, 1994
and January 29, 1993............................................................................ F-6; F-7
Notes to Consolidated Financial Statements......................................................... F-8 - F-17
</TABLE>

Schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements or notes thereto.

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
50-OFF Stores, Inc.
San Antonio, Texas

We have audited the accompanying consolidated balance sheets of 50-OFF Stores,
Inc. and subsidiaries as of February 3, 1995 and January 28, 1994, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended February 3, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the 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 50-OFF Stores, Inc. and
subsidiaries as of February 3, 1995 and January 28, 1994, and the results of
their operations and their cash flows for each of the three years in the period
ended February 3, 1995 in conformity with generally accepted accounting
principles.

As discussed in notes 1 and 3 of notes to consolidated financial statements, in
fiscal 1994, the Company changed its method of accounting for pre-opening store
costs and changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.

DELOITTE & TOUCHE LLP

San Antonio, Texas
April 20, 1995

F-2
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

February 3, 1995 January 28, 1994
<S> ---------------- ----------------
CURRENT ASSETS: <C> <C>
Cash and cash equivalents..................................... $ 2,062,676 $ 2,550,588
Accounts receivable........................................... 1,645,303 2,987,329
Merchandise inventories....................................... 31,679,738 31,463,848
Prepaid and other current assets.............................. 717,561 1,422,932
----------- -----------
Total current assets........................................ 36,105,278 38,424,697

PROPERTY AND EQUIPMENT-NET.................................... 25,320,606 27,675,757

OTHER ASSETS.................................................. 1,250,043 1,500,980
----------- -----------
TOTAL ASSETS................................................ $62,675,927 $67,601,434
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Note payable-bank............................................. $ 6,955,025 $ 10,000
Accounts payable-trade........................................ 10,011,812 15,219,825
Accounts payable-other........................................ 4,896,033 5,690,416
Accrued expenses and other current liabilities................ 3,147,679 3,402,236
Current portion of closed store costs......................... 747,502 -
Current portion of long-term debt............................. 1,303,691 1,193,065
----------- -----------
Total current liabilities................................... 27,061,742 25,515,542

LONG-TERM DEBT................................................ 5,069,201 6,403,103

CLOSED STORE COSTS............................................ 1,987,692 -

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 5,000,000
shares authorized, no shares issued and
outstanding at February 3, 1995 and
January 28, 1994............................................ - -
Common stock, $.01 par value, 20,000,000
shares authorized, 12,188,415 at
February 3, 1995, and 10,370,915 at
January 28, 1994 issued and outstanding..................... 121,884 103,709
Additional paid-in-capital.................................... 36,022,389 31,150,955
Subscription receivable....................................... (3,991,050) -
Retained (deficit) earnings................................... (3,595,931) 4,428,125
----------- -----------
Total stockholders' equity.................................. 28,557,292 35,682,789
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $62,675,927 $67,601,434
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 3, 1995 January 28,1994 January 29, 1993
---------------- --------------- ----------------
<S> <C> <C> <C>
NET SALES............................................................ $201,543,133 $199,588,556 $181,035,097
COST OF SALES........................................................ 135,559,833 137,783,928 120,184,178
------------ ------------ ------------
GROSS PROFIT......................................................... 65,983,300 61,804,628 60,850,919
------------ ------------ ------------

OPERATING EXPENSES:
Selling, advertising, general and administrative..................... 63,576,400 61,544,419 46,029,028
Pre-opening store costs.............................................. 250,864 3,932,554 -
Amortization of pre-opening store costs.............................. - - 5,342,607
Depreciation and amortization........................................ 3,779,082 3,522,633 2,376,335
Closed store costs................................................... 5,018,593 722,534 -
------------ ------------ ------------
TOTAL OPERATING EXPENSES............................................. 72,624,939 69,722,140 53,747,970
------------ ------------ ------------

OTHER (INCOME) EXPENSE:
INTEREST INCOME...................................................... (136,280) (178,376) (351,855)
INTEREST EXPENSE..................................................... 1,518,697 706,125 177,606
------------ ------------ ------------
TOTAL OTHER (INCOME) EXPENSE......................................... 1,382,417 527,749 (174,249)
------------ ------------ ------------

(LOSS) INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE................................. (8,024,056) (8,445,261) 7,277,198

BENEFIT FROM (PROVISION FOR) INCOME TAXES............................ - 2,933,000 (2,462,000)
------------ ------------ ------------

(LOSS) INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE................................. (8,024,056) (5,512,261) 4,815,198

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF
INCOME TAX BENEFIT OF $1,753,362 (NOTE 3)........................... - (3,403,585) -
------------ ------------ ------------

NET (LOSS) INCOME.................................................... $ (8,024,056) $ (8,915,846) $ 4,815,198
============ ============ ============

PRO FORMA NET INCOME ASSUMING RETROACTIVE APPLICATION OF CHANGE
IN ACCOUNTING PRINCIPLE (unaudited) (NOTE 3)........................ $ 3,274,990
============

(LOSS) INCOME PER COMMON SHARE BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE...................................... $ (.76) $ (.53) $ .45

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX)... - (.33) -
------------ ------------ ------------

(LOSS) INCOME PER COMMON SHARE....................................... $ (.76) $ (.86) $ .45
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Number Paid-in Subscription Retained (Deficit)
of Shares Amount Capital Receivable Earnings Total
---------- -------- ----------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE: February 1, 1992............. 10,227,065 $102,271 $29,648,506 $8,528,773 $38,279,550
Net proceeds from the exercise of
stock options........................ 112,000 1,120 660,297 661,417
Tax benefit from stock options........ 633,207 633,207
Net income............................ 4,815,198 4,815,198
---------- -------- ----------- ----------- ----------- ------------

BALANCE: January 29, 1993............. 10,339,065 103,391 30,942,010 13,343,971 44,389,372
Net proceeds from the exercise
of stock options..................... 31,850 318 189,733 190,051
Tax benefit from stock options........ 19,212 19,212
Net loss.............................. (8,915,846) (8,915,846)
---------- -------- ----------- ----------- ----------- ------------

BALANCE: January 28, 1994............. 10,370,915 103,709 31,150,955 4,428,125 35,682,789
Net proceeds from issuance of
common stock for:
Exercise of stock options.......... 7,500 75 37,960 38,035
1,810,000 share offering........... 1,810,000 18,100 4,833,474 4,851,574
Subscription for 1,500,000 shares.. $(3,991,050) (3,991,050)
Net loss.............................. (8,024,056) (8,024,056)
---------- -------- ----------- ----------- ----------- -----------

BALANCE: February 3, 1995............. 12,188,415 $121,884 $36,022,389 $(3,991,050) $(3,595,931) $28,557,292
========== ======== =========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 3, 1995 January 28, 1994 January 29, 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net (loss) income....................................................... $(8,024,056) $(8,915,846) $ 4,815,198
Adjustments to reconcile net (loss) income to net cash provided
from operating activities:
Cumulative effect of a change in accounting principle............... - 3,403,585 -
Depreciation and amortization....................................... 3,779,082 3,522,633 2,376,335
Closed store charge................................................. 4,942,194 - -
Loss on disposition of fixed assets................................. 654,311 556,685 -
Amortization of pre-opening store costs............................. - - 5,342,607
Amortization of premiums paid on marketable securities.............. - - 342,410
Tax benefit from stock options...................................... - 19,212 633,207

Changes in assets and liabilities:
Accounts receivables................................................... 1,342,026 (102,909) -
Merchandise inventories................................................ (1,050,890) (303,298) (9,988,698)
Prepaid and other current assets....................................... 56,371 (27,430) (1,249,548)
Other assets........................................................... 337,170 (275,903) (824,550)
Accounts payable-trade................................................. (5,208,013) (2,123,466) 5,886,254
Accounts payable-other................................................. (794,383) 2,127,045 848,223
Deferred federal income taxes.......................................... 549,000 (1,947,079) 1,284,578
Accrued expenses and other current liabilities......................... (254,557) 1,237,879 859,658
----------- ----------- ------------

Net cash (used in) provided by operating activities..................... (3,671,745) (2,828,892) 10,325,674
----------- ----------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures................................................... (3,436,475) (7,311,696) (12,664,622)
Pre-opening store cost expenditures.................................... - - (7,705,325)
Sale of short-term marketable securities............................... - - 9,732,414
----------- ----------- ------------
Net cash used in investing activities................................... (3,436,475) (7,311,696) (10,637,533)
----------- ----------- ------------
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

Net proceeds from notes payable-bank........................... $ 6,945,025 $ 10,000 $ -
Proceeds from long-term debt................................... - 6,774,875 1,000,000
Payments on long-term debt..................................... (1,223,276) (940,532) (241,773)
Net proceeds from the issuance of common stock................. 898,559 190,051 661,417
----------- ----------- ----------
Net cash provided by financing activities........................ $ 6,620,308 6,034,394 1,419,644
----------- ----------- ----------

(Decrease) increase in cash and cash equivalents............... (487,912) (4,106,194) 1,107,785
Cash and cash equivalents at beginning of year................. 2,550,588 6,656,782 5,548,997
----------- ----------- ----------
Cash and cash equivalents at end of year....................... $ 2,062,676 $ 2,550,588 $6,656,782
=========== =========== ==========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid/received during the period for:
Interest paid.................................................. $ 1,407,788 $ 683,000 $ 177,606
Income tax paid................................................ - 224,000 1,163,000
Income tax refund received..................................... 1,658,134 - -

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES:

Subscription receivable for 1,500,000 shares of
common stock................................................... $ 3,991,050 - -
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements include the accounts of 50-OFF Stores, Inc. and
its wholly-owned subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated.

Operations

The Company operates a chain of off-price retail stores targeted to a broad
range of value-conscious lower to moderate income customers, who typically shop
for their family's apparel, as well as related merchandise such as housewares,
giftware, toys, domestic needs and health and beauty aids.

Fiscal Year

The Company's fiscal year is a fifty-two or fifty-three week period ending
on the Friday nearest to January 31. Fiscal year 1995 was comprised of fifty-
three weeks and fiscal years 1994 and 1993 were comprised of fifty-two weeks.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents.

Inventory Valuation

Merchandise inventories are valued at the lower of cost (first-in, first-
out) or market, using the retail inventory method. Merchandise inventories
consist entirely of finished goods.

Pre-opening Store Costs

As discussed in Note 2, effective at the beginning of fiscal 1994, the
Company changed its accounting policy for pre-opening store costs, which consist
primarily of advertising, occupancy and payroll expenses, to expense such costs
as incurred. Prior to the change, the Company capitalized such costs and
amortized them over twelve months following the month of store opening.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed on
the straight-line method at rates based upon the estimated useful lives of the
respective assets. Leasehold improvements are amortized on the straight-line
method over the shorter of the economic life of the improvements or the
respective terms of the lease. Gains and losses upon retirement or disposal of
fixed assets are recognized currently.

Income Taxes

The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the beginning of fiscal 1994. This statement
supersedes Accounting Principles Board Opinion No. 11, "Accounting for Income
Taxes" which had been the method previously used by the Company to account for
income taxes.

F-8
<PAGE>

Under SFAS No. 109. deferred income taxes represent taxes established for
temporary differences between the financial reporting and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. The change in accounting policy had
no effect on the Company's financial position or results of operations.

(Loss) Income Per Common Share

(Loss) income per common share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding. Fully diluted
(loss) income per common share is not presented as it is not materially
different than the calculation of primary (loss) income per common share.

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares 10,539,089 10,356,775 10,791,950
</TABLE>

Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt instruments. The
book value of cash and cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the short-term
maturity of these instruments. The book value of the Company's debt instruments
is considered to approximate their fair value, based on current market rates and
conditions.

Reclassifications

Certain reclassifications have been made to the fiscal 1994 and 1993
consolidated financial statements to conform to the fiscal 1995 consolidated
financial statement presentation.

Note 2 - Management Plans and Closed Store Costs

. made significant changes in merchandising management;

. took extensive markdowns, which reduced inventory levels and permitted
an increase in recognizable, quality goods as well as in merchandise
better suited to customer demographics and consumer buying trends;

. increased the assortment, space allocation and inventory of non-apparel
goods in response to shifts in consumer demand;

F-9
<PAGE>

. relocated the Company's freight consolidation activities to locations
more appropriate to the geographical mix of its stores to achieve
incremental time and costs savings;

. engaged a new advertising and marketing agency and implemented a new
advertising program;

. began a store consolidation program; and

. limited new store openings for foreseeable future to existing markets.

During the last 13 weeks of fiscal 1995 compared to the same period in
fiscal 1994, external factors negatively affected sales:

. warm weather in the areas of Company operations during the fourth
quarter of fiscal 1995 contributed to a 4.8% comparable store sales
decrease, and, combined with a decrease in the number of stores in
operation, a decline in sales; and

. the Mexican Government devalued the peso and subsequently released it
for free exchange just prior to Christmas, and the Company's ten border
stores most dependent upon Mexican nationals for their sales
experienced approximately a $731,000 (20%) drop in sales for the last
seven weeks of fiscal 1995 compared to the same period in fiscal 1994.

The Company has taken the following affirmative steps to achieve a more
disciplined cost structure, to attain profitability and to lessen vulnerability
to external factors:

. completed its store consolidation program;

. hired a new Vice President - Transportation and Distribution to add
management experience in that area;

. hired a new Vice President - Store Operations to concentrate on the
development of the Company's maturing store base;

. stopped new store openings, except for exsiting commitments and moving
of stores within a market;

. realigned management and staff responsibilities and substantially
reduced related compensation, relatively and absolutely, to achieve
permanent efficiencies without compromising performance;

. implemented cost and personnel reductions, including a 25% reduction in
corporate personnel, a 19% reduction in wages and benefits and an
overall $1 million decrease in fixed costs at corporate headquarters;
and

. negotiated the amendment of the financial covenants of the Company's
line of credit and long-term debt agreements.

The Company's store consolidation program closed nine stores in fiscal
1994, seven stores in fiscal 1995 and will close 12 stores during fiscal 1996.
Store closing costs for fiscal 1995 and fiscal 1996 have been recorded in fiscal
1995 operations. The store closings 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.

The amount of the closing costs associated with the 12 stores to be closed
in fiscal 1996, is approximately $4,942,000 of which approximately $835,000
pertains to inventory liquidation write-downs charged to cost of sales and
approximately $1,372,000 associated with fixed asset write-downs. The Company
has recorded approximately $2,735,000 of liabilities associated with estimated
monthly lease payments and other store closing costs of which approximately
$748,000, $956,000, $699,000, $307,000 and $25,000 are to be used in fiscal
years 1996, 1997, 1998, 1999 and 2000, respectively.

The 12 stores to be closed in fiscal 1996 contributed approximately
$13,954,000, $15,076,000 and $6,681,000 of net sales and $1,422,000 and
$1,484,000 of operating losses and $156,000 of operating income during fiscal
1995, 1994, 1993, respectively, to the Company's operations.

F-10
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Change in Accounting for Pre-opening Store Costs

In the fourth quarter of fiscal 1994, the Company changed its accounting
policy for pre-opening store costs. With the change, which has been recorded as
if it occurred at the beginning of fiscal 1994, the Company will expense pre-
opening store costs as incurred rather than continue to capitalize such costs
and amortize them over a period of 12 months from the store opening date.
Management believes the change is preferable as the new policy is consistent
with the predominant industry practice.

The change in accounting for pre-opening store costs decreased the
Company's net loss before cumulative effect of a change in accounting principle
in fiscal 1994 by approximately $2,057,000 ($.20 per share). The Company's net
loss was increased by $3,403,585 ($.33 per share) by the cumulative effect of
the change in accounting related to years prior to fiscal 1994.

The unaudited pro forma amounts shown below reflect the retroactive
application of the change in the method of accounting for pre-opening store
costs.

<TABLE>
<CAPTION>
Year Ended
January 29, 1993
----------------
As Reported Pro Forma
----------- ---------
<S> <C> <C>
Net income........................ $ 4,815,198 $3,274,990
Income per common share........... .45 .30
</TABLE>

Note 4 - Property and Equipment

Property and equipment consists of the following:

February 3, 1995 January 28, 1994
---------------- ----------------
<S> <C> <C>
Land..................................... $ 224,318 $ 224,318
Building................................. 752,231 752,231
Store equipment, furniture and fixtures.. 25,595,012 25,200,437
Leasehold improvements................... 10,237,373 9,647,067
Other.................................... 2,575,600 2,004,700
------------ ------------
39,384,534 37,828,753
Less: accumulated depreciation........... (14,063,928) (10,152,996)
------------ ------------
$ 25,320,606 $ 27,675,757
============ ============
</TABLE>

F-11
<PAGE>

Note 5 - Notes Payable-Bank and Long-Term Debt

Notes payable - bank:

In May 1993 the Company renewed its loan agreements with two financial
institutions, providing the Company a revolving line of credit totaling
$10,000,000 including letters of credit totaling $2,000,000 through May 31,
1994. In January 1994 the loan agreement was terminated by the Company after
execution of a new loan agreement..

The new loan agreement with another 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 1.25% (beginning in March 1995, interest is charged at the lenders prime
rate plus 1.75%). The lender's prime rate at February 3, 1995 was 8.5%. 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 as amended. The line of credit is
secured by inventory, certain accounts receivable and other assets. At February
3, 1995, $6,955,025 was outstanding under the line of credit.

The Company had total borrowings of $66,772,292, $46,777,500 and
$37,402,000 and repayments of $59,827,267, $46,767,500 and $37,402,000 for
fiscal years 1995, 1994 and 1993, respectively under its lines of credit.

Long-term debt consists of the following:

February 3, 1995 January 28, 1994
---------------- ----------------
<S> <C> <C>
Borrowings under promissory notes... $6,372,892 $7,590,642
Other............................... - 5,526
---------- ----------
6,372,892 7,596,168
Less: Current portion............... 1,303,691 1,193,065
---------- ----------
$5,069,201 $6,403,103
========== ==========
</TABLE>

As of February 3, 1995, maturities of long-term debt during each of the
next five fiscal years are: 1996 - $1,303,691; 1997 - $1,265,225; 1998 -
$1,229,578; 1999 - $1,091,304; 2000 - $1,175,789.

In fiscal 1993 the Company borrowed $1,000,000 from a financial
institution. The promissory note provides for outstanding principal to be paid
in monthly installments of $16,666 until January 29, 1998. Interest is charged
at a rate of 7.02%. The note is secured by a deed of trust on the land and
building used for the corporate offices. The balance of the note outstanding at
February 3, 1995 was $616,667.

Borrowings from an affiliate of an insurance company are:

<TABLE>
<CAPTION>
Interest Monthly Balance at
Date Amount Term Rate Payment (1) Collateral (2) February 3, 1995
- - ----------- ------ --------- -------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1992 $996,000 July 1996 10.68% $21,497 $734,616 $356,081

Fiscal 1994 $4,000,000 February 2000 7.85% $62,044 $3,240,530 $3,112,450

Fiscal 1994 $2,775,000 July 2000 6.92% $41,747 $2,438,084 $2,287,694
</TABLE>

(1) Monthly payment includes principal and interest
(2) Collateral is furniture and fixtures and is stated at net book value

F-12
<PAGE>

All covenants and restrictions, as specified by the Company's line of credit,
apply to the notes plus a debt to tangible net worth covenant as amended.

Note 6 - Income Taxes

As discussed in Note 1, the Company adopted SFAS No. 109 as of January 30,
1993, the beginning of fiscal 1994. The change had no effect on the Company's
financial position or results of operations.

The benefit from (provision for) income taxes consists of the following:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
February 3, 1995 January 28, 1994 January 29, 1993
--------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current.......................................... $ (547,000) $ 1,280,000 $(1,086,000)
Deferred......................................... 547,000 458,000 (1,316,000)
Net operating loss carryforwards................. - 1,252,000 -
State:
Current.......................................... - (295,000) (60,000)
Deferred......................................... - (118,000) -
Net operating loss carryforwards................. - 356,000 -
---------- ---------- -----------
$ - $2,933,000 $(2,462,000)
========== ========== ===========
</TABLE>

Temporary differences which gave rise to deferred tax assets and liabilities are
as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended
February 3, 1995 January 28, 1994
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...... $ 2,801,000 $ 1,608,000
AMT and other credit carryforward..... 507,000 1,071,000
Merchandise inventories............... 377,000 71,000
Lease obligations..................... 1,034,000 -
Other................................. 49,000 -
----------- -----------
4,768,000 2,751,000
Deferred tax liabilities:
Property and equipment................ (1,422,000) (1,951,000)

Net deferred tax assets before
valuation allowance................... 3,346,000 800,000
Valuation allowance.................... (3,093,000) -
----------- -----------
Net deferred tax assets................ $ 253,000 $ 800,000
=========== ===========
</TABLE>

Approximately $253,000 and $151,000 of the balance of net deferred tax
assets for the years ended February 3, 1995 and January 28, 1994, respectively,
is included in other assets in the consolidated balance sheet with the remaining
$649,000 for the year ended January 28, 1994 being included in prepaid and other
current assets.

During the years ended January 29, 1993, deferred taxes were provided for
timing difference in the recognition of income and expense items in the
consolidated financial statements. The source of significant timing differences
generated by net income which gave rise to deferred income tax expense (benefit)
were as follows:

Year Ended
January 29, 1993
----------------
<S> <C>
Depreciation.......................... $ 404,000
Pre-opening store costs............... 803,000
Capitalization of inventory costs..... (17,000)
Deferred expenses..................... 126,000
---------
$ 1,316,000
=========
</TABLE>

F-13
<PAGE>

As of February 3, 1995, the Company had federal tax net operating loss
carryforwards of approximately $6,599,000 expiring in 2010, alternative minimum
tax credit carryforwards of approximately $329,000 which are available to offset
regular federal income taxes in the future until fully utilized, and targeted
jobs credit carryforwards of approximately $178,000 expiring in 2006 through
2009.

The Company recognized income tax benefits of approximately $19,000 and
$633,000 relating to stock options exercised under the Company's Stock Option
Plan during fiscal 1994 and 1993, respectively. The income tax benefits were
credited to additional paid-in capital.

Note 7 - Commitments and Contingencies

The Company leases the store facilities and the distribution warehouses
used in its operations under operating leases. Most leases contain escalation
clauses for real estate taxes, renewal options ranging from five to ten years
and required additional payments based on percentages of sales (contingent
rentals). Approximate future minimum lease payments (excluding renewal options)
under leases having a remaining non-cancelable term in excess of 12 months as of
February 3, 1995 are as follows:

Year Ending
-----------
<S> <C>
1996................................ $ 9,201,000
1997................................ 9,329,000
1998................................ 9,373,000
1999................................ 9,489,000
2000................................ 9,103,000
2001 and subsequent................. $29,912,000
</TABLE>

Actual rental expense, including contingent rentals, was as follows:

<TABLE>
<S> <C>
Year Ended January 29, 1993.................... $ 7,755,000
Year Ended January 28, 1994.................... 10,412,000
Year Ended February 3, 1995.................... $10,762,000

</TABLE>

Contingent rentals represented approximately 10% in the year ended January
29, 1993, 5% in year ended January 28, 1994 and 4% in the year ended February 3,
1995 of actual rent expense.

Note 8 - Related Party Transactions

The Company had two store leases in force during fiscal 1995, 1994 and
fiscal 1993 with Spigel Properties, the owner of which is a director of the
Company. These leases expire at various periods through December 1999, provide
for one five-year renewal option, have aggregate annual minimum rental of
approximately $144,000 in fiscal 1996 and may require additional rental payments
based on a percentage of sales. The Company paid an aggregate of approximately
$136,000, $112,000 and $112,000 in minimum rental and approximately $14,000,
$26,000 and $27,000 in percentage rental for these locations during fiscal 1995,
1994 and 1993, respectively.

The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly
performed legal services as counsel to the Company. Cecil Schenker, a director
of the Company, is the sole shareholder of Cecil Schenker, P.C., a partner with
Akin, Gump, Strauss, Hauer & Feld, L.L.P.

The investment firm of James M. Raines & Company, the owner of which is a
director of the Company, performed consulting services in connection with the
Company's Regulation S offering.

F-14
<PAGE>

Charles J. Fuhrmann II, a director of the Company, has performed certain
financial and strategic advisory services for the Company.

Note 9 - Common Stock

In November 1994, the Company received subscription 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 as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. 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 believed to be
controlled by them 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 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 lawsuit has only recently been filed, and
discovery has not commenced. 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. The related subscription receivable
recorded in the accompanying consolidated balance sheet is based upon a share
price of $2.94, the closing price of the Company's common stock on January 12,
1995 and the date the stock was removed from escrow. 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.

F-15
<PAGE>

Note 10 - Stock Option Plan

Under the Company's Stock Option Plan, as amended (the "Plan"), stock
options may be granted to full-time employees, directors, advisors and outside
consultants of the Company for the purchase of up to a maximum of 3,000,000
shares of common stock. Options (either incentive or non-qualified options) may
be granted for a term not to exceed ten years. The exercise price of all
incentive stock options must be at least equal to the fair market value of the
common stock on the date of grant, or 110% of such fair market value with
respect to any optionee who is more than a 10% stockholder of the Company's
shares. Any non-qualified stock option issued pursuant to the Plan must be at an
exercise price equal to at least 85% of the fair market value of the Company's
common stock on the date of grant.

The following table summarizes certain information regarding stock options
granted under the Plan:

<TABLE>
<CAPTION>
Options
Total --------------------------
Reserved Outstanding Exercisable
--------- ----------- -----------
<S> <C> <C> <C>
Balances at February 1, 1992 2,612,350 972,850 15,350
Granted at $12.75 to $28.00 195,700
Becoming exercisable 209,000
Exercised (112,000) (112,000) (112,000)
Canceled (10,600) (10,600)
--------- --------- --------

Balances at January 29, 1993 2,500,350 1,045,950 101,750
Granted at $6.13 to $12.50 339,270
Becoming exercisable 306,700
Exercised (31,850) (31,850) (31,850)
Canceled (182,475) (73,900)
--------- --------- --------

Balances at January 28, 1994 2,468,500 1,170,895 302,700
Granted at $2.75 to $4.94 273,250
Becoming exercisable 504,270
Exercised (7,500) (7,500) (7,500)
Canceled (110,085) (110,085)
--------- --------- --------

Balances at February 3, 1995 2,461,000 1,326,560 689,385
========= ========= ========
</TABLE>

In November 1994, the Company's Board of Directors effected a repricing of
employee stock options at $4.125 per share effective December 5, 1994, excluding
executives, directors, advisors and outside consultants.

F-16
<PAGE>

50-OFF STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
February 3, October 28, July 29, April 29,
1995 1994 1994 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales............................................... $65,311,257 $45,693,006 $44,718,647 $45,820,223
Gross Profit............................................ 20,013,626 16,008,292 14,479,342 15,482,040

Net Loss Applicable to Common stock..................... (6,186,113) (636,112) (668,116) (533,715)

Net Loss per share of Common stock...................... $ (.56) $ (.06) $ (.06) $ (.05)

Average Common and Common Equivalent
Shares Outstanding (1)................................. 10,986,680 10,378,415 10,378,165 10,378,165
</TABLE>

<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
January 28, October 29, July 30, April 30,
1994 1993 1993 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales............................................... $68,398,755 $45,384,918 $41,534,812 $44,270,071
Gross Profit............................................ 20,490,383 14,721,015 11,852,460 14,740,770

Loss before cumulative effect of a change in
accounting principle................................... (377,430) (721,065) (3,345,369) (1,068,397)

Net Loss applicable to common stock..................... (377,430) (721,065) (3,345,369) (4,471,982)

Loss per share of Common stock before cumulative
effect of a change in accounting principle............. (.04) (.07) (.32) (.10)

Net Loss per share of Common stock...................... $ (.04) $ (.07) $ (.32) $ (.42)

Average Common and Common Equivalent
Shares Outstanding (1)................................. 10,367,079 10,374,308 10,354,041 10,556,182

</TABLE>

(1) All per share and share data fully diluted

F-17
<PAGE>

EXHIBIT INDEX

Page
----
<S> <C>
Exhibit 4.1...................................................... 45

Exhibit 10.8..................................................... 47

Exhibit 11....................................................... 57

Exhibit 23....................................................... 59
</TABLE>

<PAGE>
EXHIBIT 4.1

50FF
NUMBER STORES SHARES
NY
Where You Save As Much As You Spend

COMMON STOCK 50-OFF STORES, INC. CUSIP 316811 10 8
SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE

THIS CERTIFIES THAT

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES, OF THE PAR VALUE OF $0.01 PER SHARE, OF
COMMON STOCK OF

50-OFF STORES, INC.
transferred on the books of the Corporation by the holder hereof in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal and signatures of the duly authorized officers
of the Corporation.

Dated

/s/ Charles Siegel 50-OFF STORES, INC.
President CORPORATE

SEAL

DELAWARE
/s/ Joseph Lehrman
Secretary

Countersigned and Registered:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
(A LIMITED PURPOSE TRUST COMPANY)
(Jersey City, New Jersey)
Transfer Agent
and Registrar

By
Authorized Signature

AMERICAN BANK NOTE COMPANY
<PAGE>

50-OFF STORES, INC.

The Corporation will furnish, upon request and without charge, a full
statement of the powers, designations, preferences and relative, participating,
optional or other special rights (if any) of each class of stock or series
thereof authorized to be issued by it, and the qualifications, limitations or
restrictions of such preferences and/or rights (if any). Such request may be
made to the Secretary of the Corporation.

The following abbreviations, when used in the inscription on the face of
the Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM --as tenants in common UNIF GIFT MIN ACT--______Custodian______
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act___________________
tenants in common (State)

Additional abbreviations may also be used though not in the above list

For value received___________________hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - -------------------------------------------

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

- - --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee

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

_________________________________________________________________________Shares

of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________________

- - --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.

Dated_____________________

NOTICE:

THE SIGNATURE(S) TO THIS X___________________________________
ASSIGNMENT MUST CORRES- (SIGNATURE)
POND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTER- X___________________________________
ATION OR ENLARGEMENT OR (SIGNATURE)
ANY CHANGE WHATEVER.

-----------------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN "ELIGIBLE
GUARANTOR INSTITUTION" AS DEFINED
IN RULE 17AD-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
___________________________________
SIGNATURE(S) GUARANTEED BY:

___________________________________

<PAGE>

EXHIBIT 10.8

FIRST AMENDMENT TO
------------------
ACCOUNTS FINANCING AGREEMENT [SECURITY AGREEMENT]
-------------------------------------------------
AND REVOLVING CREDIT NOTE
-------------------------

THIS FIRST AMENDMENT TO ACCOUNTS FINANCING AGREEMENT [SECURITY AGREEMENT]
AND REVOLVING CREDIT NOTE (this "Amendment") is made and entered into
---------
effective as of the ____ day of March 1995, by and among CONGRESS FINANCIAL
CORPORATION (SOUTHWEST), a Texas corporation ("Lender"), 50-OFF OPERATING
------
COMPANY, a Nevada corporation ("Operating"), 50-OFF MULTISTATE OPERATIONS, INC.,
---------
a Nevada corporation ("Multistate"), and 50-OFF TEXAS STORES, L.P., a Texas
----------
limited partnership ("Texas") (Operating, Multistate and Texas are collectively
-----
referred to herein as "Borrowers").
---------

RECITALS

A. Borrowers and Lender are parties to that certain Accounts Financing
Agreement [Security Agreement] dated January 12, 1994 (the "Agreement").
---------

B. In connection with the Agreement, Borrowers executed that certain
Revolving Credit Note dated January 12, 1994, in the original principal amount
of $20,000,000, payable to the order of Lender (the "Revolving Credit Note").
---------------------

C. In connection with the Agreement, 50-Off Stores, Inc., 50-Off Texas
Management, Inc. (together, "Guarantors") and Franklin Stores Corporation of
----------
Beaumont executed that certain Guarantee and Waiver dated January 12, 1994, in
favor of Lender.

D. Borrowers and Lender desire to amend the Agreement and the Revolving
Credit Note in the manner provided below.

NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties, intending to be legally bound, agree as follows:

ARTICLE I
Definitions
-----------

Section 1.01. Definitions. Capitalized terms used in this Amendment, to
-----------
the extent not otherwise defined herein, shall have the same meaning as in the
Agreement, as amended hereby.
<PAGE>

ARTICLE II
Amendments
----------

Section 2.01. Amendment to Section 1.9 of the Agreement. Effective as of
the date hereof, Section 1.9 of the Agreement is hereby amended by deleting the
reference to "The Philadelphia National Bank, Philadelphia, Pennsylvania" where
it appears therein and replacing it with a reference to "CoreStates Bank, N.A."

Section 2.02. Amendment to Section 3.1 of the Agreement. Effective as of
-----------------------------------------
the date hereof, the first sentence of Section 3.1 of the Agreement is hereby
-----------
amended and restated to read in its entirety as follows:

"Interest shall be payable by us to you on the first day of each month
upon the closing daily balances in our loan account for each day during the
immediately preceding month, at a rate equal to one and three-quarters
percent (1.75%) per annum in excess of the Index Rate (the "Annual Rate")."
-----------

Section 2.03. Amendment to Rider 6.15 to Agreement. Effective as of the
------------------------------------
date hereof, the table set forth in Rider 6.15 to the Agreement is hereby
----------
amended and restated with respect to the period set forth below to read as
follows:

"Period Net Worth
------ ---------

At 1/27/95 $25,000,000

For the period from
1/28/95 through 2/2/96 $25,000,000"

Section 2.04 Amendment to Rider 6.16 to Agreement. Effective as of the
------------------------------------
date hereof, the first sentence of Rider 6.16 to the Agreement is hereby amended
----------
and restated to read as follows:

"6.16 We shall maintain at all times Working Capital of not less than
$5,400,000."

Section 2.05 Amendment to Rider 6.17 to Agreement. Effective as of the
------------------------------------
date hereof, the table set forth in Rider 6.17 to the Agreement is hereby
----------
amended and restated with respect to the period set forth below to read in its
entirety as follows:

Pre-Tax
"Fiscal Year Ending Net Income
------------------ ----------

2/2/96 $500,000"

-2-

<PAGE>

Section 2.06 Amendment to Revolving Credit Note. Effective as of the date
----------------------------------
hereof, the second sentence of the first paragraph of the Revolving Credit Note
is hereby amended by (a) deleting the words "one and one-quarter percent
(1.25%)" where they appear therein and replacing them with the words "one and
three-quarters percent (1.75%)" and (b) deleting the reference to "The
Philadelphia National Bank, Philadelphia, Pennsylvania" where it appears therein
and replacing it with a reference to "CoreStates Bank, N.A."

ARTICLE III
Conditions Precedent
--------------------

3.01. Conditions. The effectiveness of this Amendment is subject to the
----------
satisfaction of the following conditions precedent, unless specifically waived
by Lender:

(a) Lender shall have received a notice regarding the absence of oral
agreements in the form of Exhibit A attached hereto, dated as of the date
---------
of this Amendment, and duly executed by Borrowers;

(b) Lender shall have received a Consent and Ratification in the form
of Exhibit B attached hereto, dated as of the date of this Amendment, duly
---------
executed by Guarantors;

(c) Lender shall have received a Secretary's Certificate dated as of
the date of this Amendment, in form and substance satisfactory to Lender,
certified by the Secretary of each Borrower certifying among other things,
(i) that such Borrower's Board of Directors has met and has adopted,
approved, consented to and ratified resolutions which authorize the
execution, delivery and performance by such Borrower of this Amendment and
all such other loan documents to which it is or is to be a party, and (ii)
the names of the officers of such Borrower authorized to sign this
Amendment and each of such other loan documents to which it is or is to be
a party hereunder (including the certificates contemplated herein) together
with specimen signatures of such officers;

(d) The representations and warranties contained herein, in the
Agreement, as amended hereby, and/or in the other documents and agreements
relating hereto or thereto (hereinafter individually referred to as a "Loan
----
Document" and collectively referred to as the "Loan Documents") shall be
-------- --------------
true and correct as of the date hereof as if made on the date hereof;

(e) No default shall have occurred under the Agreement or any of the
other Loan Documents and be continuing and no default shall exist under the
Agreement,

-3-
<PAGE>

unless such default has been specifically waived in writing by Lender; and

(f) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments
and other legal matters incident thereto shall be satisfactory to Lender
and its legal counsel, Hughes & Luce, L.L.P.

ARTICLE
Ratifications, Representations, Warranties and Waiver
-----------------------------------------------------

Section 4.01. Ratifications. The terms and provisions set forth in this
-------------
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Agreement and except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement are ratified and confirmed
and shall continue in full force and effect.

Section 4.02. Representations and Warranties. Each Borrower hereby
------------------------------
represents and warrants to Lender that (i) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been authorized by all requisite
corporate or partnership action on the part of such Borrower and will not
violate the Articles of Incorporation or Bylaws, or partnership agreement, as
the case may be, of such Borrower, (ii) the representations and warranties
contained in the Agreement, as amended hereby, and any other Loan Document are
true and correct on and as of the date hereof as though made on and as of the
date hereof, and (iii) such Borrower is in full compliance with all covenants
and agreements contained in the Agreement, as amended hereby, and (iv) such
Borrower has not amended its Certificate of Incorporation or Bylaws except
changes in officers duties, or partnership agreement, as the case may be, since
January 12, 1994, except as disclosed to Lender in writing contemporaneously
with the execution of this Amendment.

ARTICLE V
Miscellaneous
-------------

Section 5.01. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties made in the Agreement or any other document or
documents relating thereto, including, without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
Lender or any closing shall affect the representations and warranties or the
right of Lender to rely upon them.

Section 5.02. Reference to Agreement. Each of the Loan Documents,
----------------------
including the Agreement and any and all other

-4-

<PAGE>

agreements, documents or instruments now or hereafter executed and delivered
pursuant to the terms hereof or pursuant to the terms of the Agreement as
amended hereby, are hereby amended so that any reference in such Loan Documents
to the Agreement shall mean a reference to the Agreement as amended hereby.

Section 5.03. Expenses of Lender. As provided in the Agreement, Borrowers
------------------
agree to pay on demand all reasonable costs and expenses incurred by Lender in
connection with the preparation, negotiation and execution of this Amendment and
the other Loan Documents executed pursuant hereto and any and all amendments,
modifications, and supplements thereto, including without limitation the
reasonable costs and fees of Lender's legal counsel, and all reasonable costs
and expenses incurred by Lender in connection with the enforcement or
preservation of any rights under the Agreement, as amended hereby or any other
Loan Document, including without limitation the reasonable costs and fees of
Lender's legal counsel.

Section 5.04. Severability. Any provision of this Amendment held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.

SECTION 5.05. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
--------------
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE
IN DALLAS, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF TEXAS.

Section 5.06 Successors and Assigns. This Amendment is binding upon and
----------------------
shall inure to the benefit of Lender and Borrowers and their respective
successors and assigns, except Borrowers may not assign or transfer any of their
rights or obligations hereunder without the prior written consent of Lender.

Section 5.07. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.

Section 5.08. Effect of Waiver. No consent or waiver, express or implied,
----------------
by Lender to or for any breach of or deviation from any covenant or condition of
the Agreement shall be deemed a consent or waiver to or of any other breach of
the same or any other convenant, condition or duty.

-5-
<PAGE>

Section 5.09. Headings. The headings, captions, and arrangements used in
--------
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.

IN WITNESS WHEREOF, this Amendment has been duly executed by Borrowers and
Lender as of the date first written above.

50-OFF OPERATING COMPANY

By: /s/ Pat L. Ross
----------------------
Name: Pat L. Ross
Title: Vice President and
Chief Financial Officer

50-OFF MULTISTATE OPERATIONS, INC.

By: /s/ Pat L. Ross
----------------------------
Name: Pat L. Ross
Title: Vice President and
Chief Financial Officer

50-OFF TEXAS STORES, L.P.

By: 50-OFF TEXAS MANAGEMENT
INC., its General Partner

By: /s/ Pat L. Ross
----------------------------
Name: Pat L. Ross
Title: Vice President and
Chief Financial Officer

AGREED AND ACCEPTED as of March 15, 1995.

CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)

By: /s/ Edward Franco
---------------------------
Edward Franco
Vice President

Attachments:

Exhibit A - Form of Notice Regarding No Oral Agreements
Exhibit B - Form of Consent and Ratification

-6-
<PAGE>

NOTICE
------

THIS NOTICE RELATES TO ALL OF THE AGREEMENTS, INSTRUMENTS AND OTHER
DOCUMENTS EXECUTED IN CONNECTION WITH THE FIRST AMENDMENT TO ACCOUNTS FINANCING
AGREEMENT [SECURITY AGREEMENT] AND REVOLVING CREDIT NOTE (COLLECTIVELY, THE
"LOAN AGREEMENT") DATED AS OF MARCH 15, 1995 AMONG THE UNDERSIGNED.

THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
---------------------------------------------------------------------
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
- - ----------------------------------------------------------------------------
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
- - ------------------------------------------

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
-----------------------------------------------------------

CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)

By: /s/ Edward Franco
----------------------------
Name: Edward Franco
Title: Vice President

50-OFF OPERATING COMPANY