<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1996.
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13076
50-OFF STORES, INC.
DELAWARE 74-2640559
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
8750 Tesoro Drive, San Antonio, Texas 78217
- ---------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Telephone: (210) 805-9300
-----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes: X No:
--- ---
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12,200,915 shares of the Registrant's common stock were outstanding at
August 2, 1996.
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There are 21 pages in the sequentially numbered, manually signed original.
<PAGE> 2
FORM 10-Q INDEX
PART I
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PAGE
<S> <C> <C>
ITEM 1. Financial Statements......................................... 3
Condensed Consolidated Balance Sheets, August 2, 1996
(unaudited), February 2, 1996 and August 4, 1995
(unaudited).................................................. 3
Condensed Consolidated Statements of Operations, thirteen and
twenty-six weeks ended August 2, 1996 (unaudited), and
thirteen and twenty-six weeks ended August 4, 1995
(unaudited).................................................. 5
Condensed Consolidated Statements of Cash Flows, twenty-six
weeks ended August 2, 1996 (unaudited), and twenty-six weeks
ended August 4, 1995 (unaudited)............................. 6
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 13
PART II
ITEM 1. Legal Proceedings........................................... 20
ITEM 2. Changes in Securities....................................... 20
ITEM 3. Defaults Upon Senior Securities............................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders......... 20
ITEM 5. Other Information........................................... 20
ITEM 6. Exhibits and Reports on Form 8-K............................ 20
Signatures................................................................. 21
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
August 2, 1996 February 2, 1996 August 4, 1995
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<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 592,931 $ 341,334 $ 2,932,822
Accounts receivable 712,593 1,129,604 3,380,276
Merchandise inventories 28,915,488 27,753,965 34,859,992
Prepaid and other current assets 942,334 437,226 1,579,697
-------------- -------------- ------------
TOTAL CURRENT ASSETS 31,163,346 29,662,129 42,752,787
PROPERTY AND
EQUIPMENT-NET 23,391,382 24,888,222 25,928,586
OTHER ASSETS 1,203,941 899,126 1,078,657
TOTAL ASSETS $ 55,758,669 $ 55,449,477 $ 69,760,030
============== ============= =============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
August 2, 1996 February 2, 1996 August 4, 1995
------------------ ---------------- ------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $ 16,967,884 - -
Accounts payable-trade 14,542,527 $ 8,595,246 $ 13,251,777
Accounts payable-other 3,089,379 4,238,123 4,377,462
Accrued expenses and
other current liabilities 3,609,661 3,280,093 2,923,411
Current portion of closed store costs 899,196 1,168,213 760,040
Current portion of long-term debt 4,770,798 1,286,372 1,366,059
------------ ----------- ------------
TOTAL CURRENT LIABILITIES 43,879,445 18,568,047 22,678,749
------------ ----------- ------------
CREDIT FACILITY, REFINANCED - 11,218,051 13,887,458
LONG-TERM DEBT - 3,884,515 4,454,344
NOTES PAYABLE - VENDORS - - -
CLOSED STORE COSTS - - 1,420,000
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock 122,009 122,009 121,884
Additional paid-in capital 36,022,264 36,022,264 36,022,389
Subscription receivable (3,991,050) (3,991,050) (3,991,050)
Accumulated deficit (20,273,999) (10,374,359) (4,833,744)
------------ ----------- ------------
TOTAL STOCKHOLDERS' EQUITY 11,879,224 21,778,864 27,319,479
------------ ----------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 55,758,669 $ 55,449,477 $ 69,760,030
============ ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 5
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------- ---------------------------------
August 2, 1996 August 4, 1995 August 2, 1996 August 4, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 31,708,019 $ 41,947,203 $ 64,123,428 $ 87,006,477
COST OF SALES 22,349,660 27,727,578 45,583,056 57,438,128
------------ ------------- ------------- -------------
GROSS PROFIT 9,358,359 14,219,625 18,540,372 29,568,349
------------ ------------- ------------- -------------
OPERATING EXPENSES:
Selling, advertising, general
and administrative 12,820,473 13,591,083 25,581,795 28,548,901
Depreciation and amortization 966,597 989,239 1,937,074 1,963,327
Closed store costs (32,852) - (32,852) -
------------ ------------- ------------- -------------
TOTAL OPERATING EXPENSES 13,754,218 14,580,322 27,486,017 30,512,228
------------ ------------- ------------- -------------
OTHER EXPENSE (INCOME):
Interest income (20,573) (27,550) (40,239) (54,746)
Interest expense 623,081 512,300 994,235 986,680
------------ ------------- ------------- -------------
TOTAL OTHER EXPENSE
(INCOME) 602,508 484,750 953,996 931,934
------------ ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (4,998,367) (845,447) (9,899,641) (1,875,813)
BENEFIT FROM INCOME TAXES - 290,000 - 638,000
------------ ------------- ------------- -------------
NET LOSS $ (4,998,367) $ (555,447) $ (9,899,641) $ (1,237,813)
============ ============= ============= =============
LOSS PER COMMON SHARE (.41) (.05) (.81) (.10)
============ ============= ============= =============
WEIGHTED AVERAGE SHARES 12,200,915 12,200,915 12,200,915 12,200,915
============ ============= ============= =============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
August 2, 1996 August 4, 1995
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(9,899,641) $(1,237,813)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,937,074 1,963,327
Deferred income tax - (638,000)
Non-cash interest expense on long-term debt 117,981 -
Changes in assets and liabilities:
Accounts receivable 417,011 (1,734,973)
Merchandise inventories (1,161,523) (3,180,254)
Prepaid and other current assets (505,108) (224,136)
Other assets (311,698) 164,504
Accounts payable-trade 5,947,281 3,239,965
Accounts payable-other (1,148,744) (518,571)
Accrued expenses and other
current liabilities 329,568 (224,268)
Closed store costs (269,017) (555,154)
----------- -----------
Net cash used in operating activities $(4,546,816) $(2,945,373)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures $ (433,350) $(2,564,425)
----------- -----------
Net cash used in investing activities $ (433,350) $(2,564,425)
----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Continued)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
-------------------------------------------------
August 2, 1996 August 4, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from revolving debt $ 5,749,833 $ 6,932,433
Payments on long-term debt (518,070) (552,489)
----------- ------------
Net cash provided by financing activities 5,231,763 6,379,944
----------- ------------
Increase in cash and cash equivalents 251,597 870,146
Cash and cash equivalents at
beginning of period 341,334 2,062,676
----------- ------------
Cash and cash equivalents at
end of period $ 592,931 $ 2,932,822
=========== ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 876,254 $ 986,680
Income taxes - -
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 8
50-OFF STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated balance sheet at February 2, 1996 has been
condensed from the audited consolidated balance sheet at February 2,
1996.
The condensed consolidated balance sheets at August 2, 1996 and August
4, 1995 and the condensed consolidated statements of operations and
cash flows for the thirteen and twenty-six weeks ended August 2, 1996
and the thirteen and twenty-six weeks ended August 4, 1995 have been
prepared by the Company without audit. In the opinion of management,
all adjustments necessary to present fairly the condensed consolidated
financial position, results of operations and cash flows have been
made. Such adjustments are of a normal and recurring nature. The
results of operations for the thirteen and twenty-six week periods
ended August 2, 1996 are not necessarily indicative of the operating
results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in
the Registrant's annual report on Forms10-K and 10-KA for the year
ended February 2, 1996.
Certain reclassifications have been made to the fiscal 1996 condensed
consolidated financial statements to conform to the fiscal 1997
condensed consolidated financial statements.
As discussed below, the Company and its significant subsidiaries on
October 9, 1996 filed petitions under Chapter 11 of the Bankruptcy
Code (Chapter 11) in the United States Bankruptcy Court for the Western
District of Texas (the Bankruptcy Court). The financial statements
do not purport to show assets at their realizable values, pre-petition
liabilities at amounts that may be allowed or the effect of any
changes that may be made in the capitalization of the Company or its
operations.
NOTE 2: On October 9, 1996, the Company and its significant subsidiaries filed
petitions under Chapter 11 in the Bankruptcy Court. Faced with
deteriorating results and the apparent consumer rejection of the
50-OFF retailing concept in almost all its markets, the Board of
Directors supported a change of leadership in mid-May. In September
1996, the Board of Directors approved a plan which provided for the
continued conversion of existing 50-OFF stores to LOT$OFF stores, a
geographic consolidation of the chain (exiting Alabama, Georgia, North
Carolina, South Carolina and Arkansas and parts of Florida and
Tennessee) and the liquidation or closing of at least 37
under-performing stores or stores located outside of the reduced
market area and appropriate reductions in field and corporate overhead
and staffing. Accordingly, inventory liquidation markdowns of
$2,218,000 have been recorded during the thirteen weeks ended August
2, 1996. Any related lease and employee termination costs, which
could be substantial, have not been accrued and are currently expected
to be recorded as an expense in the third quarter of fiscal 1997. On
October 8, 1996, the Board of Directors approved the filing of a
petition under Chapter 11 of the Bankruptcy Code.
The Company has been pursuing an infusion of capital and an external
affiliation with a supplier of product and credit and additional
concessions from lenders and landlords to secure the
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<PAGE> 9
resources necessary to implement its business plan to effect the
changes believed necessary by management to achieve profitability.
Although management believes it has developed an appropriate plan for
the Company in its current environment, the Company was unable to
secure the necessary concessions and resources to improve operations
and reverse operating trends and was forced to seek the protections
afforded under Chapter 11 of the Bankruptcy Code. The Company will
continue to manage its affairs and operate its business under Chapter
11 as debtor in possession while a plan of reorganization is
formulated. Through a reorganization under Chapter 11, management
intends to restructure the operations and capitalization of the
Company in order to implement its plan and strengthen the Company's
financial position and operating performance. The Company's ability
to successfully reorganize and continue as a going concern will be
affected by a number of factors, including, but not limited to,
uncertainty regarding the eventual outcome of the bankruptcy case, the
degree of success in reversing the Company's recent business trends,
the ability to alleviate trade credit concerns and restore merchandise
flow to adequate levels in light of the Company's reduced scale of
operations and success in securing required financial resources.
Management believes that the recent and planned closing of stores and
the implementation of expense cuts commensurate with the down-sizing
of the total stores in operation facilitates its efforts to improve
the Company's financial performance.
Management is in the process of redirecting 50-OFF's retail activities
from off-price retailing to a close-out retailing concept. Coincident
and consistent with this change is a change in the mix of products,
historically a majority in family apparel, to a majority in
non-apparel merchandise, principally through the addition of new
product categories to the Company's historical non-apparel offerings
which include cosmetics, housewares and giftware, home furnishings,
shelf-stable food products, toys, luggage, footwear, stationery and
health and beauty aids. New categories include sporting goods,
automotive, greeting cards, fine jewelry, books, party goods,
seasonal, pet supplies and hardware, among others. The Company will
continue to maintain a healthy showing of basic family apparel
products in new LOT$OFF stores. The actual merchandise mix will
fluctuate by category, by season and by store based on customer needs
and buying trends, demographics and the availability of products at
close-out prices. This merchandising concept is designed to appeal to
value-conscious shoppers and other "bargain hunters," and management
is hopeful its implementation will lead to higher initial mark-ups,
less promotional pricing, fewer mark-downs, less inventory shrink,
increased store traffic and improved operating results. No assurance
can be given that the Company will be successful in its continuing
efforts to secure required financial resources, reverse recent
business trends and return to profitability. Management is also
considering, among other alternatives, strategic or financial
alliances with third parties and /or the merger or sale of all or a
part of the Company.
Because of uncertainty regarding the outcome of the bankruptcy case
and the effect of any bankruptcy reorganization plan on the interest
of the Company's creditors and stockholders, the ultimate impact of
the bankruptcy case on the Company's results of operations and
financial position cannot be determined. The Company is also unable
to predict the value, if any, to be realized by stockholders in the
bankruptcy case whether or not a successful reorganization is
achieved. For this reason, any investment in the Company's common
stock should be considered speculative.
NOTE 3: In February 1996 and with the support of its vendors, 50-OFF
implemented a payment plan with respect to its $8,447,000 of unsecured
trade payables as of February 26, 1996. Under the plan, such payables
were to be paid in full within a two year period. Approximately
$4,690,000 of such payables remained outstanding at August 2, 1996 and
are included in accounts payable-trade.
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In April 1996, the Company restructured its $4,000,000 and $2,775,000
long term borrowings with an affiliate of an insurance company into
one promissory note for approximately $4,645,000. The promissory note
provides for monthly installments (including principal and interest)
of $94,638 until March 2000. Interest is charged at a rate of 8.50%.
The note is secured by the Company's furniture and fixtures. All
restrictive covenants, as specified in the Company's credit facility
(See below), apply to the notes plus a debt to tangible net worth
financial covenant as amended.
On May 13, 1996, the Company entered into a credit facility with two
financial corporations providing the Company with a line of credit
through May 1998 of up to $22,500,000, including letters of credit.
Borrowings under the line are limited to a borrowing base equal to the
lessor of, (i) eligible inventory at cost: December 16 to February 28,
55.75%, March 1 to September 15, 60.75% and September 16 to December
15, 63.75% or (ii) eligible inventory at retail: December 16 to
February 28, 33.45%, March 1 to September 15, 37.25% and September 16
to December 15, 39.0%. Interest under the line is charged on funds
borrowed at the First National Bank of Boston's base rate (currently
8.25%) plus 1.75% and there is a monthly administrative fee of $12,000
and an annual facility fee of 1.5% ($337,500). The line of credit is
secured by inventory, accounts receivable and other assets. In
addition, the Company issued the lenders a three year warrant to
purchase 400,000 shares of Common Stock at $2.50 per share. The
agreement contains various restrictive covenants, including
restrictions on the payment of cash dividends. The agreement also
contains minimum gross margin, minimum EBITDA, minimum and maximum
inventory levels, minimum working capital and minimum trade support
financial covenants. On August 8, 1996, the Company was notified that
it was in violation of the minimum gross margin and the minimum
working capital financial covenants and that such breaches constituted
Events of Default under the loan documents. The lenders subsequently
established additional availability reserves, imposed certain
increased fees and other charges and accelerated fees deemed earned at
the initial closing.
Prior to entering into the Company's new credit facility on May 13,
1996, the Company had a credit facility with a financial institution
providing the Company a line of credit through January 1998, as
amended, of up to $20,000,000, including letters of credit of up to
$4,000,000. Borrowings under the facility were 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 was charged on funds borrowed at
the lender's prime rate plus 1.75%. The agreement contained various
restrictive covenants, including restrictions on the payment of cash
dividends. This credit facility was secured by inventory, certain
accounts receivable and other assets.
The Company had total borrowings of $47,791,460 and $28,648,015 and
repayments of $42,041,627 and $21,715,582 for the twenty-six weeks
ended August 2, 1996 and August 4, 1995, respectively, under the
respective credit facilities.
The Company's bankruptcy filing resulted in events of default for all
pre-petition loan agreements, and, accordingly, such obligations have
been classified as current in the condensed consolidated balance
sheet at August 2, 1996..
NOTE 4: The Company, at August 2, 1996 and August 4, 1995, has recorded
approximately $899,000 and $2,180,000, respectively, of liabilities
associated with estimated monthly lease payments and other store
closing costs for stores closed in fiscal 1996. The stores closed in
fiscal 1996 contributed approximately $379,000 and $4,108,000 of net
sales and $45,000 of operating loss
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and $228,000 of operating income during the thirteen and twenty-six
weeks ended August 4, 1995.
NOTE 5: In November 1994, the Company received subscriptions for 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
purchase agreements 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 Banque Paribas (Suisse) S.A., Betafid S.A.,
three purchaser entities allegedly 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.
The lawsuit also includes securities fraud, promissory estoppel,
conspiracy and conversion claims. The conversion claim relates to
actions of the defendants in removing the shares from an escrow
account into which they had been issued for authentication purposes,
even though the defendants have never paid anything for such shares.
The Company seeks recovery of actual and punitive damages, an
injunction against the defendant's transfer of such stock in
violation of the Securities Act, pre- and post-judgment interest,
attorneys' fees and such other remedies to which the Company may show
itself entitled.
Dennis Morris and Howard White have answered the Complaint with White
raising the affirmative defense of contributory negligence. Defaults
have been sought and/or entered against Andalucian Villas, Brocimast,
Betafid and Koutsoubos for failure to appear or answer. Banque
Paribas has recently renewed its Motion to Dismiss the action for
lack of jurisdiction and forum non conveniens.
Written discovery has been served on all defendants who have appeared
and depositions have been taken of Howard White and two non-party
witnesses. The Court referred all pre-trial matters to a U.S.
Magistrate, who reversed an earlier decision and required that all
discovery of Paribas take place pursuant to the provisions of the
Hague Evidence Convention. Additionally, the Court recently entered
an Order granting Howard White leave to amend his answer in order to
assert a third-party claim against Chase Manhattan Bank, N.A. 50-OFF
will shortly move for leave to join Chase as an additional defendant.
On January 9, 1996, the Company filed a lawsuit [50-OFF Stores, Inc.
v. Jefferies & Company, Inc. and Jefferies International, Ltd., Cause
No. 96-CI-00349] in Bexar County District Court in San Antonio, Texas
against the Company's placement agents in the securities offering
referenced in the lawsuit discussed above. The suit alleges that the
defendants breached their contracts with the Company, breached their
fiduciary duties to the Company and were reckless or grossly negligent
in failing to investigate properly the qualifications of the
purchasers they introduced to the Company. The Company seeks to
recover actual and exemplary damages in excess of $10,000,000, pre-
and post-judgment interest, costs and attorneys' fees. Both
defendants have answered the Petition and raised the affirmative
defense of contributory negligence. Additionally, Jefferies & Company
filed a cross-claim against Howard White. Discovery is proceeding.
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The Company, based upon advice of counsel, believes that it will
obtain a favorable judgment against one or more of these defendants,
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 uncollected amount of the subscription receivable
will be recorded in the consolidated financial statements. Damages
awarded to the Company or settlement amounts paid to the Company, if
any, in excess of the subscriptions receivable would be credited to
earnings.
The Company will continue to prosecute these cases vigorously.
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ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
50-OFF Stores' operating results in recent years have been disappointing,
reflecting weaknesses in retailing generally and in apparel retailing
specifically: the casualization of apparel has hurt many apparel retailers;
and regional, off-price retailers have faced increased competition for the
"value-conscious" consumers' purchases. In addition, 50-OFF was especially
hard hit by the last devaluation and continued deterioration of the Mexican
peso and the continuing economic turmoil along the Texas-Mexico border where it
operated thirteen 50-OFF stores, historically its best performing locations.
For the twenty-six week period ended August 2, 1996, the Company had net sales
of $64.1 million, down 26.3% from the comparable prior year period's $87.0
million, and the Company's loss before income taxes rose to $9.9 million
(including a $4.3 million write down of inventories in stores scheduled for
liquidation, but excluding any as yet undetermined charges for future store
closings and staff reductions) from $1.9 million. The Company operated a
weighted average of 100.4 stores in the most recent period as compared to 106.6
in the comparable prior year period.
Faced with such deteriorating results and the apparent consumer rejection of
the 50-OFF retailing concept in almost all its markets, the Board of Directors
supported a change of leadership in mid-May and, more recently, the continued
conversion of existing 50-OFF stores to LOT$OFF stores, a geographic
consolidation of the chain and the liquidation or closing of at least 37
under-performing stores or stores located outside of the reduced market area,
appropriate reductions in field and corporate overhead and staffing and the
Company's and its significant subsidiaries' filing of petitions for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Western District of Texas on October 9, 1996. Although management
believes it has developed an appropriate plan for the Company in its current
environment, the Company was unable to secure the resources required to
implement its plan and to effect the changes believed necessary to improve
operations and reverse the Company's disappointing operating results and was
forced to seek the protections afforded under Chapter 11 of the Bankruptcy
Code. The Company will continue to manage its affairs and operate its business
under Chapter 11 as a debtor in possession while a plan of reorganization is
formulated. Through a reorganization under Chapter 11, management intends to
restructure the operations and capitalization of the Company in order to
implement its plan and strengthen the Company's financial position and
operating performance.
The Company's ability to successfully reorganize and continue as a going
concern will be affected by a number of factors, including, but not limited to,
uncertainty regarding the eventual outcome of the bankruptcy case, the degree
of success in reversing the Company's recent business trends, the ability to
alleviate trade credit concerns and restore merchandise flow to adequate levels
in light of the Company's reduced scale of operations and success in securing
required financial resources. Management believes that the recent and planned
closing of stores and the implementation of expense cuts commensurate with the
down-sizing of the total stores in operation facilitates its efforts to improve
the Company's financial performance. However, no assurance can be given that
the Company will be successful in its continuing efforts to secure required
financial resources, reverse recent business trends and return to
profitability. Management is also considering, among other alternatives,
strategic or financial alliances with third parties and /or the merger or sale
of all or a part of the Company.
Because of uncertainty regarding the outcome of the bankruptcy case and the
effect of any bankruptcy reorganization plan on the interest of the Company's
creditors and stockholders, the ultimate impact of the bankruptcy case on the
Company's results of operations and financial position cannot be determined.
The
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Company is also unable to predict the value, if any, to be realized by
stockholders in the bankruptcy case whether or not a successful reorganization
is achieved. For this reason, any investment in the Company's common stock
should be considered speculative, and investors should be prepared to lose
their entire investment.
On May 7, 1996, the Company's Board of Directors accepted the resignation of
Charles Siegel from his positions as President and Chief Executive Officer of
the Company, as well as his position on the Board, and appointed Charles J.
Fuhrmann II to the positions of President, Chief Executive Officer and Chief
Financial Officer. Mr. Fuhrmann, a Director of the Company since October 1994,
has served in various consulting capacities for 50-OFF, including Acting Chief
Administrative and Financial Officer until his new appointment. Mr. Fuhrmann,
most recently a private investor and strategic and financial consultant, was
formerly Managing Director-Investment Banking with Merrill Lynch & Co. in
New York. Other significant management changes included the promotions of
Allen Fields to Senior Vice President - Operations, Joe Goldstein to Senior
Vice President - Merchandise and James Scogin to Vice President - Controller,
Chief Accounting Officer and Assistant Secretary.
Management is in the process of redirecting 50-OFF's retail activities from
off-price retailing to a close-out retailing concept. Coincident and
consistent with this change is a change in the mix of products, historically a
majority in family apparel, to a majority in non-apparel merchandise,
principally through the addition of new product categories to the Company's
historical non-apparel offerings which include cosmetics, housewares and
giftware, home furnishings, shelf-stable food products, toys, luggage,
footwear, stationery and health and beauty aids. New categories include
sporting goods, automotive, greeting cards, fine jewelry, books, party goods,
seasonal, pet supplies and hardware, among others. The Company will continue
to maintain a healthy showing of basic family apparel products in the new
LOT$OFF stores. The actual merchandise mix will fluctuate by category, by
season and by store based on customer needs and buying trends, demographics and
the availability of products at close-out prices. This merchandising concept
is designed to appeal to value-conscious shoppers and other "bargain hunters,"
and management is hopeful its implementation will lead to higher initial
mark-ups, less promotional pricing, fewer mark-downs, less inventory shrink,
increased store traffic and improved operating results.
On September 27, the Company opened six LOT$OFF stores in San Antonio at
50-OFF's existing San Antonio locations, bringing to 19 the number of LOT$OFF
stores operated by the Company, 13 of such stores having opened in Oklahoma (5)
and the Dallas Metroplex (8) July 26 and August 1, 1996, respectively. Early
operating results for the LOT$OFF stores have been encouraging, in spite of
difficulties in maintaining inventories due to serious cash shortages, far
surpassing the results of the remaining 50-OFF stores. As of October 24, 1996,
the Company was continuing to operate 61 50-OFF and LOT$OFF stores in New
Mexico (4), Texas (40), Oklahoma (5), Louisiana (8), Memphis, Tennessee (3) and
Pensacola, Florida (1), four of which in Texas were being liquidated by the
Company for eventual closings. Under Chapter 11 protection, the Company hopes
to proceed with the conversion of those 50-OFF stores it elects to continue to
operate to LOT$OFF stores.
Liquidity and Capital Resources
The Company began fiscal 1997 with cash of $341,334. During the twenty-six
weeks ended August 2, 1996, the Company increased borrowings by a net of
$5,231,763, used $4,546,816 for operating activities, used $433,350 for capital
expenditures in refurbishing existing stores, opening one store in the
Atlanta, Georgia area and converting 13 50-OFF stores to LOT$OFF stores and
ended the period with cash on hand of $592,931.
On May 13, 1996, the Company entered into a new $22.5 million revolving credit
facility with Foothill Capital Corporation and GBFC, Inc. which provides for a
60.75% advance rate on eligible inventory (63.75%,
-14-
<PAGE> 15
September 16 - December 15; 55.75%, December 16 - February 28) with interest
set at prime plus 1.75% through May 31, 1998. The line of credit is secured
by inventory, accounts receivable and other assets. In addition, the Company
issued the lenders a three year warrant to purchase 400,000 shares of Common
Stock at $2.50 per share. The agreement contains various restrictive
covenants, including restrictions on the payment of cash dividends. The
agreement also contains minimum gross margin, minimum EBITDA, minimum and
maximum inventory levels, minimum working capital and minimum trade support
financial covenants. As of August 2, 1996, the Company had approximately
$16,968,000 outstanding under the credit facility and had approximately
$313,000 available for use. On August 8, 1996, the Company was notified that
it was in violation of the minimum gross margin and the minimum working capital
financial covenants and that such breaches constituted Events of Default under
the loan documents. The lenders subsequently established additional
availability reserves, imposed certain increased fees and other charges and
accelerated fees deemed earned at the initial closing, which, individually and
together, substantially impacted the Company's financial liquidity and.
therefore, its ability to acquire and maintain much needed inventory for its
stores.
The Company and its significant subsidiaries filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
Western District of Texas on October 9, 1996. Although management believes it
has developed an appropriate plan for the Company in its current environment,
the Company was unable to secure the resources required to implement its plan
and to effect the changes believed necessary to improve operations and reverse
the Company's disappointing operating results and was forced the protections
afforded under Chapter 11 of the Bankruptcy Code. The Company will continue to
manage its affairs and operate its business under Chapter 11 as a debtor in
possession while a plan of reorganization is formulated. Through the
reorganization under Chapter 11, management intends to restructure the
operations and capitalization of the Company in order to implement its plan and
strengthen the Company's financial position and operating performance.
The Company's ability to successfully reorganize and continue as a going
concern will be affected by a number of factors, including, but not limited to,
uncertainty regarding the eventual outcome of the bankruptcy case, the degree
of success in reversing the Company's recent business trends, the ability to
alleviate trade credit concerns and restore merchandise flow to adequate levels
in light of the Company's reduced scale of operations and success in securing
required financial resources. Management believes that the recent and planned
closings of stores and the implementation of expense cuts commensurate with the
down-sizing of the total stores in operation facilitates its efforts to improve
the Company's financial performance. However, no assurance can be given that
the Company will be successful in its continuing efforts to secure required
financial resources, reverse recent business trends and return to
profitability. Management is also considering, among other alternatives,
strategic or financial alliances with third parties and /or the merger or sale
of all or a part of the Company.
Significant Litigation
The Company has filed a lawsuit seeking in excess of $5 million 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 favorable
judgment or result in this court action, 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 or the shares are not ultimately returned, an extraordinary
non-cash charge to earnings for the uncollected amount of the subscription
receivable ($3,991,050) will be recorded in the consolidated financial
statements. Damages awarded to the Company or
-15-
<PAGE> 16
settlement amounts paid to the Company, if any, in excess of the subscriptions
receivable would be credited to earnings. See Note 5 to the Condensed
Consolidated Financial Statements for further discussion of this matter and
information pertaining to a related lawsuit filed by the Company against the
placement agents.
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 the first twenty-six
weeks of fiscal 1997, approximately 12.1 % of the Company's net sales were
attributable to the Company's 13 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 1994, and
the Company's border stores experienced a significant drop in sales for the
last seven weeks of fiscal 1995. The continuing economic weakness along the
border and further erosion of the peso continued to negatively affect sales and
operating results in the Company's border stores throughout fiscal 1996; the
Company's border stores experienced an approximately $10.2 million (32.0%) drop
in sales to $21.8 million for fiscal 1996. With the continued erosion of the
value of the peso well into fiscal 1996 and with the current peso value still
below its comparable level a year ago, sales in the Company's border stores
have continued to suffer through the first twenty-six weeks of fiscal 1997 (an
approximately $2.7 million, or 25.5%, drop to $7.8 million). While the Company
cannot predict the ultimate effect on fiscal 1997 results, continuing weakness
in the border economy and negative comparable peso values would have a
continuing negative effect on the operating results of its border stores. In
October 1996, the Company closed one of its border stores and began the
liquidation of three others in anticipation of their eventual closings.
-16-
<PAGE> 17
Results of Operations
The following tables set forth (i) certain items in the condensed consolidated
statements of operations as a percentage of net sales for the periods
indicated, and (ii) the percentage change in such items from the comparable
period of the prior year.
<TABLE>
<CAPTION>
Percentage of Sales
-------------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------------------------------------------------------
August 2, August 4, August 2, August 4,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 70.5 66.1 71.0 66.0
Selling, advertising, general and
administrative 40.4 32.4 39.9 32.8
Depreciation and amortization 3.0 2.4 3.0 2.3
----- ----- ----- -----
Total 113.9 100.9 113.9 101.1
Other expense, net 1.9 1.1 1.5 1.1
----- ----- ----- -----
Total expenses 115.8 102.0 115.4 102.2
----- ----- ----- -----
Loss before income taxes (15.8) (2.0) (15.4) (2.2)
Benefit from income taxes - 0.7 - 0.8
----- ----- ----- -----
Net loss (15.8)% (1.3)% (15.4)% (1.4)%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Percentage Change
-------------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
August 2, 1996 compared to August 2, 1996 compared to
Thirteen Weeks Ended Twenty-six Weeks Ended
August 4, 1995 August 4, 1995
-------------------------- --------------------------
<S> <C> <C>
Net sales (24.4)% (26.3)%
Cost of sales (19.4) (20.6)
Selling, advertising, general
and administrative (5.7) (10.4)
Depreciation and amortization (2.3) (1.3)
Other expense, net 24.3 2.4
Loss before income taxes 491.2 427.8
Benefit from income taxes (100.0) (100.0)
Net loss 799.9% 699.8%
</TABLE>
-17-
<PAGE> 18
THIRTEEN WEEKS ENDED AUGUST 2, 1996 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 4,
1995:
The net sales decrease of 24.4% for the thirteen weeks ended August 2, 1996
compared to the thirteen weeks ended August 4, 1995 is attributable to a 3.2%
decrease in the weighted average number of stores in operation (from 103.6
stores to 100.3) and a 20.2% decrease in comparable store sales.
Cost of sales as a percentage of net sales increased from 66.1% for the
thirteen weeks ended August 4, 1995 to 70.5% for the thirteen weeks ended
August 2, 1996, due primarily to an approximately $2,218,000 write down of
inventories in anticipation of store liquidations scheduled to begin in
September and offset in part by otherwise higher initial mark-ups on
merchandise and lower markdowns as a percentage of net sales as compared to the
comparable period of the prior year. Excluding the inventory liquidation
write-downs, cost of sales as a percentage of net sales would have been 63.5%
for the thirteen weeks ended August 2, 1996.
Selling, advertising, general and administrative expenses increased from 32.4%
of net sales for the thirteen weeks ended August 4, 1995 to 40.4% of net sales
for the thirteen weeks ended August 2, 1996. The percentage decrease of 5.7%
was due in part to the 3.2% decrease in the weighted average number of stores
open and in part to other cost savings.
Depreciation and amortization decreased by 2.3% in the thirteen weeks ended
August 2, 1996 compared to the comparable period of the prior year, due
primarily to the decreased number of stores in operation.
Other expense, net, increased to approximately $603,000 in the thirteen weeks
ended August 2, 1996 compared to approximately $485,000 in the comparable
period of the prior year, due primarily to increased interest expense
attributable to increased borrowings under the Company's line of credit.
The increase in the Company's loss before income taxes for the thirteen weeks
ended August 2, 1996 compared to the thirteen weeks ended August 4, 1995 is
primarily due to the Company's lower net sales, the write down of inventories
discussed above and increased interest expense.
Income tax benefit related to the loss for the thirteen weeks ended August 2,
1996 was not recognized because the utilization of such benefit is not assured.
Such benefit is available for recognition in future years.
TWENTY-SIX WEEKS ENDED AUGUST 2, 1996 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
4, 1995:
The net sales decrease of 26.3% for the twenty-six weeks ended August 2, 1996
compared to the twenty-six weeks ended August 4, 1996 is attributable to a 5.8%
decrease in the weighted average number of stores in operation (from 106.6
stores to 100.4) and a 20.9% decrease in comparable store sales. These
decreases were partially offset by increased net sales pertaining to
liquidations of inventory at thirteen 50-OFF stores in the process of
converting to LOT$OFF stores during the thirteen weeks ended August 2, 1996;
such stores were closed, however, on average, 17 days during the period for
remodeling and re-merchandising.
Cost of sales as a percentage of net sales increased from 66.0% for the
twenty-six weeks ended August 4, 1995 to 71.0% for the twenty-six weeks ended
August 2, 1996, due primarily to an approximately $4,271,000 write down of
inventories in stores liquidated (13) or scheduled to be liquidated (37) and
offset in part by otherwise higher initial mark-ups on merchandise and lower
markdowns as a percentage of net sales as compared to the comparable period of
the prior year. Excluding the inventory liquidation write-downs, cost of sales
as a percentage of net sales would have been 64.4% for the twenty-six weeks
ended August 2, 1996.
-18-
<PAGE> 19
Selling, advertising, general and administrative expenses increased from 32.8%
of net sales for the twenty-six weeks ended August 4, 1995 to 39.9% of net
sales for the twenty-six weeks ended August 2, 1996. The percentage decrease
of 10.4% was due in part to the 5.8% decrease in the weighted average number of
stores open and in part to other cost savings.
Depreciation and amortization decreased by 1.3% in the twenty-six weeks ended
August 2, 1996 compared to the comparable period of the prior year, due to the
decreased number of stores in operation.
Other expense, net increased to approximately $954,000 in the twenty-six weeks
ended August 2, 1996 compared to approximately $932,000 in the comparable
period of the prior year, due primarily to increased interest expense
attributable to increased borrowings under the Company's line of credit.
The increase in the Company's loss before income taxes for the twenty-six weeks
ended August 2, 1996 compared to the twenty-six weeks ended August 4, 1995 is
primarily due to the Company's lower net sales and the write down of
inventories discussed above.
Income tax benefit related to the loss for the twenty-six weeks ended August 2,
1996 was not recognized because the utilization of such benefit is not assured.
Such benefit is available for recognition in future years.
-19-
<PAGE> 20
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 5 to the Condensed Consolidated Financial Statements regarding
lawsuits filed in February 1995 and January 1996. Such lawsuits were also
reported in the Company's annual reports on Form 10-K for the fiscal years
ended February 3, 1995 and February 2, 1996 and Form 10-Q for the fiscal
quarter ended May 3, 1996.
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 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On August 8, 1996, the Company received notice from its principal lender, GBFC,
Inc, as agent for itself and Foothill Capital Corporation, that it was in
violation of two financial covenants and that such violations constituted
events of default under the loan documents. The Company's bankruptcy filing on
October 9, 1996 resulted in events of default under all pre-petition loan
agreements (See Note 3 to Notes to Condensed Consolidated Financial Statements
herein).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On October 9, 1996, the Company and its significant subsidiaries filed
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Western District of Texas.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: To be filed by amendment.
Exhibit 10 - GBFC, Inc. Loan Documents
Exhibit 15 - Review Report of Deloitte & Touche LLP
Exhibit 99 - Bankruptcy Petitions
No other exhibits are required to be filed by the Registrant under Item 601 of
Regulation S-K with this report on Form 10-Q.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended August 2,
1996.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
50-OFF STORES, INC.
By: /s/ Charles J. Fuhrmann II
--------------------------------------------------
Charles J. Fuhrmann II, President, Chief
Executive and Financial Officer
By: /s/ James G. Scogin
--------------------------------------------------
James G. Scogin, Vice-President, Controller
Chief Accounting Officer, and Assistant
Secretary
-21-
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 50-OFF
STORES, INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE THIRTEEN WEEKS ENDED
AUGUST 2, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-02-1996
<PERIOD-END> AUG-02-1996
<CASH> 593
<SECURITIES> 0
<RECEIVABLES> 713
<ALLOWANCES> 0
<INVENTORY> 28,915
<CURRENT-ASSETS> 31,163
<PP&E> 41,390
<DEPRECIATION> 17,999
<TOTAL-ASSETS> 55,759
<CURRENT-LIABILITIES> 43,879
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 11,757
<TOTAL-LIABILITY-AND-EQUITY> 55,759
<SALES> 31,708
<TOTAL-REVENUES> 31,708
<CGS> 22,350
<TOTAL-COSTS> 22,350
<OTHER-EXPENSES> 13,754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 603
<INCOME-PRETAX> (4,998)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,998)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,998)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> (.41)
</TABLE>
