<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 MAY 3, 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 78217-0555
(Address of principal executive offices) (Zip Code)
Telephone: (210) 805-9300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No:
12,200,915 shares of the Registrant's Common Stock were outstanding at May 3,
1996.
There are 22 pages in the sequentially numbered, manually signed
original. The exhibit index is located on page 20.
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FORM 10-Q INDEX
PART I PAGE
ITEM 1. Financial Statements 3
Condensed Consolidated Balance Sheets, May 3, 1996,
February 2, 1996 and May 5, 1995 (unaudited) 3
Condensed Consolidated Statements of Operations, thirteen weeks
ended May 3, 1996, and thirteen weeks ended May 5, 1995
(unaudited) 5
Condensed Consolidated Statements of Cash Flows, thirteen
weeks ended May 3, 1996, and thirteen weeks ended May 5, 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 12
PART II
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Exhibit Index 20
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PART I
ITEM 1. FINANCIAL STATEMENTS
50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
MAY 3, 1996 FEBRUARY 2, 1996 MAY 5, 1995
----------- ---------------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 440,335 $ 341,334 $ 2,764,560
Accounts receivable 1,210,407 1,129,604 2,164,599
Merchandise inventories 26,658,232 27,753,965 34,735,075
Prepaid and other current assets 671,279 437,226 1,284,047
----------- ----------- -----------
TOTAL CURRENT ASSETS 28,980,253 29,662,129 40,948,281
----------- ----------- -----------
PROPERTY AND
EQUIPMENT-NET 24,204,099 24,888,222 26,055,174
OTHER ASSETS 1,132,971 899,126 1,175,548
----------- ----------- -----------
TOTAL ASSETS $54,317,323 $55,449,477 $68,179,003
=========== =========== ===========
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>
MAY 3, 1996 FEBRUARY 2, 1996 MAY 5, 1995
------------ ---------------- ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable-trade $ 9,705,104 $ 8,595,246 $ 11,111,039
Accounts payable-other 4,809,516 4,238,123 5,051,947
Accrued expenses and
other current liabilities 4,104,654 3,280,093 3,461,919
Current portion of closed store costs 1,001,449 1,168,213 1,217,025
Current portion of long-term debt 1,063,273 1,286,372 1,340,168
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 20,683,996 18,568,047 22,182,098
------------ ------------ ------------
CREDIT FACILITY, REFINANCED 10,109,405 11,218,051 11,956,695
LONG-TERM DEBT 4,014,674 3,884,515 4,778,284
NOTES PAYABLE - VENDORS 2,631,658 -- --
CLOSED STORE COSTS -- -- 1,387,000
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 (15,275,633) (10,374,359) (4,278,297)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,877,590 21,778,864 27,874,926
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 54,317,323 $ 55,449,477 $ 68,179,003
============ ============ ============
</TABLE>
See accompanying notes to these condensed
consolidated financial statements.
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50-OFF STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen Weeks Ended Thirteen Weeks Ended
-------------------- --------------------
May 3, 1996 May 5, 1995
-------------------- --------------------
NET SALES $ 32,415,409 $ 44,789,934
COST OF SALES 23,233,396 29,441,210
------------ ------------
GROSS PROFIT 9,182,013 15,348,724
------------ ------------
OPERATING EXPENSES:
Selling, advertising, general and
administrative 12,761,322 14,957,818
Depreciation and amortization 970,477 974,088
------------ ------------
TOTAL OPERATING EXPENSES 13,731,799 15,931,906
------------ ------------
OTHER (INCOME) EXPENSE:
Interest income (19,666) (27,196)
Interest expense 371,154 474,380
------------ ------------
TOTAL OTHER (INCOME) EXPENSE 351,488 447,184
------------ ------------
LOSS BEFORE INCOME TAXES (4,901,274) (1,030,366)
BENEFIT FROM INCOME TAXES -- 348,000
------------ ------------
NET LOSS $ (4,901,274) $ (682,366)
============ ============
LOSS PER COMMON SHARE $ (.40) $ (.06)
============ ============
WEIGHTED AVERAGE SHARES 12,200,915 12,188,415
============ ============
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>
Thirteen Weeks Ended
--------------------
May 3, 1996 May 5, 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(4,901,274) $ (682,366)
Adjustments to reconcile net loss to net cash
provided from operating activities:
Depreciation and amortization 970,477 974,088
Non-cash interest expense on long-term debt 117,981 --
Changes in assets and liabilities:
Accounts receivable (80,803) (519,296)
Merchandise inventories 1,095,733 (3,055,337)
Prepaid and other current assets (234,053) (218,486)
Other assets (237,287) 70,183
Accounts payable-trade 3,741,516 1,099,227
Accounts payable-other 571,393 155,914
Deferred income tax -- (348,000)
Accrued expenses and other
current liabilities 824,561 314,240
Closed store costs (166,764) (131,169)
----------- -----------
Net cash provided by (used in) operating
activities 1,701,480 (2,341,002)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (282,912) (1,619,174)
----------- -----------
Net cash used in investing activities (282,912) (1,619,174)
----------- -----------
</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>
Thirteen Weeks Ended
--------------------
May 3, 1996 May 5, 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net (payments) proceeds from credit facility (1,108,646) 5,001,670
Payments on long-term debt (210,921) (339,610)
----------- -----------
Net cash (used in) provided by financing
activities (1,319,567) 4,662,060
----------- -----------
Increase in cash and cash equivalents 99,001 701,884
Cash and cash equivalents at
beginning of period 341,334 2,062,676
----------- -----------
Cash and cash equivalents at
end of period $ 440,335 $ 2,764,560
=========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 253,175 $ 474,380
Income taxes -- --
SUPPLEMENTAL DISCLOSURES OF
NON-CASH FINANCING ACTIVITIES:
Store equipment leases capitalized -- $ 85,171
</TABLE>
See accompanying notes to these condensed
consolidated financial statements.
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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 May 3,
1996 and May 5, 1995 and the condensed consolidated
statements of operations and statements of cash flows for
the thirteen weeks ended May 3, 1996 and the thirteen weeks
ended May 5, 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
week period ended May 3, 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 Form 10-K 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.
NOTE 2: In the first quarter of fiscal 1997, the Company began to
address a liquidity problem and anticipated violations of
financial covenants in its credit arrangements by
restructuring certain debt obligations, including its
unsecured trade obligations owed to vendors and its long
term notes with an affiliate of an insurance company.
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 will be paid in full within a two year period. The
restructuring of the long term notes, including an extension
of the maturity, reduced monthly debt service requirements.
On May 13, 1996, the Company entered into a new $22.5
million credit facility with two financial corporations
which provides for a 60.75% advance rate on eligible
inventory (63.75%, September 16 - December 15; 55.75%,
December 16 - February 28) with interest set at prime plus
1.75%. The new facility matures on May 31, 1998. This
facility replaces a prior commitment of $20.0 million
providing for a 45% advance rate with interest set at prime
plus 1.75% expiring on January 12, 1998. The Company expects
the increased liquidity under the new facility to provide
important cash resources and, with the other restructurings
discussed above, increased creditworthiness (see Note 3,
below). As of June 12, 1996, the Company had approximately
$1,206,000 available for use under its new credit facility.
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The Company has filed lawsuits related to certain parties'
breach of contractual obligations to purchase 1,500,000
shares of the Company's Common Stock and actions in
misappropriating and removing these shares from an escrow
account prior to payment for such shares. The Company is
vigorously prosecuting this matter and intends to pursue all
reasonable avenues to effect either the receipt of payment
for such shares or the return of the shares themselves, plus
actual and punitive damages. The Company, based upon advice
of counsel, believes that it will obtain a favorable
judgment or result in these actions; however, the
collectibility of any such judgment is uncertain at this
time (See Note 5, below).
The Company believes its operating cash flow, its new,
increased credit facility with its larger advance rate, its
restructuring of certain other debt obligations and its cash
on hand, as well as the expected results of its efforts to
resolve its lawsuits or to secure concessions from landlords
or additional capital, will be adequate to finance its
operations through fiscal 1997.
For the balance of fiscal 1997, management has developed and
is implementing a new business strategy which seeks, among
other things, to achieve higher gross margins and a return
to profitability. The key elements of this strategy, which
includes converting a majority of the 50-OFF stores to
LOT$OFF stores, are more close-out buying, higher initial
mark-ups, less promotional pricing, new "hardlines"
categories, elimination of certain "softline" categories
subject to high mark-downs and shrink, extensive programs to
reduce and control shrink generally and a reduced expense
structure. Although management believes that it has
developed an appropriate plan for the Company in its current
environment, no assurance can be given that the Company will
be successful in its efforts to improve operations and
reverse recent operating trends. If the Company's plans to
improve operations are not successful, and absent a positive
resolution of its lawsuits (see Note 5, below), a capital
infusion or additional concessions from landlords or
lenders, management will consider, among other alternatives,
strategic or financial alliances with third parties
(including wholesalers or manufacturers) and the merger or
sale of all or a part of the Company.
NOTE 3: 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 toSeptember 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 agreement
contains various restrictive covenants, including
restrictions on the payment of cash dividends. The
agreement contains minimum gross margin, minimum EBITDA,
minimum and maximum inventory levels, minimum working
capital and minimum trade support financial covenants.
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. As of June 12,
1996, approximately $13,628,000 was outstanding under this
credit facility and approximately $1,206,000 was
available for use.
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<PAGE> 10
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 $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 lender's
prime rate at May 3, 1996 was 8.25%. The agreement contained
various restrictive covenants, including restrictions on the
payment of cash dividends. The lender agreed to waive
violations related to minimum tangible net worth, minimum
working capital and minimum pre-tax profit financial
covenants as of the end of fiscal 1996. This credit facility
was secured by inventory, certain accounts receivable and
other assets. At May 3, 1996, $10,109,405 was outstanding
under the credit facility and approximately $416,000 was
available for use under this facility.
The Company had total borrowings of $8,389,666 and
$16,269,883 and repayments of $9,498,312 and $11,268,213 for
the thirteen weeks ended May 3, 1996 and May 5, 1995,
respectively under its credit facility.
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, apply to the notes plus a debt to tangible
net worth financial covenant as amended.
NOTE 4: The Company, at May 3, 1996 and May 5, 1995, has
recorded approximately $1,001,000 and $2,604,000,
respectively of liabilities associated with estimated monthly
lease payments and other store closing costs for stores
closing in fiscal 1996. The stores closed in fiscal 1996
contributed approximately $3,729,000 of net sales and
$273,000 of operating income during the thirteen weeks ended
May 5, 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
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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 has answered the Complaint. Defaults
have been sought and/or entered against Andalucian
Villas, Brocimast and Koutsoubos for failure to appear.
Banque Paribas, Betafid and Howard White have moved to
dismiss the action for lack of jurisdiction and forum non
conveniens.
Written discovery has been served on all defendants who
have appeared. The Court referred all pretrial matters to a
U.S. Magistrate who entered an order requiring Paribas and
Betafid to make witnesses available in the United States for
depositions. Paribas appealed that decision.
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.
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 $10,000,000, pre-
and post-judgment interest, costs and attorney's fees.
Both defendants have answered the Petition and raised
the affirmative defense of contributory negligence.
Additionally, Jefferies & Company filed a cross-claim against
Howard White. Discovery is proceeding.
The Company will continue to prosecute these cases
vigorously.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
50-OFF Stores, Inc. ("50-OFF" or the "Company") is a
regional, off-price retailer currently operating 100 stores under the name
"50-OFF" in 11 states in the southern and southwestern United States. The
Company is in the process of redirecting its retail activities, including
converting a majority of its off-price 50-OFF stores to close-out LOT$OFF
stores, beginning with its five stores in Oklahoma and eight of its nine
stores in the Dallas, Texas area. The Company's targeted customers are
value-conscious shoppers, those with low-to-moderate income and greater
sensitivity to price than customers of discount retailers and other "bargain
hunters." 50-OFF stores primarily offer moderately priced, regionally and
nationally advertised merchandise, including family apparel and non-apparel
goods such as domestics, housewares and giftware, home furnishings,
shelf-stable food products, toys, stationery 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 and the
availability of products at close-out prices. 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
25.0% of merchandise sales in fiscal 1992 to 41.5% in the first quarter of
fiscal 1997. LOT$OFF stores are expected to have an even higher percentage of
non-apparel merchandise sales; initial plans call for in excess of 60% of
inventory in LOT$OFF stores to be non-apparel.
Historical and Recent Developments
The Company achieved strong growth in stores, sales and
earnings for a number of years after its development of the 50-OFF store
concept in fiscal 1987. When the Company began to experience declines in
comparable store sales and operating results, management made significant
changes to its operations, including closing underperforming stores, limiting
new store openings to existing markets, recruiting new merchandising
management and increasing sales of non-apparel merchandise as a percentage of
total sales. These changes resulted in improved financial performance for the
Company; however, certain external factors, including the Mexican Government's
devaluation of the peso in December 1994, had a negative effect on the
Company's operating performance in late fiscal 1995. The Company had a net
loss of $8,024,000 in fiscal 1995, including store closing costs of
approximately $5,019,000. The Company's financial performance in fiscal 1996
continued to be disappointing, especially in the second half; the Company had
a net loss of $6,778,000. During fiscal 1996, certain factors negatively
affected operating results and liquidity:
o the breach of certain foreign purchasers in an
international offering by the Company in late fiscal 1995 of
their contractual obligation to purchase in aggregate
1,500,000 shares of Common Stock at $3.65 per share
($5,475,000 in aggregate) led to a continuing increase in
borrowings by the Company under its then credit facility
(and a decrease in availability under the facility) and
contributed to an increase in the interest rate on
borrowings under the facility;
o such breach, and the resulting lack of the planned
equity infusion and decrease in availability under the credit
facility, negatively impacted the Company's perceived
creditworthiness with sources of trade credit, which led, in
some cases, to shorter payment terms and/or less credit
support from such sources;
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<PAGE> 13
o concerns of sources of trade credit with the financial
stability of the retail industry, generally, and with the
continuing negative impact of the economic turmoil in Mexico
on retailers with border exposure similarly affected payment
terms and credit support from such sources;
o the economic weakness along the Texas/Mexico border
continued to negatively affect sales and operating results;
o the physical inventory taken at fiscal year end resulted
in an unanticipated high inventory shrinkage; and o
disappointing sales during the "Back-to-School" and
Christmas/holiday selling seasons contributed to lower than
expected sales.
During fiscal 1996, the Company took the following affirmative steps in its
continuing efforts to achieve a more disciplined cost structure, to lessen
vulnerability to external factors and to attain profitability:
o filed lawsuits against the defaulting foreign purchasers
and others involved in the international offering by the
Company in an effort to obtain appropriate remedies,
including either the agreed upon proceeds or the shares
themselves, as well as the Company's actual and punitive
damages (see Significant Litigation, below);
o completed its store consolidation program by closing 14
stores;
o opened five stores;
o negotiated monthly rent reductions in a significant
number of its 100 continuing stores with the cooperation of
its landlords;
o engaged a new, San Antonio-based marketing and advertising
agency; and
o made plans to expand its offering of shelf-stable
food product through its neighborhood stores (to lessen
seasonality and to increase store traffic), a logical
extension of its merchandising commitment to offer its
customers the products they need, conveniently and at the
best prices.
While significant operating losses continued through the Company's
first fiscal quarter of 1997 [a loss of $4.9 million (including an approximate
$2.1 million write down of certain inventories in anticipation of the
conversion of the Oklahoma and certain Dallas stores to LOT$OFF stores in the
late second fiscal quarter) on net sales of $32.4 million from 100.5 weighted
average stores], in late February, the Company began to address its
liquidity problem by restructuring certain debt obligations, including its
unsecured trade obligations owed to vendors and its long term notes with an
affiliate of an insurance company. On May 13, 1996, the Company entered into a
new $22.5 million credit facility which provides generally for a 60.75% advance
rate on eligible inventory with interest set at their base rate plus 1.75%. The
new credit facility matures on May 31, 1998. This new facility replaced a prior
credit facility of $20.0 million providing for a 45% advance rate with interest
set at prime plus 1.75% maturing on January 12, 1998. The Company expects the
increased liquidity under the new facility to provide important cash resources
to 50-OFF and, with the other restructurings discussed above, increased
creditworthiness (see Liquidity and Capital Resources, below).
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<PAGE> 14
On May 7, 1996, the Company's Board of Directors accepted the
resignation of Charles Siegel from his positions as President and Chief
Executive Officer of the Company, as well as his position on the Board, and
appointed Charles J. Fuhrmann II to the positions of President, Chief Executive
Officer and Chief Financial Officer. Mr. Fuhrmann, a Director of the Company
since October 1994, has served in various consulting capacities for 50-OFF,
including Acting Chief Administrative and Financial Officer until his new
appointment. Mr. Fuhrmann, most recently a private investor and strategic and
financial consultant, was formerly Managing Director-Investment Banking with
Merrill Lynch & Co. in New York. Other significant management changes included
the promotions of Allen Fields to Senior Vice President - Operations, Joe
Goldstein to Senior Vice President - Merchandise and James Scogin to Vice
President - Controller, Chief Accounting Officer and Assistant Secretary. For
the balance of fiscal 1997, the new management team has developed and is
implementing a new business strategy which seeks to achieve higher gross
margins and profitability. The key elements of this strategy, which includes
converting a majority of the 50-OFF stores to LOT$OFF stores, are more
close-out buying, higher initial mark-ups, less promotional pricing, new
"hardlines" categories, elimination of certain "softline" categories subject to
high mark-downs and shrink, extensive programs to reduce and control shrink
generally and a reduced expense structure. Although management believes that it
has developed an appropriate plan for the Company in its current environment,
no assurance can be given that the Company will be successful in its efforts to
improve operations and reverse recent operating trends.
Liquidity and Capital Resources
The Company began fiscal 1997 with cash of $341,334. During the first
fiscal quarter, the Company decreased borrowings by a net of $1,319,567,
received $1,701,480 from operating activities, used $282,912 for capital
expenditures in refurbishing existing stores and opening one store in the
Atlanta, Georgia area and ended the period with cash on hand of $440,335. The
Company had a credit facility for up to $20,000,000, obtained in January 1994,
which was to expire on January 12, 1998; permitted 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 bore interest at 1.75% over the prime rate. The
credit facility was secured by inventory and other assets of the Company and
contained minimum tangible net worth, minimum working capital and minimum
pre-tax profit financial covenants. As of May 3, 1996, the Company had
approximately $10,109,000 outstanding under the credit facility and had
approximately $416,000 available for use under its line of credit.
As stated above, the Company has opened one store in fiscal 1997 and
has no other lease commitments for additional stores. Future store openings
will depend upon the sales and income performance of existing stores and the
Company's ability to obtain attractive leases for locations in existing markets
where the targeted customer base is large enough to support additional
stores.
As stated above, during fiscal 1995 and 1996, certain factors
negatively affected the Company's liquidity, including significant operating
losses. While significant operating losses continued through the Company's
first fiscal quarter of 1997 (a loss of $4.9 million, including inventory
adjustments related to the future conversion of Oklahoma and Dallas area 50-OFF
stores to LOT$OFF stores, as discussed above, on net sales of $32.4 million
from 100.5 weighted average stores), in late February, the Company began to
address its liquidity problem and anticipated violations of financial covenants
in its credit agreements by restructuring certain debt obligations, including
its unsecured trade obligations owed to vendors and its long term notes with an
affiliate of an insurance company. With the support of its vendors, 50-OFF
implemented a payment plan with respect to $8,447,000 of unsecured trade
payables as of February 26, 1996. Under the plan, such payables will be paid in
full within a two year period. The restructuring of the long term notes,
including an extension of the maturity, reduced monthly debt service
requirements.
-14-
<PAGE> 15
On May 13, 1996, the Company entered into a new $22.5 million credit
facility with Foothill Capital Corporation and GBFC, Inc. which provides for a
60.75% advance rate on eligible inventory (63.75%, September 16 - December 15;
55.75%, December 16 - February 28) with interest set at their base rate plus
1.75%. The new credit facility matures on May 31, 1998. This new facility
replaced the credit facility described above. The Company expects the increased
liquidity under the new facility to provide important cash resources and, with
the other restructurings discussed above, increased creditworthiness. In
conjunction with the establishment of this new facility, the Company issued
Foothill Capital and GBFC, Inc. a three year warrant to purchase 400,000 shares
of Common Stock at $2.50 per share. As of May 13, 1996, the Company had
approximately $4,061,000 available for use under its new revolving credit
facility.
The Company believes its operating cash flow, its new, increased
revolving credit facility with its larger advance rate, its restructuring of
certain other debt obligations and its cash on hand, as well as the expected
results of its efforts to resolve its lawsuits or to secure concessions from
landlords or additional capital, will be adequate to finance its operations
through fiscal 1997. For the balance of fiscal 1997, a new management team has
developed and is implementing a new business strategy which seeks, among other
things, to achieve higher gross margins and a return to profitability. The key
elements of this strategy, which includes converting a majority of the 50-OFF
stores to LOT$OFF stores, are more close-out buying, higher initial mark-ups,
less promotional pricing, new "hardlines" categories, elimination of certain
"softline" categories subject to high mark-downs and shrink, extensive programs
to reduce and control shrink generally and a reduced expense structure.
Although management believes that it has developed an appropriate plan for the
Company in its current environment, no assurance can be given that the Company
will be successful in its efforts to improve operations and reverse recent
operating trends. If the Company's plans to improve operations are not
successful, and absent a positive resolution of its lawsuits (see Significant
Litigation, below), a capital infusion or additional concessions from landlords
or lenders, management will consider, among other alternatives, strategic or
financial alliances with third parties (including wholesalers or manufacturers)
and the merger or sale of all or a part of the Company.
Significant Litigation
The Company has filed lawsuits 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 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 settlement amounts
paid to the Company, if any, in excess of the subscriptions receivable would
be credited to earnings.
-15-
<PAGE> 16
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 quarter of fiscal 1997, approximately 13.7% 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 approximate $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 well below its comparable level a year ago, sales in
the Company's border stores have continued to suffer through the first quarter
of fiscal 1997 (an approximate $1.3 million, or 24.1%, drop to $4.1 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.
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 prior period.
<TABLE>
<CAPTION>
Percentage of Net Sales
------------------------------------------------
Thirteen Weeks Ended
------------------------------------------------
May 3, 1996 May 5, 1995
--------------------- ----------------------
<S> <C> <C>
Net sales 100.0% 100.0%
----- -----
Cost of sales 71.7 65.7
Selling, advertising, general and administrative 39.3 33.4
Depreciation and amortization 3.0 2.2
Other expense, net 1.1 1.0
---- -------
Total expenses 115.1 102.3
----- -----
Loss before income taxes (15.1) (2.3)
Benefit from income taxes 0 .8
Net loss (15.1)% (1.5)%
===== =======
</TABLE>
-16-
<PAGE> 17
<TABLE>
<CAPTION>
Percentage Change
----------------------------------------------
13 Weeks Ended
May 3, 1996 compared to
13 Weeks Ended May 5, 1995
----------------------------------------------
<S> <C>
Net sales (27.6)%
Cost of sales (21.1)
Selling, advertising, general and administrative (14.7)
Depreciation and amortization (.4)
Other expense, net (21.4)
Loss before income taxes 375.7
Benefit from income taxes (100.0)
Net loss 618.3%
</TABLE>
THIRTEEN WEEKS ENDED MAY 3, 1996 COMPARED TO THIRTEEN WEEKS ENDED MAY 5, 1995:
The net sales decrease of 27.6% for the thirteen weeks ended
May 3, 1996 compared to the thirteen weeks ended May 5, 1995 is attributable
to a 21.7% decrease in comparable store sales and a 8.3% decrease in the
weighted average number of stores in operation. The comparable store sales
decrease of 21.7% is attributable largely to a 19.5% decrease in the weighted
average amount of inventory, due in part to the Company's inability to have
inventory shipped on acceptable credit terms. Comparable stores experienced a
13.5% drop in transactions and an 8.0% drop in average transaction amount to
$13.06 for the fiscal 1997 period as compared to the same period in fiscal
1996.
Cost of sales as a percentage of net sales increased to
71.7% for the thirteen weeks ended May 3, 1996 from 65.7% for the comparable
period of the prior year, due primarily to approximately $2,053,000 in
inventory liquidation write-downs in connection with the conversion of
Oklahoma and Dallas area stores from 50-OFF stores to LOT$OFF stores scheduled
for late May 1996 through early July 1996. Excluding the inventory liquidation
write-downs, cost of sales as a percentage of net sales would have been 65.3%
for the thirteen weeks ended May 3, 1996.
Selling, advertising, general and administrative expenses
increased to 39.3% of net sales for the thirteen weeks ended May 3, 1996 from
33.4% for the comparable period of the prior year due to the decrease in
sales. The 14.7% decrease in the amount of selling, advertising, general and
administrative expenses compared to the thirteen weeks ended May 5, 1995 was
the result of the 8.3% decrease in the weighted average number of stores open
and certain cost reductions, including negotiated monthly rent reductions and
personnel.
Other expense, net decreased to approximately $351,000 in the thirteen
weeks ended May 3, 1996 compared to approximately $447,000 in the comparable
period of the prior year, due primarily to decreased borrowings under the
Company's credit facility.
-17-
<PAGE> 18
The increase in the Company's loss before income taxes for the thirteen
weeks ended May 3, 1996 compared to the thirteen weeks ended May 5, 1995
is primarily due to a decrease in net sales and the $2,053,000 charge to cost
of sales pertaining to the inventory liquidation write-downs, offset in part by
a decrease in selling, advertising, general and administrative expenses.
Income tax benefit related to the loss for the thirteen weeks ended May
3, 1996 was not recognized because the utilization of such benefit is not
assured. Such benefit is available for recognition in future years.
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 report on Form 10-K for the fiscal year ended
February 2, 1996. There have been no material developments with regard to the
lawsuits since the filing of those reports.
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
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The Registrant reports no information, not previously reported in a
report on Form 8-K, in lieu of filing a report on Form 8-K with respect to such
information.
-18-
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 15 - Review Report of Deloitte & Touche LLP
No other exhibits are required to be filed by the Registrant
under Item 601 of Regulation S-K with this report on Form 10-Q.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended May 3,
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
50-OFF STORES, INC.
By: CHARLES J. FUHRMANN II
Charles J. Fuhrmann II, President, Chief
Executive and Financial Officer
By: JAMES G. SCOGIN
James G. Scogin, Vice-President, Controller
Chief Accounting Officer, and Assistant
Secretary
-19-
<PAGE> 20
EXHIBIT INDEX
Exhibit 15 -- Review Report of Deloitte & Touche LLP
Exhibit 27 -- Financial Data Schedule
<PAGE> 1
EXHIBIT 15
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
50-OFF Stores, Inc.
San Antonio, Texas
We have reviewed the accompanying condensed consolidated balance sheet
of 50-OFF Stores, Inc. and subsidiaries as of May 3, 1996, and the related
condensed consolidated statements of income and cash flows for the thirteen week
periods ended May 3, 1996. These financial statements are the responsibility of
the Corporations management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
The accompanying condensed financial statements have been prepared
assuming that Corporation will continue as a going concern. As discussed in Note
2 to the condensed financial statements, the Corporation's recurring losses from
operations, the continuing decrease in sales and the necessity to restructure
the repayment of trade payables raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of 50-OFF Stores, Inc. and
subsidiaries as of February 2, 1996, and the related consolidated statement of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated May 20, 1996, we expressed an
unqualified opinion on those consolidated financial statements and included an
explanatory paragraph concerning matters that raise substantial doubt about the
Corporation's ability to continue as a going concern. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of February 2, 1996 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
San Antonio, Texas
June 17, 1996
<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 MAY
3, 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> MAY-03-1996
<PERIOD-END> MAY-03-1996
<CASH> 440
<SECURITIES> 0
<RECEIVABLES> 1,210
<ALLOWANCES> 0
<INVENTORY> 26,658
<CURRENT-ASSETS> 28,980
<PP&E> 41,285
<DEPRECIATION> 17,081
<TOTAL-ASSETS> 54,317
<CURRENT-LIABILITIES> 20,684
<BONDS> 16,756
<COMMON> 122
0
0
<OTHER-SE> 16,756
<TOTAL-LIABILITY-AND-EQUITY> 54,317
<SALES> 32,415
<TOTAL-REVENUES> 32,415
<CGS> 23,233
<TOTAL-COSTS> 23,233
<OTHER-EXPENSES> 13,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> (4,901)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,901)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,901)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
