<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 October 31, 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
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:
--- ---
------------------------
856,080 shares of the Registrant's common stock were outstanding at October 31,
1997.
------------------------
There are 22 pages in the sequentially numbered, manually signed original. The
exhibit index is located on page 21.
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FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I
ITEM 1 Financial Statements ................................................................................ 3
Condensed Consolidated Balance Sheets: October 31, 1997 (unaudited);
January 31, 1997; and November 1, 1996 (unaudited) .................................................. 3
Condensed Consolidated Statements of Operations: thirteen and thirty-nine weeks
ended October 31, 1997 (unaudited); and thirteen and thirty-nine weeks ended November 1,
1996 (unaudited) .................................................................................... 5
Condensed Consolidated Statements of Cash Flows: thirty-nine weeks
ended October 31, 1997 (unaudited); and thirty-nine weeks ended November 1, 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 ........................................................................... 14
PART II
ITEM 1 Legal Proceedings ................................................................................... 19
ITEM 3 Defaults Upon Senior Securities ..................................................................... 19
ITEM 6 Exhibits and Reports on Form 8-K .................................................................... 19
Signatures .......................................................................................... 20
Exhibit Index ....................................................................................... 21
</TABLE>
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<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
October 31, 1997 January 31, 1997 November 1, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 511,137 $ 491,297 $ 2,034,429
Cash in escrow -- 330,000 --
Accounts receivable 725,436 717,852 1,266,219
Merchandise inventories 16,180,959 12,974,958 15,342,362
Prepayments and other
current assets 747,756 393,526 498,237
----------- ----------- -----------
TOTAL CURRENT ASSETS 18,165,288 14,907,633 19,141,247
----------- ----------- -----------
PROPERTY AND
EQUIPMENT-NET 3,831,268 3,988,760 4,391,037
OTHER ASSETS 405,275 358,343 1,061,843
----------- ----------- -----------
TOTAL ASSETS $22,401,831 $19,254,736 $24,594,127
=========== =========== ===========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 4
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
October 31, 1997 January 31, 1997 November 1, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $ 8,849,527 $ 5,396,580 $ 7,335,364
Accounts payable-trade 4,826,459 1,381,708 250,365
Accounts payable-other 2,166,380 2,032,512 1,097,693
Accrued expenses and
other current liabilities 2,230,399 1,757,468 462,451
Current portion of long-term debt 42,804 266,667 266,667
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 18,115,569 10,834,935 9,412,540
LONG-TERM DEBT, less
current portion 1,401,339 -- --
LIABILITIES SUBJECT TO
COMPROMISE -- 30,250,544 30,446,376
STOCKHOLDERS' (DEFICIT)
EQUITY:
Series A preferred stock 4,280,400 -- --
Series B preferred stock 3,991,050 -- --
Common stock 8,561 122,009 122,009
Additional paid-in capital 56,147,275 36,022,264 36,022,264
Subscription receivable -- (3,991,050) (3,991,050)
Accumulated deficit (61,542,363) (53,983,966) (47,418,012)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,884,923 (21,830,743) (15,264,789)
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 22,401,831 $ 19,254,736 $ 24,594,127
============ ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 5
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------------- ---------------------------------
Oct. 31, 1997 Nov. 1, 1996 Oct. 31, 1997 Nov. 1, 1996
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 9,365,822 $ 27,111,033 $ 31,665,991 $ 91,234,461
COST OF SALES 6,196,978 20,926,072 21,130,762 66,509,128
------------ ------------ ------------ ------------
GROSS PROFIT 3,168,844 6,184,961 10,535,229 24,725,333
----------- ------------ ------------ ------------
OPERATING EXPENSES:
Selling, advertising, general
and administrative 5,777,220 9,407,634 16,563,029 34,989,429
Depreciation and amortization 193,311 875,132 547,881 2,812,206
Reorganization items -- 9,841,701 500,000 22,411,791
----------- ------------ ------------ ------------
TOTAL OPERATING EXPENSES 5,970,531 20,124,467 17,610,910 60,213,426
----------- ------------ ------------ ------------
OPERATING INCOME (LOSS) (2,801,687) (13,939,506) (7,075,681) (35,488,093)
OTHER EXPENSE (INCOME):
Interest income (5,125) (19,087) (47,314) (59,326)
Interest expense 159,542 467,688 471,172 1,461,923
----------- ------------ ------------ ------------
TOTAL OTHER EXPENSE 154,417 448,601 423,858 1,402,597
----------- ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (2,956,104) (14,388,107) (7,499,539) (36,890,690)
PROVISION FOR INCOME TAXES -- 152,873 -- 152,873
----------- ------------ ------------ ------------
NET INCOME (LOSS) (2,956,104) (14,540,980) (7,499,539) (37,043,563)
PREFERRED DIVIDENDS (58,856) -- (89,171) --
----------- ------------ ------------ ------------
INCOME (LOSS) APPLICABLE TO
COMMON STOCK $(3,014,960) $(14,540,980) $ (7,588,710) $(37,043,563)
=========== ============ ============ ============
INCOME (LOSS) PER SHARES OF
COMMON STOCK $ (3.52) $ (1.19) $ (1.68) $ (3.04)
=========== ============ ============ ============
WEIGHTED AVERAGE SHARES 856,080 12,200,915 4,513,023 12,200,915
=========== ============ ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 6
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
----------------------------------
October 31, 1997 November 1, 1996
---------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(7,499,539) $(37,043,563)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 547,881 2,812,206
Reorganization items 500,000 21,724,340
Loss of write-off of loan origination fees -- 369,806
Non-cash interest expense on long-term debt -- 117,981
Changes in assets and liabilities:
Accounts receivable (7,584) (245,299)
Merchandise inventories (3,206,001) 14,211,603
Prepayments and other current assets (370,256) (430,817)
Other assets (46,932) (173,043)
Accounts payable-trade 3,444,751 7,534,134
Accounts payable-other (492,634) (653,487)
Accrued expenses and other
current liabilities (27,069) (214,851)
Closed store costs -- (1,168,213)
----------- ------------
Net cash provided by (used in) operating activities (7,157,383) (6,840,797)
----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (374,363) (565,664)
----------- ------------
Net cash provided by (used in) investing activities (374,363) (565,664)
----------- ------------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
-------------------------------------
October 31, 1997 November 1, 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit facility 44,324,149 64,844,472
Payments on credit facility (40,871,203) (68,727,159)
Payments on long-term debt (267,287)
(699,351)
Net proceeds from sale of common and preferred
stock
4,094,783 --
Cash in escrow 330,000
Dividend payment (58,856) --
------------ ------------
Net cash provided by (used in) financing
activities 7,551,586 (4,582,038)
------------ ------------
Increase in cash and cash equivalents 19,840 1,693,095
Cash and cash equivalents at
beginning of period 491,297 341,334
------------ ------------
Cash and cash equivalents at
end of period $ 511,137 $ 2,034,429
============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 442,626 $ 1,343,942
Income taxes -- --
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES:
Conversion of liabilities subject to compromise to
long-term debt $ 1,444,762 --
Conversion of liabilities subject to compromise to
accounts payable-other 626,503 --
Conversion of liabilities subject to compromise to
Series B preferred stock 3,991,050 --
Conversion of liabilities subject to compromise to
additional paid in capital 24,188,229 --
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE> 8
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated balance sheet at January 31, 1997 has
been condensed from the audited consolidated balance sheet of
LOT$OFF Corporation [formerly known as 50-OFF Stores, Inc.
(debtor-in-possession)] at January 31, 1997.
The condensed consolidated balance sheets at October 31, 1997 and
November 1, 1996 and the condensed consolidated statements of
operations and cash flows for the thirteen and thirty-nine weeks
ended October 31, 1997 and the thirteen and thirty-nine weeks ended
November 1, 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 thirty-nine week period ended October 31, 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 certain financial covenants of their credit agreement and that
such breaches constituted events of default under the loan
documents. See Note 2. 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 a 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 has restructured the operations and capitalization of the
Company in order to strengthen the Company's financial position and
implement its business plan.
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<PAGE> 9
NOTE 2: On the Effective Date, 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 then outstanding common stock in 50-OFF Stores,
Inc. The Plan provided for the recapitalization of the Company,
partially 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, with a minimum aggregate purchase amount of
$3,050,000. Contemporaneously with filing the Plan, the Company
filed a related disclosure statement ("the Disclosure Statement")
setting forth more detailed information regarding the Company and
the Plan. Under applicable Bankruptcy Court rules and procedures, a
hearing was held to review and approve the Disclosure Statement
which was approved March 20, 1997. Upon approval of the Disclosure
Statement by the Bankruptcy Court, the Plan and Disclosure Statement
were furnished to creditors and stockholders, and votes in support
of the Plan were solicited. The Plan was approved by both creditors
and stockholders, and a Bankruptcy Court order confirming the Plan
was entered on June 3, 1997. At the confirmation hearing on June 3,
1997, the Company announced it had received more than enough
subscriptions for the required minimum to be met. On June 16, 1997,
the Plan went effective, and the Company issued 856,080 shares of
LOT$OFF Series A Preferred Stock (each such share has a liquidation
preference of $5.00, is convertible into two shares of LOT$OFF
Common Stock and is entitled to a 5.5%, $0.275, cumulative annual
dividend; LOTSP: CUSIP #545674202) and 856,080 shares of LOT$OFF
Common Stock (LOTS: CUSIP # 545674103) to subscribers to its rights
offering for gross proceeds of $4,280,400.
On the Effective Date, LOT$OFF also entered into a $15,000,000
revolving credit agreement maturing on June 16, 2000 with General
Electric Capital Corporation ("GECC"). The proceeds of the facility,
together with the net proceeds from the rights offering, were used
to refinance the Company's debtor-in-possession facility, also with
GECC, and to provide post-confirmation working capital for increased
inventories for its 44 continuing stores and selected other general
corporate purposes, including financing LOT$OFF's exit from
bankruptcy. See Note 3.
The Company's Plan of Reorganization also provided for the
cancellation of all non-priority unsecured indebtedness of the
Company. Such cancellation caused the elimination of approximately
$24.9 million of unsecured debt and $3.3 million of collateralized
debt, which was initially converted to an unsecured claim, from the
Company's balance sheet. Each holder of an allowed general unsecured
claim will, in cancellation of its claim, receive a pro rata share
of LOT$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 Series B Preferred Stock are secured by two liens against
net lawsuit proceeds from significant litigation being prosecuted by
the Company. See Note 6. 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 or cash for net proceeds
in excess of $3,991,050 (as described in the Plan) up to the full
amount of the allowed general unsecured claims. The receipt of Series
A Conversion Rights, Series A Preferred Stock and/or cash by holders
of Series B Preferred Stock will result in a proportionate release of
the liens. By issuing such Series B Preferred Stock to general
unsecured creditors, such creditors are essentially receiving the net
value of the Company's litigation (up to the full face amount of the
allowed general unsecured claims) which was pending pre-Petition
Date.
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<PAGE> 10
Management has been redirecting the Company's retail activities from
50-OFF's off-price retailing concept to LOT$OFF's close-out
retailing concept. Coincident and consistent with this change 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. The Company continues to
maintain basic family apparel products in the LOT$OFF stores. The
actual merchandise mix fluctuates by category, by season and by
store based on customer needs and buying trends, demographics and
the availability of products at close-out prices. This merchandise
concept is designed to appeal to value-conscious shoppers and other
"bargain hunters."
The Company's ability to continue as a going concern will be
affected by a number of factors, including, but not limited to, the
need to comply with the terms, covenants and conditions of its
post-confirmation credit facility, the degree of success in
reversing the Company's recent business trends (by increasing sales
and achieving operating profits) and the ability to maintain trade
credit and merchandise flows at adequate levels. While management
believes that the closings of stores and the implementation of
expense cuts commensurate with the downsizing of the total stores in
operation (from 101 to now 44 stores) facilitates its efforts to
improve the Company's operating performance and that the
recapitalization implemented on the Effective Date of its Plan of
Reorganization strengthened its financial position and alleviated
concerns of credit and merchandise suppliers [and the recent judgment
and anticipated receipt of proceeds from one of the Company's
lawsuits (see Note 6) should further strengthen its financial
position], no assurance can be given that the Company will be
successful in its continuing efforts to reverse negative business
trends, which have continued to date, and return to profitability.
For this reason, any investment in LOT$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 and the merger, sale or
liquidation of all or a part of the Company.
NOTE 3: On June 16, 1997, LOT$OFF, with the approval of the Bankruptcy
Court, entered into a credit agreement with GECC (amended August 28,
1997) providing LOT$OFF with a revolving credit facility through
June 16, 2000 of up to $15,000,000. The new credit facility bears
interest at a floating rate equal to the published rate for
thirty-day commercial paper issued by major corporations (5.58% at
October 31, 1997) plus 3% per annum and provides for an unused
facility fee of 0.5% per annum. Borrowings under the facility are
available in aggregate amounts up to 65% of LOT$OFF's eligible
inventory at cost 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 excess availability, minimum working
capital, maximum capital expenditure financial covenants and some
financial reporting covenants. As of December 12, 1997, the Company
was in violation of minimum EBITDA, minimum excess availability,
maximum capital expenditures and reporting covenants. The Company is
currently negotiating with GECC regarding a forbearance, waiver,
covenant holiday and/or modification to the revolving credit
agreement. As of October 31, 1997, LOT$OFF had approximately
$9,068,000 available for borrowings under the line (after reserves
of approximately $930,000 ), of
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<PAGE> 11
which approximately $8,850,000 was committed, leaving a net
availability of approximately $218,000.
NOTE 4: The following table shows proforma earning per share calculated
assuming that the Company's emergence from bankruptcy and the
contemporaneous recapitalization discussed in Note 2 occurred as of
the beginning of each period.
<TABLE>
<CAPTION>
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Oct. 31, 1997 Nov. 1 1996 Oct. 31, 1997 Nov. 1, 1996
------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net Income (Loss) $(2,956,104) $(14,540,980) $(7,499,539) $(37,043,563)
Preferred Dividends (58,856) (58,856) (176,083) (176,083)
----------- ------------ ----------- ------------
Income (Loss) Applicable
to Common Stock $(3,014,960) $(14,599,836) $(7,675,622) $(37,219,646)
=========== ============ =========== ============
Weighted Average Shares 856,080 856,080 856,080 856,080
Income (Loss) Per Share $ (3.52) $ (17.05) $ (8.97) $ (43.48)
=========== ============ =========== ============
</TABLE>
NOTE 5: The Company has restated previously reported numbers for the
thirteen and thirty-nine week periods ended November 1, 1996. A
fixed asset impairment of $12.6 million (previously recorded in the
thirteen week period ended November 1, 1996) related to the 37
stores which began to be closed in September 1996 has been recorded
as of August 2, 1996. Additionally, certain asset impairment and
related closing costs related to these 37 stores as well as 18
additional stores closed during the fourth quarter of fiscal 1997
have now been recorded in the thirteen weeks ended November 1, 1996
as approval of the Board of Directors for these closings occurred
during the thirteen weeks ended November 1, 1996.
<TABLE>
<CAPTION>
Thirteen Weeks Thirty-nine Weeks
Nov. 1, 1996 Nov. 1, 1996
-------------- -----------------
<S> <C> <C>
Net Loss as Previously Reported $ (15,677,286) $ (25,576,927)
Adjustment 1,136,306 $ (11,466,636)
-------------- --------------
Restated Net Loss $ (14,540,980) $ (37,043,563)
============== ==============
Loss Per Share of Common Stock
as Previously Reported $ (1.28) $ (2.10)
Adjustment $ 0.09 $ (0.94)
-------------- --------------
Restated Loss Per Share of
Common Stock $ (1.19) $ (3.04)
============== ==============
</TABLE>
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<PAGE> 12
NOTE 6: 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, Chase
Manhattan Bank, N.A. and Aries Peak, Inc., 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., Chase
Manhattan Bank, N.A. ("Chase") and certain affiliated individuals
and companies in connection with the theft of 1,500,000 shares of
the Company's old common stock which certain of the defendants had
agreed to purchase at $3.65 per share. Among other counts, the
lawsuit alleged breach of contracts, securities fraud, conspiracy and
conversion. The conversion claim related to actions of the
defendants in transferring, selling and trading the shares despite
the fact that the defendants had never paid for such shares. The
Company sought recovery of actual and punitive damages and pre- and
post-judgment interest.
No answer defaults were entered against Arnass, Andalucian Villas,
Brocimast, Betafid and Koutsoubos for failure to appear or answer.
On October 14, 1997, the trial of this case began before the
Honorable H.F. Garcia. Defendants, Paribas, Chase and Dennis Morris,
appeared and announced ready for trial.
On November 14, 1997, after four weeks of evidence, the Company
entered into a Settlement Agreement and Full and Final General
Release with Paribas. As part of the settlement, Paribas agreed to
pay the Company a specified amount (of which the Company received
$1,800,000 after attorneys' fees) in exchange for which the Company
agreed to dismiss all claims against Paribas with prejudice. The
Company also dismissed all claims against Dennis Morris; however,
such dismissal was not the result of a settlement agreement between
the parties.
On November 20, 1997, at the close of evidence, the Company obtained
a jury verdict against Chase on its claim of conversion in the
amount of $150,975,000, representing $12,975,000 in actual damages
and $138,000,000 in punitive damages. On November 21, 1997, the
Company moved the court to enter a final judgment against Chase in
the amount of $148,575,000, which reflects the jury's verdict, minus
a credit for Paribas' settlement amount. In addition to the verdict
against Chase, the Company obtained a $30,000,000 default judgment
against defendant Yanni Koutsoubos, on its claims for violation of
Section 10b-5 of the Securities Exchange Act and common law fraud.
Such judgment represents $10,000,000 in actual damages and
$20,000,000 in punitive damages. The Company intends to vigorously
pursue collection of the judgments obtained.
On December 4, 1997, the court entered a judgment against Chase in
the Company's favor for $148,575,000 plus costs of court,
pre-judgment interest on $12,975,000 at 10% per annum from November
18, 1994 until December 4, 1997 and post-judgment interest on the
entire judgment amount at 5.42% from December 4, 1997. It is
anticipated that Chase will appeal the judgment entered by the
court.
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<PAGE> 13
On January 9, 1996, the Company filed a lawsuit [50-OFF Stores, Inc.
v. Jefferies & Company, Inc. and Jefferies International Limited,
Cause No. 96-CI-00349] in Bexar County District Court, San Antonio,
Texas against its placement agents in the securities offering
referenced in the lawsuit discussed above. The suit alleges that the
defendants breached their contracts with the Company and breached
their fiduciary duties to the Company by failing to investigate
properly the qualifications of the purchasers that they introduced
to the Company. The Company has also asserted securities fraud
claims against the defendants in connection with the transaction.
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. Jefferies
& Company has also filed a third party claim against Howard White.
Discovery is proceeding.
On June 26, 1997, the defendants moved for summary judgment on all
claims. Judge Peeples denied the defendants' motion as to the
Company's breach of contract and breach of fiduciary duty claims.
On August 9, 1997, the parties conducted a mediation as ordered by
the Bexar County District Court. Although the parties were unable to
resolve the lawsuit at that time, settlement discussions have
continued among the parties.
The Company will continue to prosecute this case vigorously. This
case is specially set for jury trial on March 23, 1998. The Company
believes its claims against these defendants are meritorious.
The Company is party to certain other legal proceedings arising in
the ordinary course of business, none of which are believed to be
material.
-13-
<PAGE> 14
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 Sales
-----------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------- --------------------------
October 31, November 1, October 31, November 1,
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ....................... 66.2% 77.2% 66.7% 72.9%
Selling, advertising, general and
administrative .................... 61.7% 34.7% 52.3% 38.4%
Depreciation and amortization ....... 2.1% 3.2% 1.7% 3.1%
Reorganization items ................ 0.0% 36.3% 1.6% 24.6%
Operating income (loss) ............. (29.9)% (51.4)% (22.3)% (38.9)%
----- ----- ----- -----
Other expense, net .................. 1.6% 1.7% 1.3% 1.5%
----- ----- ----- -----
Total expenses ...................... 131.6% 153.1% 123.7% 140.4%
Income (loss) before income taxes ... (31.6)% (53.1)% (23.7)% (40.4)%
(Benefit from) income taxes ......... 0.0% (0.6)% 0.0% (0.2)%
Net income (loss) ................... (31.6)% (53.7)% (23.7)% (40.6)%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Percentage Change
----------------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 31, 1997 compared to October 31, 1997 compared to
Thirteen Weeks Ended Thirty-nine Weeks Ended
November 1, 1996 November 1, 1996
---------------------------- ----------------------------
<S> <C> <C>
Net sales ...................................... (65.5)% (65.3)%
Cost of sales .................................. (70.4)% (68.2)%
Selling, advertising, general
and administrative .......................... (38.6)% (52.7)%
Depreciation and amortization .................. (77.9)% (80.5)%
Reorganization items ........................... (100.0)% (97.8)%
Operating income (loss) ........................ (79.9)% (80.1)%
Other expense, net ............................. (65.6)% (69.8)%
Total expenses ................................. (70.3)% (69.4)%
Income (loss) before income taxes .............. (79.5)% (79.7)%
(Benefit from) income taxes .................... (100.0)% (100.0)%
Net income (loss) .............................. (79.7)% (79.8)%
</TABLE>
-14-
<PAGE> 15
Thirteen weeks ended October 31, 1997 compared to thirteen weeks ended
November 1, 1996:
The net sales decrease of 65.5% for the thirteen weeks ended October 31, 1997
compared to the thirteen weeks ended November 1, 1996 is attributable to a
48.7% decrease in the weighted average number of stores in operation (from 81.1
stores to 41.6 stores) and a decrease in comparable store sales (due primarily
to inventory imbalances in the 41 continuing stores and decreased customer
traffic in the stores). Also contributing to this decrease were the increased
net sales pertaining to liquidations of inventory at six 50-OFF stores in the
process of converting to LOT$OFF stores during the thirteen weeks ended
November 1, 1996.
Cost of sales as a percentage of net sales decreased from 77.2% for the
thirteen weeks ended November 1, 1996 to 66.2% for the thirteen weeks ended
October 31, 1997, due primarily to lower markdowns as a percentage of net sales
as compared to the comparable period.
Selling, advertising, general and administrative expenses increased from 34.7%
of net sales for the thirteen weeks ended November 1, 1996 to 61.7% of net
sales for the thirteen weeks ended October 31, 1997 due primarily to lower
sales and a substantial increase in advertising late in the period in
anticipation of the holiday shopping season. The 38.6% decrease in the amount
of selling, advertising, general and administrative expense compared to the
thirteen weeks ended November 1, 1996 was the result of the 48.7% decrease in
the weighted average number of stores in operation.
Depreciation and amortization decreased by 77.9% in the thirteen weeks ended
October 31, 1997 compared to the comparable period of the prior year, due
primarily to the substantial decrease in the 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 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, of certain equipment and leasehold
improvements.
Other expense, net, decreased to approximately $154,417 in the thirteen weeks
ended October 31, 1997 compared to approximately $448,601 in the comparable
period of the prior year, due primarily to decreased interest expense
attributable to decreased borrowings under the Company's line of credit and a
lower effective interest rate on such borrowings.
The decrease in the Company's loss before income taxes for the thirteen weeks
ended October 31, 1997 compared to the thirteen weeks ended November 1, 1996 is
primarily due to higher maintained margins (higher initial markups, less
promotional pricing, fewer markdowns and less inventory shrinkage) and lower
depreciation, amortization, reorganization and interest expenses.
Income tax benefits related to the losses for the thirteen weeks ended October
31, 1997 were not recognized because the utilization of such benefits is not
assured. Such benefits, if any, are available for recognition in future years.
-15-
<PAGE> 16
Thirty-nine weeks ended October 31, 1997 compared to thirty-nine weeks ended
November 1, 1996:
The net sales decrease of 65.3% for the thirty-nine weeks ended October 31, 1997
compared to the thirty-nine weeks ended November 1, 1996 is attributable to a
56.0% decrease in the weighted average number of stores in operation (from 94.0
stores to 41.4 stores) and a decrease in comparable store sales (due primarily
to inventory imbalances in the 41 continuing stores and decreased customer
traffic in the stores). Also contributing to this decrease were the increased
net sales pertaining to liquidations of inventory at 50-OFF stores in the
process of converting to LOT$OFF stores during the thirty-nine weeks ended
November 1, 1996.
Cost of sales as a percentage of net sales decreased from 72.9% for the
thirty-nine weeks ended November 1, 1996 to 66.7% for the thirty-nine weeks
ended October 31, 1997, due primarily to lower markdowns as a percentage of net
sales (i.e., higher maintained margins) as compared to the comparable period of
the prior year when substantial write-downs of inventories in the stores
liquidated in connection with the conversions discussed above and scheduled for
late May 1996 through early July 1996 or in the 37 stores scheduled to be
liquidated and closed beginning in September 1996 were taken.
Selling, advertising, general and administrative expenses increased to 52.3% of
net sales for the thirty-nine weeks ended October 31, 1997 from 38.4% of net
sales for the thirty-nine weeks ended November 1, 1996 due primarily to lower
sales. The 52.7% decrease in the amount of selling, advertising, general and
administrative expense compared to the thirty-nine weeks ended November 1, 1996
was the result of the 56.0% decrease in the weighted average number of stores
in operation.
Depreciation and amortization decreased by 80.5% in the thirty-nine weeks ended
October 31, 1997 compared to the comparable period of the prior year, due to
the substantial decrease in the 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 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, of certain equipment and leasehold improvements.
Other expense, net decreased to $423,858 in the thirty-nine weeks ended October
31, 1997 compared to approximately $1,402,597 in the comparable period of the
prior year, due primarily to decreased interest expense attributable to
decreased borrowings under the Company's line of credit, a lower effective
interest rate on such borrowings and the Company's discontinuing the accrual of
interest on certain of its other obligations through June 16, 1997.
The decrease in the Company's loss before income taxes for the thirty-nine
weeks ended October 31, 1997 compared to the thirty-nine weeks ended November
1, 1996 is primarily due to higher maintained margins (higher initial markups,
less promotional pricing, fewer markdowns and less inventory shrinkage) and
lower depreciation, amortization and interest expenses.
Income tax benefits related to the loss for the thirty-nine weeks ended October
31, 1997 were not recognized because the utilization of such benefits is not
assured. As of January 31, 1997, the Company had federal tax net operating loss
carryforwards of approximately $46,906,000 expiring through 2013, 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 $178,000 expiring in 2006
through 2009. As a result of the Chapter 11 proceedings and the related Plan of
Reorganization, the net operating loss (NOL) carryforwards, tax credit
carryforwards and other tax attributes of the Company will be reduced (perhaps
significantly) as a result of debt forgiveness income in accordance with
section 108(b) of the Internal Revenue Code (IRC) or the receipt of substantial
net lawsuit proceeds in excess of such debt. In addition, IRC section 382
limits NOL and tax credit carryforwards when an ownership change of more than
fifty
-16-
<PAGE> 17
percent of the value of stock in a loss corporation occurs within a three year
period. Under the Plan of Reorganization, the ownership of the Company may be
deemed to have changed by more than fifty percent. Accordingly, to the extent
NOL and tax credit carryforwards remain after reduction under IRC section
108(b) and/or the receipt of any net lawsuit proceeds, the ability to utilize
remaining NOL and tax credit carryforwards may be significantly restricted.
Store Conversions and Openings
The Company has completed its store conversion program, from an off-price
("50-OFF") to a close-out ("LOT$OFF") retailing concept, with the conversion of
17 store locations in 13 markets. The week of August 25, 1997, such conversions
were implemented at the Company's store locations in Brownsville, Harlingen,
Pharr, McAllen, Roma and Laredo, Texas with "Grand Re-Openings" on Saturday,
August 30, and running through Labor Day weekend. The balance of the
conversions (in Albuquerque, Baton Rouge, Bossier City, El Paso, Memphis, New
Orleans and Shreveport) were implemented the week of September 28 with "Grand
Re-Openings" on October 4. The Company opened three seasonal stores with month
to month leases in San Antonio (2) and Fort Worth (1) in October 1997 to take
advantage of the Christmas selling season. Based upon the performance of the
stores and other factors, the Company may decide to commit to long term leases
on some, all or none of the seasonal stores. All 44 of its stores (Texas,
Louisiana, Oklahoma, New Mexico and Tennessee) have been converted to the
Company's new store name ("LOT$OFF") and retailing concept or were opened as
LOT$OFF stores.
Liquidity and Capital Resources
The Company began fiscal 1998 with cash of $491,297. During the thirty-nine
weeks ended October 31, 1997, the Company increased borrowings by a net of
$3,185,659, paid dividends on the Series A Preferred Stock of $58,856, used
$7,157,383 in operating activities, used $374,363 for capital expenditures in
refurbishing existing stores, opening three new stores in San Antonio (2) and
Fort Worth (1) and converting 50-OFF stores to LOT$OFF stores, received net
proceeds of $4,094,783 from its rights offering and ended the period with cash
on hand of $511,137.
On June 16, 1997, LOT$OFF, as part of its Plan of Reorganization and with the
approval of the Bankruptcy Court, entered into a credit agreement with GECC
(amended August 28, 1997) providing LOT$OFF with a revolving credit facility
through June 16, 2000 of up to $15,000,000. See Note 3 of "Notes to Condensed
Consolidated Financial Statements," above. As of November 21, 1997, LOT$OFF had
approximately $10,693,000 available for borrowings under the line (after
reserves of approximately $873,000), of which approximately $9,589,000 was
committed, leaving a net availability of approximately $1,104,000.
The Company believes borrowings available under its revolving credit facility,
trade credit, its restructuring of certain obligations under the Plan, its
operating cash flow and its cash on hand, (see Note 1 of "Notes to Condensed
Consolidated Financial Statements," above), will be adequate to finance its
operations, including increased inventories for its 44 continuing stores and
for other general corporate purposes, including financing the balance of the
Company's exit from bankruptcy. No assurance can be given, however, that such
sources of capital will be sufficient or that the Company will be successful in
its continuing efforts to reverse recent business trends and return to
profitability. The receipt of additional proceeds from the significant
litigation brought by the Company could add significantly to the Company's
capital resources and liquidity (see "Significant Litigation," below).
-17-
<PAGE> 18
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 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.
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.
On December 3, 1997, the Company announced comparable stores sales for November
1997 were up 44.3%. Last year's sales were achieved at a time of low store
inventory and the lack of resources to promote customer traffic due to the
Filing on October 9, 1996.
Redemption of Series A Preferred Stock
On December 8, 1997, the Company notified holders of Series A Preferred Stock
that it will redeem all 856,080 shares outstanding on December 30, 1997 at a
price of $5.00, subject to sufficient surplus being available therefor and to
the Company's deposit of funds with Continental Stock Transfer & Trust Company
on December 30, 1997 sufficient to pay the redemption price on such shares of
Series A Preferred Stock to be redeemed.
From and after December 30, 1997, the presently outstanding Series A Preferred
Stock will be deemed to be no longer outstanding, further dividends will cease
on such Series A Preferred Stock and the holders thereof will be entitled to no
rights as such holders except to receive the redemption price of $5.00 per
share. Notwithstanding the notice of redemption, if the Company does not have
sufficient surplus to pay the redemption price of $5.00 per share or fails to
deposit funds sufficient to pay the redemption price with Continental Stock
Transfer & Trust Company, the notice will have no effect, and there will be no
redemption.
Shares of Series A Preferred Stock converted into Common Stock prior to
December 30, 1997 will not be subject to redemption. Holders of Series A
Preferred Stock may convert their Series A Preferred Stock to Common Stock at a
rate of two shares of Common Stock for each share of Series A Preferred Stock
upon written notice to Continental Stock Transfer & Trust Company, (located at
2 Broadway, 19th Floor, New York, New York 10004) of the holder's election to
convert and presentation and surrender of the certificate (duly endorsed in
blank, accompanied by proper instruments of assignment and transfer duly
endorsed in blank or by other customary means).
-18-
<PAGE> 19
PART II
ITEM 1. LEGAL PROCEEDINGS
The information contained in Note 6 of "Notes to Condensed Consolidated
Financial Statements," herein, regarding significant lawsuits filed in
February 1995 and January 1996 incorporated by reference to this Item 1.
Such lawsuits were also reported in the Company's annual reports on Form
10-K for the fiscal year ended January 31, 1997 and the lawsuit against Paribos
and Chase was the subject of a report on Form 8-K dated December 9, 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 3. DEFAULTS UPON SENIOR SECURITIES
The Company has notified its primary secured lender, GECC, that it is in
violation of the terms of the revolving credit agreement dated June 16, 1997
with respect to the minimum EBITDA, minimum excess availability, maximum
capital expenditures and reporting covenants. The Company and GECC are
currently negotiating a forbearance, waiver, covenant holiday and/or a
modification to the revolving credit agreement.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
Exhibit 27.0 - Financial Data Schedule
-19-
<PAGE> 20
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 Officer (Principal Executive
Officer)
By: /s/ Jeff Seidel
-------------------------------------------------------
Jeff Seidel, Vice-President, Chief Financial Officer,
(Principal Financial and Accounting Officer)
-20-
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Exhibit 27.0 - Financial Data Schedule .................................. 22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LOT$OFF
STORES CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE THIRTY-NINE WEEKS
ENDED OCTOBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 511
<SECURITIES> 0
<RECEIVABLES> 725
<ALLOWANCES> 0
<INVENTORY> 16,181
<CURRENT-ASSETS> 18,165
<PP&E> 7,634
<DEPRECIATION> 3,803
<TOTAL-ASSETS> 22,402
<CURRENT-LIABILITIES> 18,116
<BONDS> 1,401
0
8,271
<COMMON> 9
<OTHER-SE> (5,395)
<TOTAL-LIABILITY-AND-EQUITY> 22,402
<SALES> 31,666
<TOTAL-REVENUES> 31,666
<CGS> 21,131
<TOTAL-COSTS> 21,131
<OTHER-EXPENSES> 17,611
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> (7,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,500)
<EPS-PRIMARY> (1.68)
<EPS-DILUTED> (1.68)
</TABLE>
