<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 2, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13076
LOT$OFF CORPORATION
(F/K/A 50-OFF STORES, INC.)
DELAWARE 74-2640559
- ---------------------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization
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 old common stock were outstanding at May
2, 1997.
855,320 shares of the Registrant's new common stock were outstanding at June
18, 1997.
--------------------------
There are 21 pages in the sequentially numbered, manually signed original. The
exhibit index is located on page 20.
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FORM 10-Q INDEX
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PAGE
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PART I
ITEM 1. Financial Statements ...................................................... 3
Condensed Consolidated Balance Sheets, May 2, 1997 (unaudited),
January 31, 1997 and May 3, 1996 (unaudited) .............................. 3
Condensed Consolidated Statements of Operations, thirteen weeks
ended May 2, 1997, and thirteen weeks ended May 3, 1996 (unaudited) ...... 5
Condensed Consolidated Statements of Cash Flows, thirteen weeks
ended May 2, 1997, and thirteen weeks ended May 3, 1996 (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 ......................................................... 17
ITEM 2. Changes in Securities ..................................................... 17
ITEM 3. Defaults Upon Senior Securities ........................................... 17
ITEM 4. Submission of Matters to a Vote of Security Holders ....................... 17
ITEM 5. Other Information ......................................................... 17
ITEM 6. Exhibits and Reports on Form 8-K .......................................... 18
Signatures ................................................................ 19
Exhibit Index ............................................................. 20
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
May 2, 1997 January 31, 1997 May 3, 1996
------------ ---------------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 590,730 $ 491,297 $ 440,335
Cash in escrow -- 330,000 --
Accounts receivable 206,887 717,852 1,210,407
Merchandise inventories 14,049,783 12,974,958 26,658,232
Prepaid and other current assets 402,056 393,526 671,279
------------ ------------ ------------
TOTAL CURRENT ASSETS 15,249,456 14,907,633 28,980,253
------------ ------------ ------------
PROPERTY AND
EQUIPMENT-NET 3,940,548 3,988,760 24,204,099
OTHER ASSETS 456,762 358,343 1,132,971
------------ ------------ ------------
TOTAL ASSETS $ 19,646,766 $ 19,254,736 $ 54,317,323
============ ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
May 2, 1997 January 31, 1997 May 3, 1996
-------------- ---------------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $ 7,660,908 $ -- $ --
Accounts payable-trade 1,747,773 8,595,246 9,705,104
Accounts payable-other 2,278,479 4,238,123 4,809,516
Accrued expenses and
other current liabilities 1,823,620 3,280,093 4,104,654
Current portion of closed store
costs -- 1,168,213 1,001,449
Current portion of long-term debt -- 1,286,372 1,063,273
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 13,510,780 18,568,047 20,683,996
CREDIT FACILITY, refinanced -- 11,218,051 10,109,405
LONG-TERM DEBT, less
current portion -- 3,884,515 4,014,674
NOTES PAYABLE - VENDORS -- -- 2,631,658
LIABILITIES SUBJECT TO
COMPROMISE -- -- --
COMMITMENTS AND
CONTINGENCIES 30,193,052 -- --
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock 122,009 122,009 122,009
Additional paid-in capital 36,022,264 36,022,264 36,022,264
Subscription receivable (3,991,050) (3,991,050) (3,991,050)
Accumulated deficit (56,210,289) (10,374,359) (15,275,633)
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY (24,057,066) 21,778,864 16,877,590
-------------- -------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ (19,646,766) $ 55,449,477 $ 54,317,323
============== ============== ==============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirteen Weeks Ended
-------------------- --------------------
May 2, 1997 May 3, 1996
-------------------- --------------------
<S> <C> <C>
NET SALES $ 11,919,152 $ 32,415,409
COST OF SALES 7,720,547 23,233,396
---------------- ----------------
GROSS PROFIT 4,198,605 9,182,013
---------------- ----------------
OPERATING EXPENSES:
Selling, advertising, general and
administrative 5,805,429 12,761,322
Depreciation and amortization 177,285 970,477
Reorganization items 300,000 --
---------------- ----------------
TOTAL OPERATING EXPENSES 6,282,714 13,731,799
---------------- ----------------
OPERATING LOSS (2,084,109) (4,549,786)
OTHER (INCOME) EXPENSE :
Interest income (24,714) (19,666)
Interest expense 166,928 371,154
---------------- ----------------
TOTAL OTHER EXPENSE (INCOME) 142,214 351,488
---------------- ----------------
LOSS BEFORE INCOME TAXES (2,226,323) (4,901,274)
BENEFIT FROM INCOME TAXES -- --
---------------- ----------------
NET LOSS $ (2,226,323) $ (4,901,274)
================ ================
LOSS PER COMMON SHARE $ (.18) $ (.40)
================ ================
WEIGHTED AVERAGE SHARES 12,200,915 12,200,915
================ ================
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------
May 2, 1997 May 3, 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (2,226,323) $ (4,901,274)
Adjustments to reconcile net loss to net cash
provided from operating activities:
Depreciation and amortization 177,285 970,477
Reorganization items 300,000 --
Non-cash interest expense on long-term debt 117,981
Changes in assets and liabilities:
Accounts receivable 510,965 (80,803)
Merchandise inventories (1,074,825) 1,095,733
Prepaid and other current assets (8,530) (234,053)
Other assets (98,419) (237,287)
Accounts payable-trade 308,573 3,741,516
Accounts payable-other 245,967 571,393
Accrued expenses and other
current liabilities (233,848) 824,561
Closed store costs -- (166,764)
------------ ------------
Net cash (used in) provided by operating
activities (2,099,155) 1,701,480
------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (129,073) (282,912)
------------ ------------
Net cash used in investing activities (129,073) (282,912)
------------ ------------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
---------------------------------
May 2, 1997 May 3, 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit facility 16,289,967 (1,108,646)
Payment on credit facility (14,025,639) --
Payments on long-term debt (266,667) (210,921)
Cash in escrow 300,000 --
------------ ------------
Net cash provided by (used in) financing
activities 2,327,661 (1,319,567)
------------ ------------
Increase in cash and cash equivalents 99,433 99,001
Cash and cash equivalents at
beginning of period 491,297 341,334
------------ ------------
Cash and cash equivalents at
end of period $ 590,730 $ 440,335
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid/received during the period for:
Interest paid $ 166,298 $ 253,175
Income taxes paid -- --
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
(F/K/A 50-OFF STORES, INC. AND SUBSIDIARIES - DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated balance sheet at January 31, 1997 has been
condensed from the audited consolidated balance sheet at January 31,
1997.
The condensed consolidated balance sheets at May 2, 1997 and May 3,
1996 and the condensed consolidated statements of operations and cash
flows for the thirteen weeks ended May 2, 1997 and the thirteen ended
May 3, 1996 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. The results of operations for the
thirteen week period ended May 2, 1997 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
January 31, 1997.
On October 9, 1996 (the "Petition Date"), the Company and its
significant subsidiaries filed petitions (the "Filing") for relief
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 Filing was precipitated by the notification
from the Company's then asset based lenders that it was in violation
of the minimum gross margin (disputed) and the minimum working
capital financial covenants of its credit agreement 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 was unable to secure the
resources required to cure the defaults under the loan documents and
to implement its business plan and effect the changes believed
necessary to improve operations and reverse the Company's
disappointing operating results without the protections afforded
under the Bankruptcy Code. The Company continued to manage its
affairs and operate its business under Chapter 11 as debtor in
possession while a plan of reorganization was formulated.
A plan of reorganization ("the Plan" or "Plan of Reorganization") was
filed on February 26, 1997, amended on March 27, 1997, confirmed by
the Bankruptcy Court on June 3, 1997 and implemented on June 16, 1997
(the "Effective Date"). See Note 2. Through the reorganization,
management intends to restructure the operations and capitalization
of the Company in order to strengthen the Company's financial
position and implement its business plan. The financial statements do
not purport to show assets at their realizable values, pre-Petition
Date liabilities at amounts that may be allowed or the effect of any
changes that have been or may ultimately be made in the
capitalization of the Company or in its operations.
NOTE 2: On the Effective Date of the Company's Bankruptcy Court-confirmed
Plan of Reorganization, certain key elements of the Plan were
implemented, including the changing of the Company's
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corporate name from 50-OFF Stores, Inc. to LOT$OFF Corporation
("LOT$OFF") and the cancellation of all common stock in 50-OFF
Stores, Inc. The Plan provides for the recapitalization of the
Company through cash raised from the Company's existing common
stockholders. Specifically, the Plan provided for the issuance to
existing common stockholders of rights to purchase units, consisting
of 20 shares of LOT$OFF Series A Preferred Stock and 20 shares of
LOT$OFF Common Stock ("a Unit"), with a minimum aggregate purchase
amount of $3,050,000. Contemporaneously with filing the Plan, the
Company filed a related disclosure statement ("the Disclosure
Statement") setting forth more detailed information regarding the
Company and the Plan. Under applicable Bankruptcy Court rules and
procedures, a hearing was held to review and approve the Disclosure
Statement which was approved March 20, 1997. Upon approval of the
Disclosure Statement by the Bankruptcy Court, the Plan and Disclosure
Statement were furnished to creditors and stockholders, and votes in
support of the Plan were solicited. The Plan was approved by both
creditors and stockholders, and a Bankruptcy Court order confirming
the Plan was entered on June 3, 1997. At the confirmation hearing on
June 3, 1997, the Company announced it had received more than enough
subscriptions for the required minimum to be met. On June 16, 1997,
the Plan went effective, and the Company issued 855,320 shares of
LOT$OFF Series A Preferred Stock (each such share is convertible into
two shares of LOT$OFF Common Stock and is entitled to a 5.5%, $0.275,
cumulative annual dividend; LOTSP: CUSIP #545674202) and 855,320
shares of LOT$OFF Common Stock (LOTS: CUSIP # 545674103) to
subscribers to its rights offering for gross proceeds of $4,276,600.
On the Effective Date, LOT$OFF also entered into a $15,000,000
revolving credit agreement maturing on June 16, 2000 with General
Electric Capital Corporation ("GECC"). The proceeds of the facility,
together with the net proceeds from the rights offering, will be used
to refinance the Company's debtor in possession facility, also with
GECC, and to provide post-confirmation working capital for increased
inventories for its 41 continuing stores and selected other general
corporate purposes, including financing LOT$OFF's exit from
bankruptcy. See Note 4.
The Company's Plan of Reorganization also provides for the
cancellation of all non-priority unsecured indebtedness of the
Company. The Company estimates such cancellation will cause the
elimination of over $25 million of unsecured debt and $3 million of
collateralized debt, which has been converted to unsecured debt, from
the Company's balance sheet. Each holder of an allowed general
unsecured claim will, in cancellation of its claim, receive a pro
rata share of LOT$OFF's Series B Preferred Stock (798,210 shares,
having a liquidation preference of $3,991,050, in the aggregate).
Each share of Series B Preferred Stock is convertible into two shares
of LOT$OFF Common Stock. Certain obligations of the Company to such
holders of such Series B Preferred Stock will be secured by two liens
against potential net lawsuit proceeds from significant litigation
being prosecuted by the Company. See Note 5. As net proceeds (net of
certain items set forth in the Plan) from such litigation are
received by the Company, holders of Series B Preferred Stock will
receive (i) Series A Conversion Rights, which provide for the
conversion of Series B Preferred Stock to Series A Preferred Stock,
until net proceeds reach $3,991,050 and (ii) Series A Preferred Stock
for net proceeds in excess of $3,991,050 (provided that "excess" net
proceeds, as defined in the Plan, will be paid in cash). The receipt
of Series A Conversion Rights, Series A Preferred Stock and/or cash
by holders of Series B Preferred Stock will result in a proportionate
release of the liens. By issuing such Series B Preferred Stock to
general unsecured creditors, such creditors are essentially receiving
the net value of the Company's litigation which was pending
pre-Petition Date.
Management has been redirecting the Company's retail activities from
50-OFF's off-price retailing concept to LOT$OFF's close-out retailing
concept. Coincident and consistent with this change
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has been 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,
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 LOT$OFF stores. The actual
merchandise mix will fluctuate by category, by season and by store
based on customer needs and buying trends, demographics and the
availability of products at close-out prices. This merchandise
concept is designed to appeal to value-conscious shoppers and other
"bargain hunters," and management is hopeful its continued
implementation will lead to higher initial mark-ups, less promotional
pricing, fewer markdowns, less inventory shrinkage, increased store
traffic and improved operating results.
The Company's ability to successfully reorganize and continue as a
going concern will be affected by a number of factors, including, but
not limited to, the need to comply with the terms, covenants and
conditions of its post-confirmation credit facility, the degree of
success in reversing the Company's recent business trends (by
increasing sales and operating profits) and the ability to alleviate
trade credit concerns and restore merchandise flows to adequate
levels. While management believes that the recent closings of stores
and the implementation of expense cuts commensurate with the
downsizing of the total stores in operation (from 101 to 41 stores)
facilitates its efforts to improve the Company's operating
performance and that the recapitalization implemented on the
Effective Date of its Plan of Reorganization should strengthen its
financial position and alleviate concerns of credit and merchandise
suppliers [the anticipated judgment and receipt of proceeds from the
Company's lawsuits (see Note 5) should further strengthen its
financial position], no assurance can be given that the Company will
be successful in its continuing efforts to reverse negative business
trends, which have continued through May 1997, and return to
profitability. For this reason, any investment in LOT$OFF's Common
and Series A Preferred Stocks should be considered speculative.
If the Company's plans to improve operations are not successful,
management will consider, among other alternatives, strategic and/or
financial alliances with third parties (including wholesalers or
manufacturers) and the merger, sale or liquidation of all or a part
of the Company.
NOTE 3: The principal categories of claims, reclassified in the consolidated
balance sheet as of May 2, 1997 and included in "Liabilities Subject
to Compromise," are as follows:
Secured debt, 8.5%, collateralized by furniture,
fixtures and equipment............................. $ 4,179,942
Secured debt (capital leases),
collateralized by signs............................ 88,498
Trade and other miscellaneous claims,
including costs of lease rejections................ 25,924,612
-----------
$30,193,052
===========
These amounts may be subject to future adjustments depending on:
filings of additional claims against the Company; actions of the
Bankruptcy Court; further developments with respect to disputed
claims - whether or not such claims are secured and the value of any
security interest securing any such claims; and other events. The
Company has estimated that certain pre-Petition Date debt exceeds the
related collateral and therefore, in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," the
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Company discontinued accruing interest on these obligations. The
above amounts represent the Company's best estimate of claims which
will ultimately be allowed by the Bankruptcy Court.
NOTE 4: 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. The line of credit was
collateralized by inventory, accounts receivable and other assets.
The agreement contained various restrictive covenants, including
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 Company was unable to secure
the resources required to cure the defaults under the loan documents
without the protections afforded under Chapter 11. As of November 1,
1996, the Company had approximately $7,335,000 outstanding under the
credit facility and, with the support and by order of the Bankruptcy
Court, was using cash collateral for working capital needs. This
facility was paid off in November 1996 (after the Company's Filing).
On November 18, 1996, the Company, with the approval of the
Bankruptcy Court, entered into a credit agreement with GECC providing
the Company with a line of credit through November 1997 of up to
$15,000,000. Borrowings under the line were limited to a borrowing
base equal to a percentage of eligible inventory at cost: August 15
through December 15, 65%; and December 16 through August 14, 60%.
Interest under the line was charged on funds borrowed at the
annualized yield on 30-day commercial paper (5.62% as of May 2, 1997)
plus 3%. The line of credit was collateralized by inventory, accounts
receivable and other assets. The credit agreement contained various
restrictive covenants. The agreement also contained minimum gross
margin, minimum EBITDA, minimum inventory, minimum sales, minimum
trade support and maximum capital expenditure financial covenants. On
February 25, 1997 and April 2, 1997, the Company was notified that it
was in violation of not receiving net proceeds of $1,000,000
(received $998,000) from the sale of its headquarters building and
the following financial covenants regarding minimum (a) EBITDA,
(covenant $400,000, actual ($484,000)) (b) net sales (covenant
$15,900,000, actual $12,609,000) (c) inventory balances (covenant
$16,000,000, actual $13,504,000) and (d) accounts payable (covenant
$2,000,000, actual $1,940,000). The violations constituted events of
default under the loan documents. GECC waived the default on net
proceeds from sale of headquarters building and was forbearing from
exercising any remedies in connection with such financial defaults.
At May 2, 1997, the Company had approximately $7,661,000 outstanding
under the credit facility and had approximately $571,000 available
for use.
On June 16, 1997, LOT$OFF, with the approval of the Bankruptcy Court,
entered into a credit agreement with GECC providing LOT$OFF with a
revolving credit facility through June 16, 2000 of up to $15,000,000.
The new credit facility bears interest at a floating rate equal to
the published rate for thirty-day commercial paper issued by major
corporations plus 3% per annum and provides for an unused facility
fee of 0.5% per annum. Borrowings under the facility are available in
aggregate amounts up to 65% of LOT$OFF's eligible inventory for the
period from August 15 through December 15 and up to 60% for the
period from December 16 through August 14, subject to certain
required reserves. The line of credit is collateralized by inventory,
accounts receivable and other assets. The credit agreement contains
various restrictive covenants, including restrictions on the payment
of dividends on common stock. The agreement also contains minimum
gross margin, minimum EBITDA, minimum inventory, minimum working
capital and maximum capital expenditure financial covenants. As of
June 18, 1997, LOT$OFF
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had $6,227,000 available for borrowings under the line (after
reserves of $1,044,000), of which $2,560,000 was committed, leaving a
net availability of $3,667,000. The Company's Filing resulted in
events of default for all pre-Petition Date loan agreements.
NOTE 5: 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 the United States District
Court in San Antonio, Texas against Banque Paribas (Suisse) S.A.
("Paribas"), Betafid S.A., three purchaser entities allegedly
controlled by them and certain affiliated individuals in connection
with the breaches by certain of the defendants of their contractual
obligations to purchase an aggregate of 1,500,000 shares of the
Company's old 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 transferring, selling and trading the shares even
though the defendants have never paid for such shares. The Company
seeks recovery of actual and punitive damages, an injunction against
the defendants' 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. White
also served a third party complaint on Chase Manhattan Bank, N.A.
50-OFF has recently joined Chase and Aries Peak, Inc. as additional
defendants. Defaults have been entered against Arnass, Andalucian
Villas, Brocimast, Betafid and Koutsoubos for failure to appear or
answer.
Paribas moved to dismiss the action for lack of personal
jurisdiction, failure to state a claim and for forum non conveniens.
The District Court referred all pre-trial matters to U.S. Magistrate
Judge John W. Primomo, who denied each of Paribas' motions to
dismiss. U.S. District Judge H.F. Garcia has adopted Judge Primomo's
rulings in their entirety.
On March 20, 1997, Paribas answered 50-OFF's complaint asserting a
number of affirmative defenses, including contributory negligence.
Paribas also asserted a counterclaim against 50-OFF for defamation.
50-OFF has moved to dismiss this counterclaim and strike Paribas'
affirmative defenses. Judge Primomo has recommended such dismissal
and the striking of the affirmative defenses.
Written discovery has been served on all defendants who have
appeared, and depositions have been taken of numerous parties and
non-party witnesses. Judge Primomo has required that all discovery of
Paribas take place pursuant to the provisions of the Hague Evidence
Convention. Paribas recently responded to 50-OFF's requests for
production and interrogatories. This matter is currently set for
trial on August 25, 1997.
On January 9, 1996, the Company filed another 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
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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.
Soon after the Company filed for protection under the Bankruptcy
Code, Jefferies and White removed this case to the Bankruptcy Court.
The United States District Court granted 50-OFF's motion to abstain
from hearing the case and remanded the case back to the Bexar County
District Court. This matter has been specially set for jury trial on
October 4, 1997. The Bexar County District Court also ordered the
parties to conduct mediation of the case prior to such trial date.
The Company will continue to prosecute these cases vigorously. The
Company believes its claims against these defendants are meritorious.
The Company, based upon advice of counsel, believes that it will
obtain a favorable judgment against one or more of the defendants
referenced in the preceding two lawsuits. The Company intends to
vigorously pursue all remedies to collect the sums owing to the
Company as per any judgment obtained against one or more of the
defendants.
The Company is party to certain other legal proceedings arising in
the ordinary course of business, none of which are believed to be
material.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 Net Sales
------------------------------
Thirteen Weeks Ended
------------------------------
May 2, 1997 May 3, 1996
------------- -------------
<S> <C> <C>
Net sales ............................................ 100.0% 100.0%
Cost of sales ........................................ 64.8 71.7
Selling, advertising, general and administrative ..... 48.7 39.3
Depreciation and amortization ........................ 1.5 3.0
Operating (loss) before reorganization items ...... (15.0) (14.0)
Reorganization items ................................. 2.5 --
Operating (loss) .................................. (17.5) (14.0)
Other expense, net ................................... 1.2 1.1
Loss before income taxes ............................. (18.7) (15.1)
(Provision for) benefit from income taxes ............ 0.0 0.0
Net loss ............................................. (18.7)% (15.1)%
</TABLE>
-13-
<PAGE> 14
<TABLE>
<CAPTION>
Percentage Change
--------------------------
13 Weeks Ended
May 2, 1997 compared to
13 Weeks Ended May 3, 1996
--------------------------
<S> <C>
Net sales ............................................ (63.2)%
Cost of sales ........................................ (66.8)%
Selling, advertising, general and administrative ..... (54.5)%
Depreciation and amortization ........................ (81.2)%
Operating loss before reorganization items ........ (60.8)%
Reorganization items ................................. N/A
-----
Operating loss .................................... (54.2)%
Other expense, net ................................... (59.5)%
-----
Loss before income taxes ............................. (54.6)%
(Provision for) benefit from income taxes ............ 0.0%
-----
Net loss ............................................. (54.6)%
-----
Weighted average number of stores .................... (58.5)%
=====
</TABLE>
Thirteen weeks ended May 2, 1997 compared to thirteen weeks ended May 3, 1996:
The net sales decrease of 63.2% for the thirteen weeks ended May 2, 1997
compared to the thirteen weeks ended May 3, 1996 is attributable primarily to a
58.5% decrease in the weighted average number of stores in operation (from
100.5 stores to 41.7 stores ) coupled with a decrease in comparable store sales
(due primarily to inventory imbalances among the 41 continuing stores and the
lack of resources to effectively promote customer traffic to such stores).
Cost of sales as a percentage of net sales decreased from 71.7% for the
thirteen weeks ended May 3, 1996 to 64.8% for the thirteen weeks ended May 2,
1997, due primarily to 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 and to higher
maintained margins in the fiscal 1998 period.
Selling, advertising, general and administrative expense increased from 39.3%
of net sales for the thirteen weeks ended May 3, 1996 to 48.7% of net sales for
the thirteen weeks ended May 2, 1997 due primarily to lower sales. The 54.5%
decrease in the amount of selling, advertising, general and administrative
expense compared to the thirteen weeks ended May 3, 1996 was the result of the
58.5% decrease in the weighted average number of stores in operation.
Depreciation and amortization expense decreased by 81.7% in the thirteen weeks
ended May 2, 1997 compared to the comparable period of fiscal 1997, due
primarily to the decreased number of stores in operation and to substantial
prior write-downs of fixed assets. In connection with the Filing, the Company
recorded as a reorganization expense in later periods of fiscal 1997 the
write-down to fair value, as determined by the Company's lender based on the
value of certain assets liquidated by the lender and on the Company's, the
lender's and an independent party's strategic review, certain equipment and
leasehold improvements.
Other expense, net, decreased to $142,214 in the thirteen weeks ended May 2,
1997 compared to $351,488 in the comparable period of the prior year, due
primarily to decreased interest expense attributable to decreased
-14-
<PAGE> 15
borrowings under the Company's line of credit, a substantially lower effective
interest rate on such borrowings and the Company's discontinuing the accrual of
interest on certain of its obligations.
The decrease in the Company's loss before income taxes for the thirteen weeks
ended May 2, 1997 compared to the thirteen weeks ended May 3, 1996 is primarily
due to higher maintained margins (higher initial markups, less promotional
pricing, fewer markdowns and less inventory shrinkage) and lower depreciation
and amortization expense, offset, in part, by $300,000 of reorganization
expenses.
Income tax benefits related to the loss for the thirteen weeks ended May 2,
1997 were not recognized because the utilization of such benefits are not
assured. Such benefits, if any remaining after the Company's reorganization,
are available for recognition in future years. As of May 2, 1997, the Company
had federal tax net operating loss carryforwards of approximately $50,258,000
expiring through 2012, alternative minimum tax credit carryforwards of
approximately $337,000 which are available to offset regular federal income
taxes in the future until fully utilized, and targeted jobs credit
carryforwards of approximately $178,000 expiring in 2006 through 2009. As a
result of the Chapter 11 proceedings and the related Plan of Reorganization,
the net operating loss (NOL) carryforwards, tax credit carryforwards and other
tax attributes of the Company may be significantly reduced as a result of debt
forgiveness income in accordance with section 108(b) of the Internal Revenue
Code (IRC). In addition, IRC section 382 limits NOL and tax credit
carryforwards when an ownership change of more than fifty percent of the value
of stock in a loss corporation occurs within a three year testing period. Under
the Plan of Reorganization, the ownership of the Company may change by more
than fifty percent. Accordingly, to the extent NOL and tax credit carryforwards
remain after reduction under IRC section 108(b), the ability to utilize such
remaining NOL and tax credit carryforwards may be significantly restricted.
Liquidity and Capital Resources
The Company began fiscal 1998 with cash of $491,297. During the thirteen weeks
ended May 2, 1997, the Company increased borrowings by a net of $2,327,661,
used $2,099,155 from operating activities, used $129,073 for capital
expenditures in refurbishing existing stores and converting ten 50-OFF stores
to LOT$OFF stores and ended the period with cash on hand of $590,730.
On November 18, 1996, the Company, with the approval of the Bankruptcy Court,
entered into a credit agreement with GECC providing the Company with a line of
credit through November 1997 of up to $15,000,000. See Note 4 of "Notes to
Condensed Consolidated Financial Statements," above. The credit agreement
contained various restrictive and financial covenants. On February 25, 1997 and
April 2, 1997, the Company was notified that it was in violation of not
receiving net proceeds of $1,000,000 (received $998,000) from the sale of its
headquarters building and certain financial covenants, those regarding minimum
(a) EBITDA, (covenant $400,000, actual ($484,000)) (b) net sales (covenant
$15,900,000, actual $12,609,000) (c) inventory balances (covenant $16,000,000,
actual $13,504,000) and (d) accounts payable (covenant $2,000,000, actual
$1,940,000). The violations constituted events of default under the loan
documents. GECC waived the default on net proceeds from sale of headquarters
building and was forbearing from exercising any remedies in connection with
such financial defaults. At May 2, 1997, the Company had approximately
$7,661,000 outstanding under the credit facility and had approximately $571,000
available for use.
On June 16, 1997, LOT$OFF, as part of its Plan of Reorganization and with the
approval of the Bankruptcy Court, entered into a credit agreement with GECC
providing LOT$OFF with a revolving credit facility through June 16, 2000 of up
to $15,000,000. The new credit facility bears interest at a floating rate equal
to the published rate for thirty-day commercial paper issued by major
corporations plus 3% per annum and provides for an unused facility fee of 0.5%
per annum. Borrowings under the facility are available in aggregate amounts up
to 65% of LOT$OFF's eligible inventory for the period from August 15 through
December 15 and up to 60% for the period from December 16 through August 14,
subject to certain required reserves. The line of credit is
-15-
<PAGE> 16
secured by inventory, accounts receivable and other assets. The credit
agreement contains various restrictive covenants, including restrictions on the
payment of dividends on common stock. The agreement also contains minimum gross
margin, minimum EBITDA, minimum inventory, minimum working capital and maximum
capital expenditure financial covenants. As of June 18, 1997, LOT$OFF had
$6,227,000 available for borrowings under the line (after reserves of
$1,044,000), of which $2,560,000 was committed, leaving a net availability of
$3,667,000.
The Company believes borrowings available under its new revolving credit
facility, trade credit, its restructuring of certain obligations under the
Plan, its operating cash flow and its cash on hand, together with the proceeds
from the rights offering (see Note 1 of "Notes to Condensed Consolidated
Financial Statements," above), will be adequate to finance its operations,
including increased inventories for its 41 continuing stores, to convert the
remaining 17 50-OFF stores to LOT$OFF stores and other general corporate
purposes, including financing LOT$OFF's exit from bankruptcy (estimated to
require, including financing costs, approximately $2.0 million, $780,000 of
which will be paid over approximately six months) through the remainder of
fiscal 1998. No assurance can be given, however, that such sources of capital
will be available or sufficient or that the Company will be successful in its
continuing efforts to reverse recent business trends and return to
profitability. The receipt of proceeds from the significant litigation brought
by the Company could add significantly to the Company's capital resources and
liquidity (see "Significant Litigation," below).
If the Company's plans to improve operations are not successful, management
will consider, among other alternatives, strategic and/or financial alliances
with third parties (including wholesalers or manufacturers) and the merger,
sale or liquidation of all or a part of the Company. See Note 2 of "Notes to
Condensed Consolidated Financial Statements," above.
Significant Litigation
The Company has filed a lawsuit seeking related to certain parties' breaches of
contractual obligations to purchase 1,500,000 shares of the Company's old
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
the receipt of payment for such shares, 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. See Note 5 of "Notes to Condensed
Consolidated Financial Statements," above, for further discussion of this
matter and information pertaining to a related lawsuit filed by the Company
against the placement agents. Both suits are being handled by counsel on a
contingency basis.
Seasonality
Historically (excluding fiscal 1997), the Company's highest net sales and
operating income have been experienced during the fourth fiscal quarter, which
includes the holiday selling season. Any adverse trend in sales or shortage of
merchandise during such period could have a material adverse effect upon the
Company's overall profitability and adversely affect its results of operations
for the entire fiscal year.
-16-
<PAGE> 17
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, February 2, 1996 and January 31, 1997.
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
On October 9, 1996 (the "Petition Date"), the Company and its significant
subsidiaries filed petitions (the "Filing") for relief under Chapter 11 of the
Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the
Western District of Texas (the "Bankruptcy Court"). A plan of reorganization
("the Plan" or "Plan of Reorganization") was filed on February 26, 1997,
amended on March 27, 1997, confirmed by the Bankruptcy Court on June 3, 1997
and implemented on June 16, 1997 (the "Effective Date"). On the Effective Date
of the Company's Bankruptcy Court-confirmed Plan of Reorganization, certain key
elements of the Plan were implemented, including the changing of the Company's
corporate name from 50-OFF Stores, Inc. to LOT$OFF Corporation ("LOT$OFF") and
the cancellation of all common stock in 50-OFF Stores, Inc. The Plan provides
for the recapitalization of the Company through cash raised from the Company's
existing common stockholders. On June 16, 1997, the Plan went effective, and
the Company issued 855,320 shares of LOT$OFF Series A Preferred Stock (each
such share is convertible into two shares of LOT$OFF Common Stock and is
entitled to a 5.5%, $0.275, cumulative annual dividend; LOTSP: CUSIP
#545674202) and 855,320 shares of LOT$OFF Common Stock (LOTS: CUSIP #
545674103) to subscribers to its rights offering for gross proceeds of
$4,276,600.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company's bankruptcy filing on October 9, 1996 resulted in events of
default under all pre-Petition Date loan agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
On October 9, 1996, the Company and its significant subsidiaries filed
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Western District of Texas. A Plan of Reorganization
was filed on February 26, 1997, amended on March 27, 1997, confirmed by the
Bankruptcy Court on June 3, 1997 and implemented on June 16, 1997.
-17-
<PAGE> 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: To be filed by amendment.
Exhibit 10.6 - General Electric Capital Corporation Revolving
Credit Agreement
No other exhibits are required to be filed by the Registrant under Item 601 of
Regulation S-K with this report on Form 10-Q.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended
January 31, 1997.
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
LOT$OFF CORPORATION
By: /s/ Charles J. Fuhrmann II
----------------------------------
Charles J. Fuhrmann II, Chairman,
President and Chief Executive
and Financial Officer
By: /s/ James G. Scogin
----------------------------------
James G. Scogin, Vice-President,
Controller, Chief Accounting
Officer, Treasurer and Secretary
<PAGE> 20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
27 Financial Data Schedule ........................... 21
<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 2, 1997, 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-02-1997
<PERIOD-END> MAY-02-1997
<CASH> 591
<SECURITIES> 0
<RECEIVABLES> 207
<ALLOWANCES> 0
<INVENTORY> 14,050
<CURRENT-ASSETS> 15,249
<PP&E> 7,405
<DEPRECIATION> 3,465
<TOTAL-ASSETS> 19,647
<CURRENT-LIABILITIES> 13,511
<BONDS> 16,756
0
0
<COMMON> 122
<OTHER-SE> (24,179)
<TOTAL-LIABILITY-AND-EQUITY> 19,647
<SALES> 11,919
<TOTAL-REVENUES> 11,919
<CGS> 7,721
<TOTAL-COSTS> 7,721
<OTHER-EXPENSES> 6,283
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> (2,226)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,226)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,226)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
