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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1998
Commission File Number 0-13076
LOT$OFF CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2640559
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1201 Austin Highway, #116
San Antonio, Texas 78209-4859
(Address of principal executive offices, including ZIP Code)
Registrant's telephone number, including area code:
(210) 805-9300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes: /X/ No: / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ x ]
As of May 4, 1998, the aggregate market value of the voting stock held
by non-affiliates of the Registrant, based on the closing sale price of the
Common Stock of the Registrant as quoted on the National Association of
Securities Dealers Bulletin Board was $28,064,000 (for purposes of
calculating this amount only, directors, officers, and beneficial owners of
5% or more of the common stock of Registrant have been deemed affiliates).
The number of shares of the Common Stock of the Registrant outstanding
as of May 4, 1998 was 4,157,810, which includes 1,596,420 shares held in
escrow and awaiting distribution to holders of allowed general unsecured
claims. See Part II. Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters - Conversion of Series B Preferred Stock.
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FORM 10-K INDEX
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PAGE
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PART I
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ITEM 1 BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 2 PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 15
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 15
ITEM 6 SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 17
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 18
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 22
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 22
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . 22
ITEM 11 EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . 22
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 22
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . 22
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 22
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PART I
PRELIMINARY STATEMENT
On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc., a
Delaware corporation ( "50-OFF"), and its significant subsidiaries (together,
the "Debtors") filed voluntary petitions for relief under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Western District of Texas, San Antonio Division (the
"Court"). At a confirmation hearing held on June 3, 1997, United States
Bankruptcy Judge Leif M. Clark entered an order confirming the Debtors' Joint
Plan of Reorganization, as Amended and Modified (the "Plan"). The Plan
became effective June 16, 1997 (the "Effective Date").
ON THE EFFECTIVE DATE, THE NAME OF THE COMPANY CHANGED TO LOT$OFF
CORPORATION ("LOT$OFF OR THE "COMPANY").
ITEM 1. BUSINESS
The Company, a regional, extreme value retailer specializing in
close-out merchandise, operates 44 LOT$OFF stores (Texas - 31, Louisiana -
5, Oklahoma -4, New Mexico - 3 and Tennessee - 1) stocked with a broad mix of
products which 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 merchandising concept is designed to
appeal to value-conscious shoppers and other bargain hunters.
OVERVIEW OF HISTORICAL OPERATIONS
50-OFF's operating results in recent years were disappointing,
reflecting weaknesses in retailing generally and in apparel retailing
specifically. The casualization of apparel hurt many apparel retailers; and
regional, off-price retailers faced increased competition for the
value-conscious consumers' purchases. In addition, 50-OFF was especially
hard hit by the last devaluation and continued deterioration of the Mexican
peso and the economic turmoil along the Texas-Mexico border where 50-OFF
operated thirteen 50-OFF stores, historically its best performing locations,
and experienced a severe liquidity crisis due, in part, to the breach of
certain foreign purchasers in an international offering by 50-OFF in late
fiscal 1995 of their contractual obligations to purchase in aggregate
1,500,000 shares of Old Common Stock at $3.65 per share ($5,475,000 in
aggregate). See Item 3. Legal Proceedings below.
While 50-OFF achieved strong growth in stores, sales and earnings from
its development of the 50-OFF store concept in fiscal 1987, 50-OFF
experienced net losses for its last four fiscal years. When 50-OFF began to
experience declines in comparable store sales and operating results,
management made significant changes to its operations, including closing
under performing stores, limiting new store openings to existing markets,
recruiting new merchandising management and increasing sales of non-apparel
merchandise as a percentage of total sales. 50-OFF's financial performance
continued to be disappointing, and significant operating losses continued.
Faced with continuing, deteriorating results and the apparent consumer
rejection of the 50-OFF retailing concept in almost all its markets, the
Board of Directors supported a change of leadership in mid-May. On May 7,
1996, 50-OFF's Board of Directors accepted the resignation of Charles Siegel
from his positions as President and Chief Executive Officer, as well as his
position on the Board. Mr. Siegel, who resigned to pursue other endeavors,
was a co-founder of 50-OFF. Upon accepting Mr. Siegel's resignation, the
Board acted to appoint Charles J. Fuhrmann II to the positions of President,
Chief Executive Officer and Chief Financial Officer. Mr. Fuhrmann, a
Director of 50-OFF since October 1994, had served in various consulting
capacities for 50-OFF, including Acting Chief Administrative and Financial
Officer until his new appointment. Mr. Fuhrmann, a private investor and
strategic and financial consultant, was formerly Managing Director-Investment
Banking with Merrill Lynch & Co. in New York.
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On May 13, 1996, 50-OFF entered into a revolving credit facility with
Foothill Capital Corporation and GBFC, Inc. providing it with a line of
credit through May 1998 of up to $22,500,000 and replacing a prior facility.
The agreement contained various restrictive covenants, including financial
covenants. On August 8, 1996, 50-OFF was notified by the lenders that it was
in violation of the minimum gross margin 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 which reduced
availability, imposed certain increased fees and other charges and
accelerated fees deemed earned at the initial closing, which, individually
and together, substantially impacted 50-OFF's financial liquidity and,
therefore, its ability to acquire and maintain much needed inventory for its
stores. 50-OFF 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 its
disappointing operating results without the protections afforded under the
Bankruptcy Code. As stated in the Preliminary Statement above, 50-OFF and
its significant subsidiaries filed petitions for relief under chapter 11 of
such Code in the Court on October 9, 1996. As of November 1, 1996, 50-OFF
had approximately $7,335,000 outstanding under the credit facility and, with
the support and by order of the Court, was using cash collateral for working
capital needs. This facility was paid off in November 1996 with proceeds
from a debtor in possession, senior secured revolving credit facility entered
into with General Electric Capital Corporation ("GECC").
In September 1996, the Board of Directors approved a plan which provided
for the continued conversion of existing 50-OFF stores to LOT$OFF stores, a
geographic consolidation of the chain (exiting Alabama, Arkansas, Florida,
Georgia, North Carolina, South Carolina and most of Tennessee) and the
liquidation or closing of at least 37 under-performing stores or stores
located outside of the reduced market area (since mid-May 1996, the Company
has closed 60 stores) with appropriate reductions in field and corporate
overhead and staffing.
On October 8, 1996, the Board of Directors approved the Company's and
its significant subsidiaries' filings of petitions for relief under the
Bankruptcy Code, and, as stated above, on October 9, 1996, such petitions
were filed in the Court. The Company had been pursuing an infusion of
capital, an external affiliation with a supplier of product and credit and
additional concessions from lenders and landlords to secure the resources
necessary to implement its business plan and to effect the changes believed
necessary by management to achieve profitability. Although management
believed it had developed an appropriate plan for the Company, the Company
was unable to secure the necessary concessions and resources to improve
operations and to reverse operating trends and its disappointing operating
results and was forced to seek the protections afforded under the Bankruptcy
Code.
REORGANIZATION PLAN
From the Petition Date to the Effective Date, 50-OFF operated its
business as a debtor in possession pursuant to sections 1107 and 1108 of the
Bankruptcy Code while management formulated and promoted a plan of
reorganization. A copy of the Plan was filed with the Securities and
Exchange Commission (the "SEC"). On March 20, 1997, the Court approved the
Disclosure Statement with respect to the Plan as containing adequate
information in accordance with section 1125 of the Bankruptcy Code. Such
Statement was mailed to all creditors of the bankruptcy estates and all
holders of Public Equity Interests as of March 21, 1997 and was also filed
with the SEC. "Public Equity Interests" refer to the common stock of 50-OFF
Stores, Inc., sometimes referred to herein as "Old Common Stock," which was
canceled upon the Effective Date, along with all then existing options and
warrants to buy such stock.
The Plan required that the Company's existing senior secured revolving
credit facility lender, GECC, provide a post-confirmation revolving credit
facility or be replaced by a new senior secured lender so that the Company
would have a source of revolving funds to continue to operate. GECC provided
such financing. The Plan also provided for the restructure of the Company's
secured obligation to MetLife Capital Corporation ("MetLife") at a face
amount of $850,000; and the Plan provided for the payment of such amount over
approximately seven years. MetLife agreed to such treatment with the balance
of its claim (approximately $3.3 million) becoming an allowed general
unsecured claim. The Plan provided for the cancellation of all non-priority
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unsecured indebtedness of 50-OFF. See Note 4 of Notes to Consolidated
Financial Statements.
Under the Plan, as further modified by Court order on March 19, 1998,
each holder of an allowed general unsecured claim will, in partial
cancellation of its allowed claim ($3,991,050 in the aggregate), receive a
pro rata share of 1,596,420 shares of LOT$OFF's common stock (the "Common
Stock"). Certain further obligations of the Company to such holders of
allowed general unsecured claims are secured by a lien up to the full face
amount of the balance of their allowed claims against potential net lawsuit
proceeds over $3,991,050 from significant litigation being prosecuted by the
Company. As net proceeds over $3,991,050 (net of certain items set forth in
the Plan) from such litigation are received by the Company, holders of
allowed general unsecured claims will receive Common Stock and/or cash
(provided that at least the "excess" net proceeds, up to $1.5 million as
defined in the Plan, will be paid in cash). The receipt of such Common Stock
and/or cash by holders of allowed general unsecured claims will result in a
proportionate release of the lien. By issuing such Common Stock and/or
paying such cash to allowed general unsecured creditors, such creditors will
be essentially receiving the net value of the Company's significant
litigation which was pending pre-Petition Date up to the full face amount of
their allowed claims. See Item 3. Legal Proceedings below.
Finally, the Plan provided for the recapitalization of the Company
through cash raised from 50-OFF's existing common stockholders (the "Rights
Offering") and potentially, as discussed above, from the litigation.
Specifically, the Plan provided for the issuance to such stockholders of
rights to subscribe for units, each consisting of 20 shares of Series A
Preferred Stock and 20 shares of Common Stock (a "Unit"). Up to 122,009
Units and a minimum of 30,500 Units could be sold in the Rights Offering.
The record date for determining which 50-OFF stockholders were entitled to
vote on the Plan and receive such rights was March 21, 1997. Persons who
acquired Public Equity Interests after such record date were not entitled to
vote on the Plan or subscribe for Units pursuant to the Rights Offering. The
Rights Offering expired on May 22, 1997. Subscriptions received in the
Rights Offering were held in escrow with Bank One, Texas N. A. pending the
Effective Date of the Plan. The gross proceeds from the Rights Offering were
$4,280,400. Such proceeds were used to provide working capital for increased
inventories for the Company's stores, to support the Company's operations and
to pay for the Company's exit from bankruptcy.
OPERATIONS IN BANKRUPTCY
For the fifty-two week period ended January 31, 1997, 50-OFF had net
sales of $106.2 million, down 39.3% from the comparable prior year period's
$175.0 million, and 50-OFF's loss before income taxes rose to $43.5 million
(including write-downs of inventories of approximately $5.4 million and
write-offs of leasehold improvements in stores closed or scheduled for
liquidation and closing and reorganization expenses, including landlord lease
rejection claims, totaling approximately $23.9 million) from $6.8 million for
the prior fiscal year. 50-OFF operated a weighted average of 82.8 stores in
the period ended January 31, 1997 as compared to 104.0 stores in the
comparable prior year period.
While in chapter 11, 50-OFF operated its business as a debtor in
possession while formulating and promoting its Plan originally filed February
6, 1997 with the Court:
- liquidating and closing 60 stores;
- reducing its geographic presence (exiting Alabama, Arkansas, Florida,
Georgia, North Carolina, South Carolina and most of Tennessee);
- closing one of two freight consolidation and distribution centers and
moving the remaining center to San Antonio;
- downsizing its corporate staff and field personnel (corporate and
distribution: 177 to 31; field and stores: 967 full time, 1,482 part
time to 382 and 425, respectively);
- selling its headquarters building and leasing appropriate, reduced
space;
- refinancing its principal credit facility through GECC's providing a
line of credit of up to $15,000,000;
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- restoring credit facilities with vendors (from 100% prepaid to
approximately 35% terms at fiscal 1997 year end);
- redirecting its retail activities from an off-price ("50-OFF") to an
extreme value, close-out ("LOT$OFF") retailing concept;
- restructuring its merchandising department, including a new Vice
President-Merchandise and a new Vice President-Marketing;
- changing its inventory mix from 25.9% (May 1996) to 45.8% (May 1997)
non-apparel through category additions;
- developing marketing and advertising strategies and programs to revive
and increase store traffic; and
- generally positioning itself for improved operating results (higher
initial mark-ups, less promotional pricing, fewer markdowns and less
inventory shrinkage).
For the first six months of fiscal 1998, the Company's sales remained
disappointing, due principally to inventory imbalances among the 41
continuing stores and the lack of resources to effectively promote customer
traffic to the stores. Results for the twenty-six weeks ended August 1,
1997 were net sales of $22.3 million and a net loss, including reorganization
items, of $4.8 million from a weighted average 41.3 stores. Comparable
results for the prior year's comparable period were net sales of $64.1
million and a net loss of $22.5 million from a weighted average 100.4 stores.
OPERATIONS POST-CONFIRMATION
Management has been redirecting the Company's retail activities from
50-OFF's off-price retailing concept to LOT$OFF's extreme value, 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 and the elimination of apparel categories subject to
substantial markdowns and inventory shrink. The Company continues to
maintain a healthy showing of basic family apparel products in its 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 merchandising 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, low inventory shrinkage, increased
store traffic and improved operating results. The Company's business plan is
focused on achieving higher gross margins, higher store contribution and
controlled corporate overhead, all promoting overall profitability, and on
being a major factor in extreme value retailing in Texas. The key elements
of this strategy included the geographic consolidation of the chain, the
liquidation and closing of under-performing stores or stores located outside
of the reduced market area with appropriate reductions in field and corporate
overhead and staffing, the conversion of the continuing 50-OFF stores to
LOT$OFF stores (only 14 of the 41 continuing stores had been converted as of
the filing of the voluntary bankruptcy petitions on October 9, 1996) and a
reduced overhead structure.
Post-confirmation:
- all 41 continuing stores have been converted to LOT$OFF stores;
- three new stores have been opened in San Antonio (2) and Fort Worth
(1), Texas;
- a separate Chief Financial Officer has been added to the corporate
staff;
- a mutually-acceptable settlement was reached with defendant Banque
Paribas (Suisse) S.A. in an important lawsuit (see Item 3. Legal
Proceedings below);
- a substantial jury verdict was achieved and a judgment entered in the
Company's favor against The Chase Manhattan Bank in a stock conversion
lawsuit (see Item 3. Legal Proceedings below);
- comparable store merchandise sales increases of 44.3%, 29.7% and 32.8%
were experienced in November and December 1997 and January 1998,
respectively;
- credit facilities with vendors have been restored (from 65% prepaid at
fiscal 1997 year end to 100% terms at fiscal 1998 year end);
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- an agreed settlement was reached with Jefferies & Company, Inc. and
Jefferies International Limited in an important lawsuit (see Item 3.
Legal Proceedings below);
- the corporate headquarters/store support center has been moved to a
new, more practical and convenient location at a substantial on-going
cost saving;
- the inventory mix objective has been achieved with a change from 74.1%
apparel and 25.9% non-apparel (May 1996) to 69.7% non-apparel and
30.3% basic apparel (March 1998);
- a Director of Merchandising has been added to the field executive
staff;
- on April 17, 1998, a contingent claim on a $10,000,000 portion of the
potential net proceeds from the $148,575,000 judgment against The
Chase Manhattan Bank was acquired by General Electric Capital
Corporation for $5,800,000, or 58 cents on the dollar, substantially
enhancing the Company's financial position (see Part II. Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources and Note 13 of
Notes to Consolidated Financial Statements); and
- comparable store and total merchandise sales increased 4.1% and 6.5%,
respectively, for the thirteen weeks ended May 1, 1998.
The management team is now concentrating on optimizing the contribution
from store operations while maintaining only the absolute minimum amount of
corporate overhead necessary to support store operations, on collecting on
significant judgments with respect to important litigation and on maximizing
shareholder value.
GENERAL BUSINESS PHILOSOPHY
LOT$OFF's mission is to create a shopping experience that surpasses
customers' expectations as it seeks to be a leading extreme value retailer of
close-out merchandise to low-to-moderate income customers and other bargain
hunters in the markets it serves. The major elements of the Company's
strategy include:
- Value Leadership: LOT$OFF intends to offer its customers a broad
selection of quality merchandise that maintains the credibility and
integrity of the Company's value pricing structure while providing a
pleasant and convenient shopping experience.
- Distinctive Marketing: The Company plans to differentiate itself from
other retail stores through its close-out purchasing and extreme value
pricing.
- Purchasing at Close-out Prices: The Company will purchase its
merchandise at close-out (substantially lower than regular wholesale)
prices relying upon its buyers' knowledge of, and reputation among,
manufacturers and other vendors and its willingness to purchase in
large quantities, in special situations, in odd lots and for immediate
delivery.
- Merchandise: The Company will offer a mix of products that may
fluctuate by category, by season and by store based on consumer needs
and buying trends and availability of products at close-out prices.
- Merchandising: The Company will present its inventory to maximize
sell-through.
- Emphasis on Low Operating Costs: The Company will focus on
maintaining low operating costs through a cost-effective,
cross-the-dock distribution system, its approach to store leases
(traditionally in strip centers), its potentially low store operating
expenses, disciplined corporate overhead and a corporation-wide effort
to minimize inventory shrinkage.
- Store Maturity: The Company will concentrate on developing existing
stores to full maturity and profitability. Over time, the Company
believes a store builds recognition and customer loyalty as management
adjusts the store's merchandise mix in response to local consumer
preferences.
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- Expansion: The Company's long-term development plan is to expand its
regional presence in existing and new markets, especially in Texas.
For the foreseeable future, however, the Company will limit any store
openings to existing and new markets in Texas, and any such opening
will be based on an evaluation of the sales and income performance of
existing stores and the ability to obtain leases for desirable
locations.
MERCHANDISING
LOT$OFF stores primarily offer moderately priced, regionally and
nationally advertised merchandise, including basic family apparel as well as
non-apparel goods. To respond to a sluggish economy for apparel sales, as
consumers concentrated more on home decor and improvement purchases, the
Company increasingly emphasized the merchandising of non-apparel products,
which generally have higher maintained gross margins. As discussed above,
with the implementation of the LOT$OFF concept, management has redirected the
Company's retail activities from off-price to extreme value, close-out
retailing. Coincident and consistent with this change is a change in the mix
of products, historically a majority in family apparel, to a majority in
non-apparel offerings. The Company continues to maintain a healthy showing
of basic family apparel products in LOT$OFF stores. The actual merchandise
fluctuates by category, by season and by store based on consumer needs and
buying trends, demographics and the availability of products at close-out
prices. This merchandising concept is designed to appeal to value-conscious
shoppers and other bargain hunters, and management is hopeful its
implementation will lead to higher initial markups, less promotional pricing,
fewer markdowns, low inventory shrinkage, increased store traffic and
improved operating results.
Merchandise, previously ticketed at twice the sales price at 50-OFF
stores, is now ticketed "Priced Right at" the price to be paid by customers
for their convenience, to avoid confusion at the cash registers and to
minimize shrinkage in the LOT$OFF stores. These prices are based upon a
combination of factors which include: the prices paid for such merchandise;
the wholesale prices paid by others and traditional markups; manufacturers'
suggested retail prices; locally and nationally advertised prices; and
comparison shopping by the Company's buyers, distributors, new Director of
Merchandising and district and store managers.
In each store, apparel is neatly displayed on modern fixtures. Other
merchandise, including certain prepackaged apparel items, is conveniently
displayed on gondolas or tables within easy reach of customers. New store
layouts include a central core for seasonal product presentations, featured
items and special promotions. While principally a self-service store
operation, the Company strives to make personnel promptly available to
customers desiring assistance. Purchases are made at cash registers located
at the front of each store, near the entrance and exit doors.
As stated above, store merchandising techniques include a center core of
merchandise as one enters a store, which, when appropriate, will feature a
seasonal theme:
Valentine's Day Easter
Mothers' Day Summer
Back-to-school Halloween
Thanksgiving Christmas
or a quarterly "Clean Sweep" or other themed concept. This area features
products from any category which relate to that season or concept and, when
not themed, features the latest buyout(s). The rest of the offerings are
presented by category, with hardlines and domestics product presented
primarily on gondolas or in case-cut floor stacks and apparel featured on
four ways and round and straight racks. The floor layout varies, based on
the size and shape of a store, but a consistent flow from one category to the
next is present in each store. Each store is stocked based on the specific
demographics of each location with input from store management and other
store personnel. Each store is encouraged to communicate directly with
buyers, the new Director of Merchandising and distributors, as well as to one
of three district managers, as to their needs and customers' requests.
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ADVERTISING AND MARKETING
The Company is implementing its own advertising and marketing program,
focusing on direct mail and other print advertising. Electronic media is
used for special events/seasons only.
The Company has developed pricing statements which accentuate the low
price image implied by the Company's name and logo, "LOT$OFF - THE ULTIMATE
CLOSE-OUT STORE." The pricing statements, "Priced Right. In Your
Neighborhood" and "Quality Merchandise. Close-out Prices," capitalize on the
low price image, while highlighting the quality merchandise benefit and
convenience. These pricing statements are communicated to customers through
in-store signs and print media.
LOT$OFF's customers are 60 percent female and 40 percent male, 25 to 50
years old and have an average annual income of $15,000 to $45,000 per
household. Their ethnic make-up is 30 percent Anglo, 30 percent Afro-American
and 40 percent Hispanic. Special efforts are made to reach military families
in markets with a large military presence, and sales to senior citizens are
also promoted with a special discount on certain days. The effective means
of communication is direct mail to residences with electronic media used for
special events. These customers shop seeking the best value, not necessarily
the lowest price, and are influenced by nationally advertised brands.
PURCHASING
The Company's three buyers purchase goods at substantially lower than
regular wholesale prices from manufacturers and other vendors. The following
factors contribute to the Company's ability to obtain quality merchandise at
reduced wholesale prices:
- manufacturers' overproduction;
- cancellations of orders by other retailers;
- merchandise which does not meet other retailers' delivery deadlines
for various reasons, including import delays;
- merchandise not shipped to other retailers that have credit problems;
- ability of the Company to buy goods at a time closer to a target
season, or, in some cases, out of season, which is generally not the
normal buying pattern of most other retail stores;
- excess merchandise accumulated by vendors;
- packaging changes by manufacturers;
- increased availability of imports from the Far East in the form of
close-outs and in-stock overruns;
- utilization of left-over piece goods available after production for
traditional department stores;
- discontinued goods;
- ability to commit for categories of merchandise produced specifically
for the Company; and
- ability of the Company to prepay or accept abbreviated credit terms.
The Company has historically purchased merchandise from more than 1,300
manufacturers and other vendors. No single manufacturer or other vendor
supplied a significant percentage of the Company's merchandise during the
last fiscal year, or, in the opinion of the Company, was material to its
operations. In the future, however, the Company may seek strategic
alliance(s) with certain manufacturers and/or other vendors. Financial
credibility and good relationships with manufacturers and other vendors,
generally, are critical to the Company's operations.
As stated above, LOT$OFF's inventory is purchased by a team of three
buyers from a large number of suppliers who provide product and credit for
these categories:
basic family apparel domestics accessories
hosiery lingerie houseware
health and beauty items household chemicals home decor
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toys consumer electronics giftware
seasonal goods small appliances automotive
shelf-stable food sporting goods books
hardware party supplies pet supplies
lawn and garden supplies infants trim-a-tree
Approximately 30 percent of purchases are of "in-line" promotional
product such as greeting cards (sold at a 40 percent discount from everyday
pricing), imports, certain seasonal items and basic commodities, including
hosiery and socks. The remaining 70 percent of purchases are principally
from manufacturers' overruns, cancellations by other retailers, refurbished
electronics, buy-backs, late in the season product and packaging changes.
All purchases are opportunistic buys, bought with customer price points in
mind.
INVENTORY MONITORING
The Company's computerized management information system, featuring
double-bar-code-scanning, point-of-sale cash registers in all of its stores
and a computerized perpetual inventory system, permits corporate management
to review each store's inventory on a daily basis. This system enables the
Company to closely monitor its inventory needs and coordinate its purchase
orders.
DISTRIBUTION SYSTEM
Substantially all of the Company's merchandise is shipped directly from
manufacturers or vendors to store locations through a Company operated
freight consolidation point in San Antonio, Texas. This cross-the-dock
distribution system generally allows merchandise delivery to the Company's
stores as quickly as ten days after placing an order and, in addition, gives
the Company the flexibility to purchase merchandise for all or a small number
of its stores.
STORE OPERATIONS
Substantially all merchandise decisions with respect to product mix,
prices, markdowns, marketing and advertising are made by management at the
Company's store support center in San Antonio, Texas. The Company has three
district managers and a new Director of Merchandising who visit each of the
Company's stores on a regular basis to review the implementation of Company
policy, monitor operations and review inventories and the presentation of
merchandise. Accounting and general financial functions for the Company's
stores are also conducted at the store support center. Each store has a
manager and one or more assistant managers responsible for store sales and
profitability, supervision and overall operations.
EMPLOYEES
The Company has completed a major downsizing and by the end of fiscal
1997 was staffed to fit its then 41 store core business group. At May 5,
1996, the Company had 1,134 full time employees (101 corporate management,
administrative and clerical personnel, 10 buyers, 56 logistics personnel and
967 store management and store personnel) and 1,482 part-time store
employees. After the substantial cutbacks in personnel and the restructuring
of responsibilities to reflect both the reduction in stores and the increased
emphasis on cost and expense containment, the Company currently has
approximately 402 full time employees (28 corporate management,
administrative and clerical personnel, 3 buyers, 11 logistics personnel and
360 store management and other field personnel) and 446 part-time employees.
Additional part-time employees are usually hired during the busier
Easter/spring, "Back-to-School" and Christmas/holiday selling seasons. None
of the Company's employees is represented by a union, and employee relations
are considered satisfactory.
10
<PAGE>
COMPETITION
The Company faces intense competition for customers, for access to
quality merchandise and for suitable store locations from regional and
national extreme value, close-out, off-price and discount retail chains,
traditional department stores and specialty retailers. Most of the Company's
competitors have greater financial and marketing resources than the Company,
including companies with similar concepts (Consolidated Stores Corporation:
Odd Lots, Big Lots and MacFrugal's stores; 99-Cents Only Stores; Dollar Tree
Stores; and Mazel Stores, Inc.: Odd Job stores; among others). In addition,
in the recent past the Company has experienced more direct price competition
from certain department store chains for limited time periods as a result of
promotional pricing activity. The Company may face similar periods of
intense competition in the future, which could have an adverse effect on its
financial results.
GEOGRAPHIC CONCENTRATION OF OPERATIONS
The Company's stores are located in the South and Southwest, and a
majority are located in Texas. Consequently, the Company's results of
operations and financial condition are dependent upon general trends in the
economy of these markets. In the event of adverse economic conditions in
these markets, retail spending may decline, resulting in a decrease in the
Company's retail sales.
MEXICAN ECONOMIC CONDITIONS
Although the Company has in recent years significantly reduced its
dependence upon border store operations by the reduction of its border
presence (from 13 to eight stores), 50-OFF's activities were historically
dependent to a significant degree upon its stores located in Texas cities
along the Mexican border, and such stores continue to represent an important
portion of the Company's business. During fiscal 1998, approximately 20.9%
of the Company's net sales were attributable to the Company's eight border
stores.
Mexican peso devaluations and duty-free import restrictions, and the
enforcement thereof, have from time to time significantly reduced purchases
by Mexican nationals, who constitute a significant portion of the Company's
customers in certain of its border locations, and have resulted in decreases
in sales during such periods. The Mexican Government devalued the peso and
subsequently released it for free exchange just prior to Christmas 1994 (late
fiscal 1995), and the Company has experienced a significant drop in sales
from border markets from historical levels ever since. The economic weakness
along the border and further erosion of the peso negatively affected sales
and operating results in 50-OFF's 13 border stores throughout fiscal 1996;
50-OFF's border stores experienced an approximately $10.2 million (32.0%)
drop in sales to $21.8 million for fiscal 1996 compared to $32.0 million for
fiscal 1995. With the continued erosion of the value of the peso well into
fiscal 1997, sales in 50-OFF's continuing border stores continued to suffer.
The eight continuing border stores experienced a 34.2% drop in sales in
fiscal 1997 (to approximately $10.1 million) as compared to their fiscal 1996
results (approximately $15.4 million); some of the drop, of course, is
attributable to 50-OFF's inability to maintain inventories at appropriate
levels due to its liquidity problems which continued for the Company well
into fiscal 1998. In fiscal 1998, the eight border stores experienced a 2.9%
drop in sales (to approximately $9.8 million) as compared to their fiscal
1997 results, but fourth quarter sales showed an increase of 47.1% over the
sales for the prior fiscal year's comparable period. For the thirteen weeks
ended May 1, 1998, merchandise sales in the eight border stores increased
4.8% over such sales for the comparable fiscal 1998 period. While the Company
cannot predict the ultimate effect on future results, any weakness in the
border economy and negative comparable peso values would have a negative
effect on sales and other operating results.
11
<PAGE>
SEASONALITY AND QUARTERLY FLUCTUATIONS
As with most retailers, highest net sales and operating income are
experienced during the fourth quarter, which includes the Christmas/holiday
selling season. Otherwise, LOT$OFF's business is heaviest on weekends
(Friday through Sunday) and at the beginning of each month. Any adverse
trend in net sales for the fourth quarter could have a material adverse
effect upon the Company's overall profitability and adversely affect its
results of operations for an entire fiscal year. See Note 12 of Notes to
Consolidated Financial Statements.
In additional to seasonality, the Company's results of operations may
fluctuate from quarter to quarter as a result of the timing of store
openings, including the level of advertising and pre-opening expenses
associated with such openings, as well as other factors.
FORWARD-LOOKING INFORMATION
This Form 10-K contains various forward-looking statements and
information that are based on management's beliefs as well as assumptions
made by and information currently available to management. When used in this
document, the words "believe," "expect," "anticipate" and similar expressions
are intended to identify forward-looking statements. Such statements are
subject to certain risks, uncertainties and assumptions including those
identified herein. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. In
addition to the other risk factors set forth above, among the key factors
that may have a direct bearing on the Company's results are competitive
practices in the close-out merchandising industry generally and particularly
in the Company's targeted market and the ability of the Company to fund its
continuing operations in the event of adverse industry or economic conditions.
ITEM 2. PROPERTIES
The Company's 44 stores (including one annex) are all leased and range
in size from 6,064 to 50,000 square feet, with most containing at least
17,000 square feet of selling space. Stores average approximately 25,900
square feet (22,120 square feet of selling space) and are located in both
urban and suburban markets and in strip centers, enclosed malls and stand
alone units. The Company's policy is to locate stores in areas where
demographics indicate that its targeted customers have easy access to the
location and where the targeted customer base is large enough to support a
store.
The Company opened a total of five stores in fiscal 1996, one store in
fiscal 1997 and three stores in late fiscal 1998. The Company currently
expects to open or move as many as 10 stores in fiscal 1999. The Company
closed 14 stores during fiscal 1996. In fiscal 1997, the Company closed one
store prior to the filing under chapter 11 of the Bankruptcy Code and 57
stores after the filing. The Company closed three stores in fiscal 1998
(February 1997). The Company currently expects to close as many as four
stores, including its store in Lawton, Oklahoma by May 5, 1998, in fiscal
1999 as a result of negotiated lease cancellations, lease expirations and/or
the Company's not exercising its renewal options.
During fiscal 1998, the Company incurred and expensed an aggregate of
approximately $4,372,000 in fixed rent and a nominal amount of additional
percentage rent. Minimum rental commitments (excluding renewal options) under
leases having a term of more than one year at January 30, 1998 are approximately
$4,140,000 for the fiscal year ending January 29, 1999. The Company plans to
downsize some continuing stores and to attempt to renegotiate rental rates on
certain remaining leases.
12
<PAGE>
The following is a list of the 44 stores the Company is currently
operating by state and city (total: 1,131,957 square feet; 893,267 square
feet selling space).
- -------------------------------------------------------------------------------
LOUISIANA (5) OKLAHOMA (4) TEXAS (31) TEXAS (CONTINUED)
- -------------------------------------------------------------------------------
Baton Rouge (2) Lawton Amarillo Laredo
- -------------------------------------------------------------------------------
Bossier City Oklahoma City (3) Austin Lubbock
- -------------------------------------------------------------------------------
New Orleans Brownsville McAllen
- -------------------------------------------------------------------------------
Shreveport TENNESSEE (1) Corpus Christi Midland
- -------------------------------------------------------------------------------
Memphis Dallas-Fort Worth (5) Pharr
- -------------------------------------------------------------------------------
NEW MEXICO (3) El Paso (2) Roma (and annex)
- -------------------------------------------------------------------------------
Albuquerque (3) Harlingen San Antonio (8)
- -------------------------------------------------------------------------------
Houston (4) Waco
- -------------------------------------------------------------------------------
In most of the Company's stores, a small portion of selling space is
subleased to an unaffiliated party operating shoe departments. Such
subleases provide for a percentage rent payable to the Company equal to 12%
of the net sales of such departments. In certain of the San Antonio, Texas
stores, a small portion of selling space is subleased to an unaffiliated
party operating jewelry departments at 10% percentage rent. The rental
income from the subleases is included in the Company's reported net sales
figures.
Typical store leases have primary terms of five to ten years with at
least one five-year renewal option. Some leases have provisions that allow
the Company, and in a few cases the landlord, to terminate the lease during
the primary term based on the Company's store not reaching predetermined
sales levels. Most of the Company's leases provide that the landlord will
pay for the major portion of leasehold improvements or allow the Company to
recover its expenditures for such improvements in the form of reduced rent.
The Company operates an approximately 40,000 square foot freight
consolidation, ticketing and cross-the-dock distribution facility in San
Antonio, Texas under a month-to-month lease at $12,400 per month.
The Company owns its equipment, furniture and fixtures which are
well-maintained and suitable for its present store requirements. The Company
sold its store support center in San Antonio, Texas for gross proceeds of
$1,440,000 on January 14, 1997 and leased back the reduced portion of the
building occupied by the downsized corporate staff for $18,001 per month to
February 1, 1998. On February 1, 1998, the Company leased a new facility to
house its store support center (corporate) staff for $10,288 per month
through January 2003.
The Company has registered its principal logos, "LOTSOFF" and "LOT$OFF"
as service marks in the principal register with the U.S. Patent and Trademark
Office.
ITEM 3. LEGAL PROCEEDINGS
As was discussed above, among the principal reasons for 50-OFF's having
to file for bankruptcy protection was a severe liquidity crisis caused in
part by the breach of certain foreign purchasers of their contractual
obligations to purchase in aggregate 1,500,000 shares of Old Common Stock at
$3.65 per share ($5,475,000 in aggregate) in an international (Regulation S)
offering by 50-OFF in late fiscal 1995. 50-OFF filed two lawsuits relating
to this matter.
On February 21, 1995, 50-OFF 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.
13
<PAGE>
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 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. 50-OFF
sought recovery of actual and punitive damages and pre- and post-judgment
interest.
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 $2,400,000 (of which the Company received $1,800,000 after
attorneys' contingent fees but before other related expenses) 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 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. 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. Subsequently, Chase filed five post-judgment
motions with the court: motion for new trial; motion to alter or amend the
judgment; renewed motion for judgment as a matter of law; motion to apply a
settlement credit and motion for leave to conduct oral deposition; and motion
for hearing. On February 23, 1998, the court, having considered such
motions, the supplements to such motions, the response of the Company to such
motions and the entire record in the cause, denied all of Chase's
post-judgment motions. Chase has given notice that it will appeal the
judgment entered by the court to the Fifth Circuit Court of Appeals in New
Orleans. The Fifth Circuit Court of Appeals has requested and arranged a
pre-hearing conference among the parties in New Orleans beginning on May 14,
1998.
On April 6, 1998, the court entered default judgments against
Betafid S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited,
Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on the
Company's claims for violations of Section 10b-5 of the Securities Exchange
Act and common law fraud. Such judgments total $166,275,000, plus pre-judgment
interest on $12,975,000 at 10% per annum from November 18, 1994 until April 6,
1998 and post-judgment interest on the entire amount at 5.31% from April 6,
1998.
The Company intends to vigorously pursue the favorable judgments
obtained against defendants in the above matter. The Company, based upon
advice from counsel, believes that it will obtain a favorable result in the
appeal of the judgment against defendant Chase referenced in the above
proceeding. The Company intends to vigorously pursue all remedies to collect
the sums owing to the Company as per the judgments that have been obtained
against the other defendants, although the collectibility of these judgments
is uncertain. Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the
Company in these matters on a contingency fee basis.
On January 9, 1996, 50-OFF 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 alleged that the defendants breached their
contracts with 50-OFF and breached their fiduciary duties to 50-OFF by
failing to investigate properly the qualifications of the purchasers that
they introduced to 50-OFF. The Company also
14
<PAGE>
asserted securities fraud claims against the defendants in connection with
the transaction. 50-OFF sought to recover actual and exemplary damages in
excess of $10,000,000, pre- and post-judgment interest, costs and attorney's
fees. On January 16, 1998, the Company reached an agreed settlement for
$4,300,000 with Jefferies & Company, Inc. and Jefferies International Limited
and received $3,000,000 after attorneys' contingent fees but before other
related expenses.
The Company is party to certain other legal proceedings, none of which
are believed to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's stockholders,
through solicitation of proxies or otherwise, during the fourth quarter of
fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
As indicated above, all Old Common Stock, along with existing options
and warrants to purchase such stock, were canceled effective June 16, 1997,
the effective date of the plan.
50-OFF's Old Common Stock began trading publicly on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") in
July of 1984 and was subsequently added to the NASDAQ National Market in
September of 1989. The NASDAQ-NM symbol was "FOFF" until October 15, 1996,
when a fifth character "Q" was appended to denote a company operating under
bankruptcy proceedings. Furthermore, the NASDAQ Listing Qualifications Panel
determined to delete 50-OFF's Old Common Stock from The NASDAQ National
Market effective December 31, 1996 due to such stock's failure to meet the
bid price and bankruptcy requirements as set forth in NASD Marketplace Rules
4450(a)(5) and 4450(e).
LOT$OFF'S Common Stock began trading over-the-counter on the National
Association of Securities Dealers Bulletin Board (the "Bulletin Board") on
August 22, 1997 under the symbol "LOTS."
RANGE OF SALE PRICES
The following table sets forth for the periods indicated the range of
high and low closing sale prices for the Old Common Stock as reported on the
NASDAQ National Market.
RANGE OF SALE PRICES FOR FOFFQ
<TABLE>
For Fiscal Year Ended January 31, 1997:
--------------------------------------
<S> <C> <C>
Quarter ended May 3, 1996.......... 1.69 0.94
Quarter ended August 2, 1996....... 1.50 0.75
Quarter ended November 1, 1996..... 0.94 0.06
Period ended December 30, 1996..... 0.44 0.16
</TABLE>
The high and low closing sales prices for FOFFQ for the period from
December 31, 1996 through June 16, 1997 were $0.19 and $0.01, respectively;
and the closing prices in the over-the-counter market on March 21, 1997 and
June 16, 1997 were $0.08 and $0.01 per share, respectively.
15
<PAGE>
The following table sets forth for the periods indicated the range of
high and low closing sale prices for the Common Stock as reported on the
Bulletin Board through May 1, 1998.
RANGE OF SALE PRICES FOR LOTS
<TABLE>
HIGH LOW
---- ---
<S> <C> <C>
FOR FISCAL YEAR ENDED JANUARY 30, 1998:
---------------------------------------
Quarter ended October 30, 1997 . . . . . . . . $1.75 $1.00
Quarter ended January 30, 1998 . . . . . . . . 5.88 1.50
FOR FISCAL YEAR ENDED JANUARY 27, 1999:
---------------------------------------
Quarter ended May 1, 1998. . . . . . . . . . . 8.38 4.63
</TABLE>
The high, low and closing sales price for the Common Stock on the Bulletin
Board on May 4, 1998 was $6.75
DIVIDENDS
50-OFF never paid cash dividends on shares of Old Common Stock. LOT$OFF
has not paid cash dividends on shares of Common Stock, and management
presently intends to retain cash for the operation and expansion of LOT$OFF's
business and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. In addition, the Company is prohibited from
paying dividends on its Common Stock by the terms of its credit facility.
See Note 4 of the Notes to Consolidated Financial Statements included
elsewhere herein.
REDEMPTION OF SERIES A PREFERRED STOCK
On December 8, 1997, the Company notified holders of Series A Preferred
Stock that it would redeem all 856,080 shares outstanding on December 30,
1997 at a price of $5.00 per share. From and after December 30, 1997, the
Series A Preferred Stock was deemed to be no longer outstanding, further
dividends ceased on such Series A Preferred Stock, and the holders thereof
were entitled to no rights as such holders except to receive the redemption
price of $5.00 per share. Shares of Series A converted into Common Stock
prior to December 30, 1997 were not subject to redemption. The Company
redeemed 17,900 shares of Series A Preferred Stock for $89,500. The
remaining 838,180 shares of Series A Preferred Stock were converted into
1,676,360 shares of Common Stock.
CONVERSION OF SERIES B PREFERRED STOCK
On March 19, 1998, in response to the Company's motion to modify the
Plan by consolidating certain steps to be taken pursuant to the Plan and with
the support of the Class 7 agent and its counsel, representing Class 7
creditors (the allowed general unsecured creditors) under the Plan, the Court
entered an order to consolidate the treatment of Class 7 creditors by
allowing the issuance of two shares of Common Stock in lieu of any single
share of Series B Preferred Stock, Series A Conversion Rights or Series A
Preferred Stock, as the case may be, which would otherwise have been issued
pursuant to the Plan. The immediate effect of the order was to cause the
conversion of the previously issued, but undistributed, 798,210 shares of
Series B Preferred Stock into 1,596,420 shares of Common Stock and the
eliminations of the Series B Preferred Stock and of any obligation of the
Company to issue Series A Conversion Rights or Series A Preferred Stock to
allowed general unsecured creditors under the Plan. Such shares of Common
Stock are in an escrow account at Continental Stock Transfer & Trust Company
for the benefit of holders of allowed general unsecured claims pending
distribution upon the filing and/or resolution of claims objections. Future
obligations, if any, to the allowed general unsecured creditors (up to the
full face amount of their allowed claims, depending on Net Lawsuits' Proceeds
as defined in the Plan) may be
16
<PAGE>
satisfied by the issuance of Common Stock and/or cash [Excess Net Lawsuits'
Proceeds (up to $1.5 million as defined in the Plan) must be paid in cash].
RECORD HOLDERS
As of April 24, 1998, the number of record holders of LOT$OFF's
4,157,810 shares of Common Stock, including the 1,596,420 shares in escrow
and awaiting distribution to holders of allowed general unsecured claims (see
Conversion of Series B Stock, above), was 47, including CEDE (nominee for the
Depository Trust Company) which holds 2,498,740 shares for the accounts of
others.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data (dollars in thousands, except per
share data) should be read in conjunction with and are qualified in their
entirety by the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Annual Report on Form 10K.
<TABLE>
FISCAL YEARS ENDED
JAN. 28, FEB. 3, FEB. 2, JAN. 31, JAN. 30,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . $199,589 $201,543 $175,023 $106,194 $48,462
Cost of sales (1). . . . . . . . . . . . 137,784 135,560 118,629 78,560 33,638
-------- -------- -------- -------- -------
Gross profit . . . . . . . . . . . . . . 61,805 65,983 56,394 27,634 14,824
Selling, advertising, general and
administrative expenses (2) . . . . . 65,477 63,827 57,377 42,295 23,589
Depreciation and amortization . . . . . 3,523 3,779 3,951 3,223 742
Reorganization items (3) . . . . . . . . - - - 23,975 600
Total operating expense (1 & 2) . . . . 69,722 72,624 60,918 69,493 24,931
Interest expense, net . . . . . . . . . 528 1,382 2,255 1,597 787
Net lawsuit proceeds . . . . . . . . . . - - - - 3,978
Income (loss) before cumulative effect
of a change in accounting
principle and income taxes (1 & 2) . . (8,445) (8,024) (6,778) (43,457) (6,915)
Benefit from (provision for)
income tax (4) . . . . . . . . . . . . 2,933 - - (153) -
Cumulative effect of a change
in accounting principle, net of
income tax benefit(2). . . . . . . . . (3,404) - - - -
-------- -------- -------- -------- -------
Net income (loss) (1, 2 & 4) . . . . . . $ (8,916) $ (8,024) $ (6,778) $(43,610) $(6,915)
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Dividends on Series A Preferred Stock . - - - - $ 59
Net income (loss) applicable to
Common Stock (1, 2 & 4). . . . . . . . $ (8,916) $ (8,024) $ (6,778) $(43,610) $(6,974)
Income (loss) per common share -
basic (5). . . . . . . . . . . . . . . $ (0.86) $ (0.76) $ (0.56) $ (3.57) $ (1.34)
OTHER DATA:
Stores open at beginning of period . . . 98 111 109 100 44
New stores . . . . . . . . . . . . . . . 22 5 5 1 3
Stores closed . . . . . . . . . . . . . 9 7 14 57 3
Stores open at end of period . . . . . 111 109 100 44 44
Softlines sales as a percentage of
merchandise sales (6) . . . . . . . . 80.3% 77.4% 75.8% 69.1% 50.5%
Hardline sales as a percentage of
merchandise sales (6) . . . . . . . . 19.7% 22.6% 24.2% 30.9% 49.5%
Comparable store sales increase
(decrease) from prior period (7) . . . (9.5)% 2.6% (8.7)% (30.9)% (11.4)%
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . $ 12,909 $ 8,503 $ 11,094 $ 4,073 $ 588
Total assets . . . . . . . . . . . . . . 67,601 62,676 55,449 19,255 20,344
Long-term obligations, excluding
current maturities . . . . . . . . . . 6,403 14,012 15,102 - 1,263
Liabilities subject to compromise . . . - - - 30,251 -
Stockholders' equity (deficit) . . . . . $ 35,683 $ 28,557 $ 21,779 $(21,831) $ 3,506
</TABLE>
- --------------
(1) Total operating expense amounts indicated for January 28, 1994, February 3,
1995, February 2, 1996, January 31, 1997 and January 30, 1998 include
closed store costs (excluding inventory liquidation write-downs of
approximately $0, $1,129,000, $0,
17
<PAGE>
$5,415,000 and $87,000, respectively, charged to cost of sales) of
approximately $722,000, $5,018,000, $(410,000), $0 and $87,000,
respectively. See Note 3.
(2) Effective with the beginning of fiscal 1994, the Company changed its method
of accounting for pre-opening store costs to expense such costs as incurred
rather than capitalizing such costs and amortizing them over a period of 12
months from the store opening date. Selling, advertising, general and
administrative expense amounts indicated for January 28, 1994, February 3,
1995, February 2, 1996, January 31, 1997 and January 30, 1998 include
pre-opening expenses of $3,932,554, $250,864, $309,035, $66,997 and
$32,940, respectively.
(3) Reorganization items in fiscal 1997 include severance payroll ($191,000),
professional fees ($997,000), loss on closings of stores ($23,143,000) and
gain on sale of building ($356,000). The fiscal 1998 reorganization items
are for professional fees of $600,000.
(4) In fiscal 1995, 1996, 1997 and 1998, no income tax benefit was recorded in
accordance with Statement of Financial Accounting Standards No. 109. In
fiscal 1997, an income tax provision was recorded to book additional
valuation allowance due to uncertain realizability of the Company's loss
carryforward. See Note 7 of Notes to Consolidated Financial Statements.
(5) Loss per share amounts prior to January 30, 1998 have been restated where
appropriate to conform with the requirements of Statement of Financial
Accounting Standard No. 128. See Note 1 of Notes to Consolidated Financial
Statements.
(6) Merchandise sales are net sales less other revenue, principally layaway
fees (no longer applicable, discontinued in fiscal 1997) and rental income
from leased shoe and jewelry departments.
(7) Comparable store date are calculated based on stores which have been open
over 24 months.
No cash dividends with respect to Old Common Stock or Common Stock were
paid during any of the fiscal periods referred to in the foregoing table.
Dividends of $58,855 were paid on Series A Preferred Stock in fiscal 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth (i) certain items in the consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated and (ii) the percentage change in certain items in the consolidated
statements of operations and in the weighted average number of stores from the
prior period.
<TABLE>
PERCENTAGE OF NET SALES
--------------------------------------------
FISCAL YEAR ENDED
--------------------------------------------
JAN. 30, 1998 JAN. 31, 1997 FEB. 2, 1996
------------- ------------- ------------
<S> <C> <C> <C>
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . 69.2% 74.0% 67.8%
Selling, advertising, general and
administrative . . . . . . . . . . . . . 48.7 39.8 32.6
Pre-opening store costs. . . . . . . . . . - - .2
Depreciation and amortization . . . . . . 1.5 3.0 2.2
Closed store costs . . . . . . . . . . . . - - (.2)
Reorganization items . . . . . . . . . . . 1.2 22.6 -
Interest expense, net . . . . . . . . . . 1.6 1.5 1.3
----- ----- -----
Total expenses . . . . . . . . . . . . . . . 122.3 140.9 103.9
----- ----- -----
Loss before income taxes and net
lawsuit proceeds . . . . . . . . . . . . . (22.3) (40.9) (3.9)
Net lawsuit proceeds . . . . . . . . . . . . 8.2 - -
Loss before income taxes . . . . . . . . . . (14.1) (40.9) (3.9)
Provision for income taxes . . . . . . . . . - (.1) -
----- ----- -----
Net loss . . . . . . . . . . . . . . . . . (14.1)% (41.0)% (3.9)%
----- ----- -----
----- ----- -----
</TABLE>
18
<PAGE>
<TABLE>
PERCENTAGE CHANGE
--------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997
COMPARED TO COMPARED TO
FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 31, 1997 FEBRUARY 2, 1996
----------------- -----------------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . (54.4)% (39.3)%
Cost of sales . . . . . . . . . . . . . . . . . . . . (57.3) (33.8)
Operating expenses
Selling, advertising, general and administrative . (44.2) (26.3)
Depreciation and amortization . . . . . . . . . . (77.0) (18.4)
Closed store costs . . . . . . . . . . . . . . . . (100.0) N/A
Reorganization items . . . . . . . . . . . . . . . (97.5) N/A
Interest expense . . . . . . . . . . . . . . . . . (50.7) (29.2)
Total operating expenses . . . . . . . . . . . . . . . (64.1) 14.1
Loss before income taxes . . . . . . . . . . . . . . . (84.1) 541.1
Net loss . . . . . . . . . . . . . . . . . . . . . . . (84.1) 543.4
Weighted average number of stores . . . . . . . . . . (49.2) (20.4)
</TABLE>
FISCAL YEAR ENDED JANUARY 30, 1998 COMPARED TO FISCAL YEAR ENDED
JANUARY 31, 1997
The net sales decrease of 54.4% for fiscal 1998 compared to fiscal 1997
resulted primarily from the decrease of 49.2% in the weighted average number
of stores (from 82.8 to 42.1) in operation during fiscal 1998 as compared to
fiscal 1997 and from a decrease in comparable store sales (due primarily to
inventory imbalances in the 41 continuing stores and decreased traffic in the
stores). Also contributing to this decrease were the increased net sales
resulting from liquidations of inventory at 50-OFF stores in the process of
closing or converting to LOT$OFF stores during fiscal 1997.
Cost of sales as a percentage of net sales decreased to 69.2% for fiscal
1998 compared to 74.0% for fiscal 1997, primarily due to lower markdowns as a
percentage of net sales (i.e., higher maintained margins) than in fiscal 1997
when substantial write-downs of inventories in stores being liquidated for
closing or conversion were taken.
Selling, advertising, general and administrative expenses increased from
39.8% of net sales for fiscal 1997 to 48.7% of net sales for fiscal 1998, due
primarily to lower sales. The 44.2% decrease in the amount of selling,
advertising, general and administrative expenses compared to fiscal 1997 was
the result of the 49.2% decrease in the weighted average number of stores in
operation.
Depreciation and amortization decreased by 77.0% in fiscal 1998 compared
to fiscal 1997, due to the substantial decrease in the number of stores in
operation and to substantial prior write-downs of fixed assets, including the
remaining equipment, fixtures and leasehold improvements.
Other expense, net, decreased to approximately $787,000 for fiscal 1998
compared to approximately $1,597,000 for fiscal 1997, due primarily to
decreased interest expense attributable to a lower effective interest rate
and decreased borrowings under the Company's revolving credit line.
The decrease in loss (before income taxes and net lawsuit proceeds) for
fiscal 1998 as compared to fiscal 1997 is due primarily to higher maintained
margins and lower reorganization, depreciation, amortization and interest
expenses.
19
<PAGE>
Income tax benefits related to the losses for fiscal 1998 and 1997 were
not recognized because the utilization of such benefits is not assured. Such
benefits are available for recognition in future years. As of January 30,
1998, the Company had federal tax net operating loss carryforwards of
approximately $58,549,000 ($46,906,000 at January 31,1997) expiring through
2014, alternative minimum tax credit carryforwards of approximately $337,000
($337,000 at January 31,1997), which are available to offset regular federal
income taxes in the future until fully utilized, and targeted jobs credit
carryforwards of approximately $178,000 ($178,000 at January 31,1997)
expiring in 2006 through 2009. As a result of the bankruptcy proceedings and
the related Plan, the net operating loss ("NOL") carryforwards, tax credit
carryforwards and other tax attributes of the Company will be reduced
(perhaps significantly) as a result of debt forgiveness income in accordance
with section 108(b) of the Internal Revenue Code ("IRC") or the receipt of
substantial net lawsuit proceeds in excess of such debt. In addition, IRC
section 382 limits NOL and tax credit carryforwards when an ownership change
of more than fifty percent of the value of stock in a loss corporation occurs
within a three year period. Under the Plan, the ownership of the Company may
be deemed to have changed by more than fifty percent. Accordingly, to the
extent NOL and tax credit carryforwards remain after reduction under IRC
section 108(b) and/or the receipt of any net lawsuit proceeds, the ability to
utilize remaining NOL and tax credit carryforwards may be significantly
restricted.
FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2,
1996
The net sales decrease of 39.3% for fiscal 1997 compared to fiscal 1996
was attributable to a 20.4% decrease in the weighted average number of stores
in operation (from 104.0 stores to 82.8) and a 30.9% decrease in comparable
store sales. These decreases were partially offset by increased net sales
pertaining to liquidations of inventories at the 50-OFF stores converted to
LOT$OFF stores during the fiscal 1997 period, the sale to a third party of
inventories at 37 stores closed during the period and the beginning of store
liquidations at other stores closed.
Cost of sales as a percentage of net sales increased from 67.8% for
fiscal 1996 to 74.0% for fiscal 1997, due primarily to approximately
$5,415,000 in write-downs of inventories at stores liquidated (including the
inventories sold to a third party at 37 stores closed during the period) and
to the store liquidations which began in September.
Selling, advertising, general and administrative expenses increased from
32.6% of net sales for fiscal 1996 to 39.8% of net sales for fiscal 1997.
The percentage increase was due to lower sales, offset in part by the cost
reductions implemented by management late in the period.
Depreciation and amortization decreased by 18.4% in fiscal 1997 compared
to the prior fiscal year, due to the decreased number of stores in operation.
Other expense, net, decreased to approximately $1,597,000 in fiscal 1997
compared to approximately $2,255,000 in the prior fiscal year, due primarily
to decreased interest expense attributable to decreased borrowings under
50-OFF's line of credit and 50-OFF's discontinuing to accrue interest on
certain of its obligations.
The increase in 50-OFF's loss before income taxes for fiscal 1997
compared to fiscal 1996 was primarily due to 50-OFF's reorganization expenses
associated with the bankruptcy filings, lower sales and the write-downs,
sales and liquidations of inventories discussed above.
Income tax benefits related to the losses for fiscal 1997 and 1996 were
not recognized because the utilization of such benefits is not assured.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company began fiscal 1998 with cash of $491,297. During the fiscal
year ended January 30, 1998, the Company increased borrowings by a net of
$934,018, used $4,889,408 for operating activities, used $518,491 for capital
expenditures in refurbishing existing stores, opening three stores and
converting 50-OFF stores to LOT$OFF stores, received net proceeds of
$4,059,994 from the sale of new equity, redeemed 17,900 shares of Series A
Preferred Stock for $89,500, distributed $58,855 for dividends on Series A
Preferred Stock and ended the fiscal year with cash on hand of $473,553.
On June 16, 1997, the Company, with the approval of the Court, entered
into a credit agreement (as amended on August 28, 1997, December 22, 1997,
February 15, 1998 and April 17, 1998) with GECC providing the Company with a
line of credit through June 16, 2000 of up to $15,000,000, including letters
of credit. Borrowings under the line are 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 is
charged on funds borrowed at the annualized yield of 30-day commercial paper
(currently 5.55%) plus 3%. The line of credit is collateralized by inventory,
accounts receivable and other assets. The credit agreement contains various
restrictive covenants. The agreement also contains minimum availability,
minimum gross margin, minimum EBITDA, minimum inventory, minimum sales,
minimum trade support and maximum capital expenditure financial covenants.
In late 1997, the Company notified GECC that it was in violation of certain
covenants under the credit agreement, including minimum availability. On
December 22, 1997, the Company entered into an amendment to the credit
agreement allowing for additional availability of $1.0 million from December
22 through December 31, 1997 and $2.0 million from January 1 through February
15, 1998. As of January 30, 1998, the Company had approximately $6,330,598
outstanding under the credit facility and had net availability of
approximately $1,853,000, including the additional availability. On February
15, 1998, the Company entered into another amendment to the credit agreement
allowing for additional availability of $1,250,000 from February 15 through
March 1, 1998. On April 17, 1998, the Company entered into a further
amendment to the credit agreement in conjunction with the acquisition by GECC
of a contingent claim on a $10,000,000 portion of the potential net proceeds
from the $148,575,000 judgment against The Chase Manhattan Bank for
$5,800,000, or 58 cents on the dollar. See Note 13 of Notes to Consolidated
Financial Statements. The effect of this amendment was the waiver of all
existing covenant violations and related defaults under the credit agreement
through May 31, 1998. At April 17, 1998 and after giving effect to the
transaction with GECC and the related amendment to the credit agreement, the
Company had approximately $4,079,000 outstanding under the credit facility,
had approximately $3,893,000 available for use and was not in default under
the credit agreement. The Company and GECC have agreed to renegotiate the
continuing covenants in the credit agreement in May 1998. The Company
believes that it will negotiate covenants with which it will be able to
comply.
The Company believes borrowings available under its revolving credit
facility, available trade credit, its restructuring of certain obligations
under the Plan, its operating cash flow and its cash on hand will be
adequate to finance its operations, including the opening of six (net) new
stores in Texas, through fiscal 1999. 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 attain and sustain profitability.
For this reason, any investment in Common Stock should be considered
speculative. 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 Part I. Item 3. Legal Proceedings.
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 remain in compliance with the terms, covenants and conditions
of it revolving credit facility, the degree of success in continuing to
increase sales and in achieving an operating profit and the ability to
maintain trade credit and merchandise flows to its stores. While management
believes that the downsizing of the total stores in operation and the
reduction in the geographic area it serves has facilitated its efforts to
improve the Company's operating performance and that the recapitalization
implemented upon the consummation of its Plan, coupled with the receipt of
net lawsuit proceeds and the receipt of contingent claim proceeds from GECC,
have strengthened its financial position and alleviated concerns of credit
and merchandise suppliers, no assurance can be given that the Company will be
successful in its continuing efforts to
21
<PAGE>
return to profitability. The anticipated receipt of additional proceeds from
the Company's lawsuit related to certain parties' breaches of contractual
obligations, as well as certain other violations, especially conversion,
related to the Company's November 1994 Regulation S offering would further
strengthen the Company's financial position. 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 or sale of all or a
part of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this item is contained in a separate
section of this report. See "Index to Consolidated Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III of this Annual Report on Form 10-K
is incorporated by reference from the Registrant's Definitive Proxy Statement
to be filed pursuant to Regulation 14A not later than 120 days after the
Registrant's fiscal year end.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are being filed as part of this annual report
on Form 10-K:
1. Consolidated financial statements and independent auditors' report for
LOT$OFF Corporation (formerly known as 50-OFF Stores, Inc.) and
subsidiaries:
Independent auditors' report.
Consolidated balance sheets - January 30, 1998 and January 31, 1997.
Consolidated statements of operations - years ended January 30, 1998,
January 31, 1997 and February 2, 1996.
Consolidated statements of changes in stockholders' equity - years
ended January 30, 1998, January 31, 1997 and February 2, 1996.
22
<PAGE>
Consolidated statements of cash flows - years ended January 30, 1998,
January 31, 1997 and February 2, 1996.
Notes to consolidated financial statements.
2. Consolidated financial statement schedules:
Schedules are omitted because they are not applicable or not required,
or because the required information is included in the Consolidated
Financial Statements and/or the Notes thereto.
3. Exhibits:
2.1 Disclosure Statement, including Joint Plan of
Reorganization, as amended. (F)
3.1 Restated Certificate of Incorporation. (F)
3.2 Amended and Restated Bylaws. (F)
4.1 Certificate of Designation for Series A Preferred Stock. (F)
4.2 Certificate of Designation for Series B Preferred Stock. (F)
10.1 Stock Option Plan. (F)
10.2 Loan with General Electric Capital Corporation (F)
10.3 Note and Security Documents with General Electric Capital
Corporation. (F)
10.4 Certificate of Corporate Resolution Adopting the Company
401K Profit Sharing Plan and Trust. (B)
10.5 Partnership Agreement dated April 17, 1998 (H)
10.6 Guaranty Agreement dated April 17, 1998 (H)
10.7 Assignment and Transfer of Judgment and Cause of Action
dated April 17, 1998 (H)
10.8 Second Amendment to the Revolving Credit Agreement dated
December 22, 1997 (H)
10.9 Third Amendment to the Revolving Credit Agreement dated
February 15, 1998 (H)
10.10 Fourth Amendment to the Revolving Credit Agreement dated
April 17, 1998 (H)
99.1 The Order entered by the Court on March 19, 1998 and related
motion. See Part II. Item 5. Conversion of Series B
Preferred Stock. Part II. Market for Registrant's Common
Stock and Related Stockholder Matters. (H)
99.2 The Judgment entered by the court on April 6, 1998 against
certain defendants. See Part I. Item 3. Legal Proceedings.
(H)
18. Change in Accounting Principles. (D)
21. Subsidiaries of the Registrant. (H)
23
<PAGE>
23. Consent of Deloitte & Touche LLP (H)
25. Power of attorney appears after signature page in this
report on Form 10-K.
27. Financial Data Schedule (H)
(A) Contained in exhibits to the Registrant's Registration Statement No.
33-48216 on Form S-4 filed with the Securities and Exchange Commission
on July 28, 1992.
(B) Contained in exhibits to the quarterly report on Form 10-Q for the
quarter ended August 3, 1990.
(C) Contained in exhibits to the Annual Report on Form 10-K for the
fiscal year ended January 29, 1993.
(D) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended January 28, 1994.
(E) Contained in exhibits to the current report on Form 8-K filed April
12, 1995.
(F) Contained in exhibits to Registration Statement No. 333-25061 on Form
S-1 filed with the Securities and Exchange Commission on April 11,
1997.
(G) Contained in exhibits to Amendment No. 1 to Registration Statement No.
333-25061 on Form S-1 filed with the Securities and Exchange
Commission on June 11, 1997.
(H) Filed herewith.
(B) Reports on Form 8-K
A report on Form 8-K was filed on December 9, 1997 reporting certain
other events as follows:
1. The adoption of certain bylaw amendments by the Board of Directors.
2. The jury verdict against Chase and the Judgment entered by the court
against Chase.
See Part I. Item 3. Legal Proceedings.
24
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED:
LOT$OFF CORPORATION
BY: /s/ CHARLES J. FUHRMANN II
---------------------------------------------
CHARLES J. FUHRMANN II, CHAIRMAN, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
BY: /s/ JEFF SEIDEL
---------------------------------------------
JEFF SEIDEL, VICE PRESIDENT, CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
DATE: MAY 15, 1998
POWER OF ATTORNEY
THE UNDERSIGNED DIRECTORS AND OFFICERS OF LOT$OFF CORPORATION HEREBY
CONSTITUTE AND APPOINT CHARLES J. FUHRMANN II AND JEFF SEIDEL OUR TRUE AND
LAWFUL ATTORNEYS-IN-FACT AND AGENTS, TO EXECUTE IN OUR NAME AND BEHALF IN THE
CAPACITIES INDICATED BELOW ANY AMENDMENTS TO THIS ANNUAL REPORT ON FORM 10-K
FOR LOT$OFF CORPORATION FOR FILING WITH THE SECURITIES AND EXCHANGE
COMMISSION AND HEREBY RATIFY AND CONFIRM ALL SUCH ATTORNEYS-IN-FACT AND
AGENTS SHALL LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT, AND IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CHARLES J. FUHRMANN II CHAIRMAN, PRESIDENT, CHIEF MAY 15, 1998
- --------------------------- EXECUTIVE OFFICER AND DIRECTOR
CHARLES J. FUHRMANN II (PRINCIPAL EXECUTIVE OFFICER)
/s/ JEFF SEIDEL VICE PRESIDENT, CHIEF FINANCIAL MAY 15, 1998
- --------------------------- OFFICER AND SECRETARY
JEFF SEIDEL (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/s/ CECIL SCHENKER DIRECTOR MAY 11, 1998
- ---------------------------
CECIL SCHENKER
/s/ SHERYLE J. BOLTON DIRECTOR MAY 11, 1998
- ---------------------------
SHERYLE J. BOLTON
/s/ WILLIAM B. SNOW DIRECTOR MAY 12, 1998
- ---------------------------
WILLIAM B. SNOW
/s/ M. DAVID WHITE DIRECTOR MAY 11, 1998
- ---------------------------
M. DAVID WHITE
25
<PAGE>
LOT$OFF CORPORATION
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
PAGE
----
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - January 30, 1998 and January 31, 1997 . . F-3
Consolidated Statements of Operations - Years ended January 30,
1998, January 31, 1997 and February 2, 1996 . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity -
Years ended January 30, 1998, January 31, 1997 and
February 2, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows - Years ended
January 30, 1998, January 31, 1997 and February 2, 1996 . . . . . . . F-6 - F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-8 - F-21
</TABLE>
Schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial
statements and/or the notes thereto.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
LOT$OFF Corporation
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of LOT$OFF
Corporation and subsidiaries as of January 30, 1998 and January 31, 1997, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended January
30, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of LOT$OFF Corporation and
subsidiaries as of January 30, 1998 and January 31, 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended January 30, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, on June 3,
1997, the Bankruptcy Court entered an order confirming the plan of
reorganization which became effective on June 16, 1997. Under the plan of
reorganization, the Company is required to comply with certain terms and
conditions as more fully described in Note 2 to the consolidated financial
statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's need to attain and sustain
profitable operations and its ability to ultimately comply with all of the
covenants (as they exist today and in the future) of its line of credit raise
substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 2.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Antonio, Texas
May 5, 1998
F-2
<PAGE>
LOT$OFF CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
JANUARY 30, 1998 JANUARY 31, 1997
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $ 473,533 $ 491,297
Cash in escrow . . . . . . . . . . . . . . . . . . - 330,000
Accounts receivable . . . . . . . . . . . . . . . 113,463 717,852
Merchandise inventories . . . . . . . . . . . . . 15,309,715 12,974,958
Prepaid and other current assets . . . . . . . . . 265,814 393,526
------------ ------------
Total current assets. . . . . . . . . . . . . . 16,162,525 14,907,633
------------ ------------
PROPERTY AND EQUIPMENT-NET . . . . . . . . . . . . 3,632,965 3,988,760
OTHER ASSETS . . . . . . . . . . . . . . . . . . . 548,464 358,343
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . $ 20,343,954 $ 19,254,736
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Credit facility . . . . . . . . . . . . . . . . . $ 6,330,598 $ 5,396,580
Accounts payable-trade . . . . . . . . . . . . . . 3,132,965 1,158,969
Accounts payable-other . . . . . . . . . . . . . . 3,333,093 1,821,499
Accrued expenses and other current
liabilities . . . . . . . . . . . . . . . . . . 1,597,859 1,623,510
Bank checks outstanding . . . . . . . . . . . . . 1,048,855 567,710
Current portion of long-term debt . . . . . . . . 131,553 266,667
------------ ------------
Total current liabilities. . . . . . . . . . . 15,574,923 10,834,935
------------ ------------
LONG-TERM DEBT, less current portion . . . . . . . 1,263,263 -
LIABILITIES SUBJECT TO COMPROMISE . . . . . . . . - 30,250,544
COMMITMENTS AND CONTINGENCIES (Notes
2, 4, 5, 8 and 10)
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A Preferred Stock, $0.01 par value,
10,000,000 shares authorized, no shares
outstanding at January 30, 1998. . . . . . . . . - -
Series B Preferred Stock, $0.01 par value,
1,000,000 shares authorized, 798,210
shares outstanding at January 30, 1998
(Note 4) . . . . . . . . . . . . . . . . . . . . 3,991,050 -
Common Stock, $0.01 par value, 25,000,000
shares authorized June 16, 1997, 2,532,440
outstanding at January 30, 1998 (Note 4) . . . . 25,325 -
Old Common Stock, $.01 par value, 20,000,000
shares authorized, 12,200,915 shares
outstanding at January 31, 1997
cancelled June 16, 1997. . . . . . . . . . . . . - 122,009
Additional paid-in-capital . . . . . . . . . . . . 60,447,467 36,022,264
Subscription receivable . . . . . . . . . . . . . - (3,991,050)
Accumulated deficit . . . . . . . . . . . . . . . (60,958,074) (53,983,966)
------------ ------------
Total stockholders' equity (deficit) . . . . . 3,505,768 (21,830,743)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY) . . . . . . . . . . . . . . $ 20,343,954 $ 19,254,736
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
NET SALES . . . . . . . . . . . . . . . . . . . . . . $ 48,461,964 $106,193,561 $175,022,949
COST OF SALES . . . . . . . . . . . . . . . . . . . . 33,637,680 78,560,029 118,628,507
------------ ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . 14,824,284 27,633,532 56,394,442
------------ ------------ ------------
OPERATING EXPENSES:
SELLING, ADVERTISING, GENERAL AND ADMINISTRATIVE. . 23,588,581 42,295,234 57,376,682
DEPRECIATION AND AMORTIZATION . . . . . . . . . . . 742,075 3,223,122 3,950,680
CLOSED STORE COSTS. . . . . . . . . . . . . . . . . - - (409,145)
------------ ------------ ------------
REORGANIZATION ITEMS:
SEVERANCE PAYROLL . . . . . . . . . . . . . . . . . - 191,385 -
PROFESSIONAL FEES . . . . . . . . . . . . . . . . . 600,000 996,841 -
LOSS ON CLOSINGS OF STORES. . . . . . . . . . . . . - 23,142,473 -
GAIN ON SALE OF BUILDING. . . . . . . . . . . . . . - (356,144) -
------------ ------------ ------------
600,000 23,974,555 -
------------ ------------ ------------
TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . 24,930,656 69,492,911 60,918,217
------------ ------------ ------------
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . (10,106,372) (41,859,379) (4,523,775)
OTHER EXPENSE (INCOME):
INTEREST (INCOME) . . . . . . . . . . . . . . . . . (60,530) (74,270) (111,616)
INTEREST EXPENSE. . . . . . . . . . . . . . . . . . 847,786 1,671,624 2,366,269
NET LAWSUIT PROCEEDS. . . . . . . . . . . . . . . . (3,978,375) - -
------------ ------------ ------------
TOTAL OTHER EXPENSE (INCOME) . . . . . . . . . . . . . (3,191,119) 1,597,354 2,254,653
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . (6,915,253) (43,456,733) (6,778,428)
------------ ------------ ------------
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . - 152,874 -
------------ ------------ ------------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . $ (6,915,253) $(43,609,607) $ (6,778,428)
SERIES A PREFERRED STOCK DIVIDENDS . . . . . . . . . . 58,855 - -
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK . . . . . $ (6,974,108) $(43,609,607) $ (6,778,428)
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE-BASIC . . . . . . . $ (1.34) $ (3.57) $ (.56)
------------ ------------ ------------
------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . 5,211,015 12,200,915 12,200,915
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK - PREFERRED STOCK -
COMMON STOCK SERIES A SERIES B
------------------------ -------------------- ---------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
--------- ------ --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE:
February 3, 1995 . . . . . . . . . . . . 12,188,415 $ 121,884
Other . . . . . . . . . . . . . . . . . 12,500 125
Net loss . . . . . . . . . . . . . . . .
---------- --------- --------- ---------- ------- ----------
BALANCE:
February 2, 1996 . . . . . . . . . . . . 12,200,915 122,009
Net loss . . . . . . . . . . . . . . . .
---------- --------- --------- ---------- ------- ----------
BALANCE:
January 31, 1997 . . . . . . . . . . . . 12,200,915 122,009
--------- --------- --------- ---------- ------- ----------
Cancellation of Old Common Stock . . . . (12,200,915) (122,009)
Offering . . . . . . . . . . . . . . . . 856,080 8,561 856,080 $4,280,400
Implementation of the Plan . . . . . . .
Cancel subscription receivable . . . .
Conversion of
general unsecured
claims to
additional paid
in capital and
Series B
Preferred Stock . . . . . . . . . . . 798,210 $3,991,050
Conversion of Series A Preferred
Stock to Common Stock . . . . . . . . 1,676,360 16,764 (838,180) (4,190,900)
Call Series A Preferred Stock . . . . . (17,900) (89,500)
Dividends paid on Series A
Preferred Stock . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . .
--------- --------- --------- ---------- ------- ----------
BALANCE:
January 30, 1998 . . . . . . . . . . . . 2,532,440 $ 25,325 - $ - 798,210 $3,991,050
--------- --------- --------- ---------- ------- ----------
--------- --------- --------- ---------- ------- ----------
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
PAID-IN SUBSCRIPTION (ACCUMULATED
CAPITAL RECEIVABLE DEFICIT) TOTAL
------- ---------- -------- -----
<S> <C> <C> <C> <C>
BALANCE:
February 3, 1995 . . . . . . . . . . . . $36,022,389 $(3,991,050) $ (3,595,931) $ 28,557,292
Other . . . . . . . . . . . . . . . . . (125)
Net loss . . . . . . . . . . . . . . . . (6,778,428) (6,778,428)
----------- ----------- ------------ ------------
BALANCE:
February 2, 1996 . . . . . . . . . . . . 36,022,264 (3,991,050) (10,374,359) 21,778,864
Net loss . . . . . . . . . . . . . . . . (43,609,607) (43,609,607)
----------- ----------- ------------ ------------
BALANCE:
January 31, 1997 . . . . . . . . . . . . 36,022,264 (3,991,050) (53,983,966) (21,830,743)
----------- ----------- ------------ ------------
Cancellation of Old Common Stock. . . . 122,009 -
Offering . . . . . . . . . . . . . . . . (228,967) 4,059,994
Implementation of the Plan . . . . . . .
Cancel subscription receivable . . . . (3,991,050) 3,991,050 -
Conversion of
general unsecured
claims to
additional paid
in capital and
Series B
Preferred Stock . . . . . . . . . . . 24,349,075 28,340,125
Conversion of Series A Preferred
Stock to Common Stock. . . . . . . . . 4,174,136 -
Call Series A Preferred Stock . . . . . (89,500)
Dividends paid on Series A
Preferred Stock. . . . . . . . . . . . . (58,855) (58,855)
Net loss . . . . . . . . . . . . . . . . (6,915,253) (6,915,253)
----------- ----------- ------------ ------------
BALANCE:
January 30, 1998 . . . . . . . . . . . . $60,447,467 $ - $(60,958,074) $ 3,505,768
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) loss . . . . . . . . . . . . . . $(6,915,253) $(43,609,607) $(6,778,428)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation and amortization . . . . . . . . . 742,075 3,223,122 3,950,680
Loss on disposition of fixed assets . . . . . . - - 187,032
Reorganization items . . . . . . . . . . . . . 600,000 23,063,554 -
Non-cash interest expense on long-term debt . . - 117,981 -
Changes in assets and liabilities:
Accounts receivables. . . . . . . . . . . . . . 644,389 411,752 515,699
Merchandise inventories . . . . . . . . . . . . (2,334,757) 14,779,007 3,925,773
Prepaid and other current assets. . . . . . . . 127,712 43,700 280,335
Other assets. . . . . . . . . . . . . . . . . . (190,121) 221,559 337,150
Accounts payable-trade. . . . . . . . . . . . . 1,973,996 8,777,565 (213,138)
Accounts payable-other. . . . . . . . . . . . . 1,088,202 2,780,188 (412,072)
Deferred federal income taxes . . . . . . . . . - 152,874 -
Closed store costs. . . . . . . . . . . . . . . - (1,168,213) (1,566,981)
Accrued expenses and other current liabilities. (625,651) (1,344,885) 188,694
----------- ------------ -----------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . (4,889,408) 7,448,597 (402,744)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of building . . . . . . . . - 1,342,648 -
Capital expenditures . . . . . . . . . . . . . . . (518,491) (694,541) (3,691,561)
----------- ------------ -----------
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . (518,491) 648,107 (3,691,561)
----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) credit facility . 934,018 (5,821,471) 4,263,026
Bank checks outstanding . . . . . . . . . . . . . 481,145 (1,049,242) (1,493,546)
Payments on long-term debt . . . . . . . . . . . . (266,667) (746,028) (1,202,005)
Redemption of Series A Preferred Stock . . . . . . (89,500) - -
Dividends on Series A Preferred Stock . . . . . . (58,855) - -
Cash in escrow . . . . . . . . . . . . . . . . . . 330,000 (330,000) -
Net proceeds from the issuance of Common Stock . . 4,059,994 - -
----------- ----------- -----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . 5,390,135 (7,946,741) 1,567,475
----------- ----------- -----------
(Increase) decrease in cash and cash equivalents . (17,764) 149,963 (1,721,342)
Cash and cash equivalents at beginning of year . . 491,297 341,334 2,062,676
----------- ----------- -----------
Cash and cash equivalents at end of year . . . . . $ 473,553 $ 491,297 $ 341,334
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . $ 628,118 $ 1,553,643 $ 2,034,339
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES:
Conversion of liabilities subject to compromise to:
Long-term debt . . . . . . . . . . . . . . . . . . $ 1,394,816 - -
Accounts payable other . . . . . . . . . . . . . . $ 515,603 - -
Series B Preferred Stock (Note 4) . . . . . . . . $ 3,991,050 - -
Additional paid in capital . . . . . . . . . . . . $24,349,075 - -
Conversion of Series A Preferred Stock to:
Common Stock . . . . . . . . . . . . . . . . . . . $ 16,764 - -
Additional paid in capital . . . . . . . . . . . . $ 4,174,136 - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the accounts of LOT$OFF Corporation
(formerly known as 50-OFF Stores, Inc., "50-OFF") and its wholly-owned
subsidiaries ("LOT$OFF" or the "Company"). All significant intercompany
balances and transactions have been eliminated.
FISCAL YEAR
The Company's fiscal year is a fifty-two or fifty-three week period
ending on the Friday nearest to January 31. Fiscal years 1998, 1997 and 1996
were each comprised of fifty-two weeks.
OPERATIONS
The Company operates a chain of extreme value, close-out retail stores
located in 5 states in the southern and southwestern United States that carry
a broad mix of merchandise targeted at value-conscious, lower to moderate
income customers and other bargain hunters.
REORGANIZATION
On October 9, 1996 (the "Petition Date"), 50-OFF and its significant
subsidiaries (together, the "Debtors") filed voluntary petitions for relief
under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Western District of Texas, San
Antonio Division (the "Court"). The filing was precipitated by the
notification from 50-OFF's asset based lender that it was in violation of the
minimum gross margin and the minimum working capital financial covenants of
its credit agreement and that such breaches constituted events of default
under the loan documents. The lender subsequently established additional
availability reserves which reduced availability, imposed certain increased
fees and other charges and accelerated fees deemed earned at the initial
closing, which, individually and together, substantially impacted 50-OFF's
financial liquidity and, therefore, its ability to acquire and maintain much
needed inventory for its stores. 50-OFF 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 its disappointing operating results without the protections
afforded under the Bankruptcy Code. 50-OFF continued to manage its business
as a debtor in possession pursuant to sections 1107 and 1108 of the
Bankruptcy Code while management formulated and promoted a plan of
reorganization.
Consistent with the bankruptcy proceedings, the 1997 financial
statements were prepared on a going concern basis assuming the realization of
assets and liquidation of liabilities in the ordinary course of business.
However, under the Bankruptcy Code, actions to enforce certain claims against
the Company are stayed if such claims arose, or are based on events that
occurred, before the Petition Date. The terms of the ultimate settlement of
these liabilities is determined based on a plan of reorganization approved by
the Court. Such liabilities in existence at October 9, 1996 are reflected as
liabilities subject to compromise in the January 31, 1997 consolidated
balance sheet.
At a confirmation hearing held on June 3, 1997, United States Bankruptcy
Judge Leif M. Clark entered an order confirming the Debtors' Joint Plan of
Reorganization, as Amended and Modified (the "Plan"). The Plan became
effective June 16, 1997 (the "Effective Date"). Accordingly, the 1998
financial statements have been prepared on a going concern basis and are
based on the application of known elements of the Plan approved by the Court.
The procedures used to determine the amount of any additional liabilities or
of any elimination of liabilities have not been completed. Additional
liabilities subject to settlement may arise from the Court's fixing of
allowed claims for disputed amounts.
F-8
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents. In
January 1997, the Company sold its corporate headquarters. An order issued
by the Bankruptcy Court escrowed $330,000 to pay the related outstanding
principal, accrued interest and attorneys' fees. In February 1997,
approximately $301,000 was paid to satisfy the debt. See Note 5.
PRE-OPENING STORE COSTS
Pre-opening store costs, which are included in selling, advertising,
general and administrative, are charged to income within the fiscal year in
which they are incurred.
INVENTORY VALUATION
Merchandise inventories are valued at the lower of cost (first-in,
first-out) or market, using the retail inventory method. Merchandise
inventories consist entirely of finished goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
on the straight-line method at rates based upon the estimated useful lives of
the respective assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the economic life of the
improvements or the respective terms of the lease. Gains and losses upon
retirement or disposal of fixed assets are recognized currently. In
connection with the bankruptcy filing, 50-OFF recorded as a reorganization
expense the write-down to fair value, as determined by its lender based on
the value of certain assets liquidated by the lender and on 50-OFF's, the
lender's and an independent party's strategic review of certain equipment and
leasehold improvements. See Note 6.
INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reported net of a valuation allowance that reduces deferred tax assets to an
amount that management believes is more likely than not realizable.
The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
LOSS PER COMMON SHARE
Earnings per share have been determined in accordance with Statement of
Financial Accounting Standard ("SFAS") No. 128 which establishes standards
for computing and presenting basic and diluted earnings per share
calculations. Basic earnings per share are determined by dividing net
earnings by the weighted average number of common shares outstanding during
the period. Dilutive earnings per share are not presented as the calculation
is anti-dilutive for all periods. Prior period amounts have been restated to
conform with the requirements of SFAS No. 128.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and debt instruments. The
book value of cash and cash equivalents, accounts receivable and accounts
F-9
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payable are representative of their respective fair values due to the
short-term maturity of these instruments. The book value of the Company's
debt instruments is considered to approximate their fair value, based on
current market rates and conditions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method described in Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's Common Stock at the date
of grant over the amount an employee must pay to acquire the stock. The
Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock Based Compensation." See Note 11.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1996 and 1997
consolidated financial statements to conform to the fiscal 1998 consolidated
financial statement presentation.
NOTE 2 - PLAN OF REORGANIZATION AND MANAGEMENT PLANS
PLAN OF REORGANIZATION
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.
On March 20, 1997, the Court approved a disclosure statement with
respect to the Plan as containing adequate information in accordance with
section 1125 of the Bankruptcy Code. Such statement was mailed to all
creditors of the bankruptcy estates and all holders of Public Equity
Interests as of March 21, 1997 and was also filed with the SEC. "Public
Equity Interests" refer to the common stock of 50-OFF Stores, Inc. ("Old
Common Stock"), which was canceled upon the Effective Date, along with all
then existing options and warrants to buy such stock.
The Plan required that the Company's existing senior secured revolving
credit facility lender, GECC, provide a post-confirmation revolving credit
facility or be replaced by a new senior secured lender so that the Company
would have a source of revolving funds to continue to operate. GECC provided
such financing. See Note 5. The Plan also provided for the restructure of
the Company's secured obligation to MetLife Capital Corporation ("MetLife")
at a face amount of $850,000; and the Plan provided for the payment of such
amount over approximately seven years. MetLife agreed to such treatment with
the balance of its claim (approximately $3.3 million) becoming an allowed
general unsecured claim. The Plan provided for the cancellation of all
non-priority unsecured indebtedness of 50-OFF. See Note 4.
Under the Plan, as further modified by Court order on March 19, 1998
(see Note 4), each holder of an allowed general unsecured claim will, in
partial cancellation of its allowed claim ($3,991,050 in the aggregate),
receive a pro rata share of 1,596,420 shares of LOT$OFF's common stock (the
"Common Stock"). Certain further obligations of the Company to such holders
of allowed general unsecured claims are secured by a lien up to the full
F-10
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
face amount of the balance of their allowed claims against potential net
lawsuit proceeds over $3,991,050 from significant litigation being prosecuted
by the Company. As net proceeds over $3,991,050 (net of certain items set
forth in the Plan) from such litigation are received by the Company, holders
of allowed general unsecured claims will receive Common Stock and/or cash
(provided that at least the "excess" net proceeds, up to $1.5 million as
defined in the Plan, will be paid in cash) as determined under the Plan. The
receipt of such Common Stock and/or cash by holders of allowed general
unsecured claims will result in a proportionate release of the lien. By
issuing such Common Stock and/or paying such cash to allowed general
unsecured creditors, such creditors will be essentially receiving the net
value of the Company's significant litigation which was pending pre-Petition
Date up to the full face amount of their allowed claims. See Note 10.
Finally, the Plan provided for the recapitalization of the Company
through cash raised from 50-OFF's existing common stockholders (the "Rights
Offering") and, potentially, as discussed above, from the litigation.
Specifically, the Plan provided for the issuance to such stockholders of
rights to subscribe for units, each consisting of 20 shares of Series A
Preferred Stock and 20 shares of Common Stock (a "Unit"). Up to 122,009
Units and a minimum of 30,500 Units could be sold in the Rights Offering.
The record date for determining which 50-OFF stockholders were entitled to
vote on the Plan and receive such rights was March 21, 1997. Persons who
acquired Public Equity Interests after such record date were not entitled to
vote on the Plan or subscribe for Units pursuant to the Rights Offering. The
Rights Offering expired on May 22, 1997. Subscriptions received in the
Rights Offering were held in escrow with Bank One, Texas N. A. pending the
Effective Date of the Plan. The gross proceeds from the Rights Offering were
$4,280,400. Such proceeds were used to provide working capital for increased
inventories for the Company's stores, to support the Company's operations and
to pay for the Company's exit from bankruptcy.
MANAGEMENT PLANS
Management has been redirecting the Company's retail activities from
50-OFF's off-price retailing concept to LOT$OFF's extreme value, 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 and the elimination of apparel categories subject to
substantial markdowns and inventory shrink. The Company continues to
maintain a healthy showing of basic family apparel products in its 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 merchandising 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, low inventory shrinkage, increased
store traffic and improved operating results. The Company's business plan is
focused on achieving higher gross margins, higher store contribution and
controlled corporate overhead, all promoting overall profitability, and on
being a major factor in extreme value retailing in Texas. The key elements
of this strategy included the geographic consolidation of the chain, the
liquidation and closing of under-performing stores or stores located outside
of the reduced market area with appropriate reductions in field and corporate
overhead and staffing, the conversion of the continuing 50-OFF stores to
LOT$OFF stores (only 14 of the 41 continuing stores had been converted as of
the filing of the voluntary bankruptcy petitions on October 9, 1996; all
stores had been converted by January 30, 1998) and a reduced overhead
structure. The management team is now concentrating on optimizing the
contribution from store operations while maintaining only the absolute
minimum amount of corporate overhead necessary to support store operations,
on collecting on significant judgments with respect to certain litigation
(see Note 10) and on maximizing shareholder value.
If the Company's plans to improve operations are not successful in
producing results which comply with the covenants of its line of credit (see
Note 5), which the Company and GECC have agreed to renegotiate in May 1998,
and in achieving sustained profitability, management will consider, among
other alternatives, strategic and/or financial alliances with third parties
and the merger or sale of all or a part of the Company. Management, based on
communications with GECC, believes that they will negotiate covenants with
which the Company will be able to comply. Management further believes this
credit facility, coupled with the capital obtained from the purchase by GECC
of a contingent claim on a $10,000,000 portion of the potential net proceeds
from the judgment obtained against The Chase Manhattan Bank for $5.8 million
subsequent to fiscal 1998 year end and anticipated proceeds from outstanding
litigation, provides sufficient liquidity to support fiscal 1999 operations,
including planned store opening.
F-11
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
JANUARY 30, 1998 JANUARY 31, 1997
---------------- ---------------
<S> <C> <C>
Store equipment, furniture and fixtures . . . . $ 1,494,702 $ 1,184,242
Leasehold improvements. . . . . . . . . . . . . 6,098,774 5,930,742
Other . . . . . . . . . . . . . . . . . . . . . 53,601 160,657
----------- -----------
7,647,077 7,275,641
Less: accumulated depreciation . . . . . . . . (4,014,112) (3,286,881)
----------- -----------
$ 3,632,965 $ 3,988,760
----------- -----------
----------- -----------
</TABLE>
NOTE 4 - LIABILITIES SUBJECT TO COMPROMISE
Liabilities in existence at October 9, 1996 were reflected as liabilities
subject to compromise in the January 31, 1997 consolidated balance sheet. The
principal categories of claims included in liabilities subject to compromise of
January 31, 1997 were as follows:
<TABLE>
<S> <C>
Secured debt, 8.5%, collateralized by furniture,
fixtures and equipment. . . . . . . . . . . . . . . . . . $ 4,190,881
Secured debt, capital leases, collateralized by signs . . . 80,763
Trade and other miscellaneous claims,
including costs of lease rejections of
approximately $5.869,000 (see Note 8) . . . . . . . . . . 25,978,900
-----------
$30,250,544
-----------
-----------
</TABLE>
At a confirmation hearing held on June 3, 1997, United States Bankruptcy
Judge Leif M. Clark entered an order confirming the Debtors' Joint Plan of
Reorganization, as Amended and Modified (the "Plan"). The Plan became
effective June 16, 1997 (the "Effective Date"). Accordingly, the 1998
financial statements have been prepared on a going concern basis and are
based on the application of known elements of the Plan approved by the Court.
Under the Plan, the $30,250,544 of liabilities subject to compromise as
included in the consolidated balance sheet as of January 31, 1997 were
converted to: long-term debt - $1,394,816 (see Note 5); accounts payable
other - $515,603; Series B Preferred Stock - $3,991,050; and additional paid
in capital - $24,349,075.
The procedures used to determine the amount of any additional
liabilities or of any elimination of liabilities have not been completed.
Additional liabilities subject to settlement may arise from the Court's
fixing of allowed claims for disputed amounts. These amounts may be subject
to further adjustments as a result of actions of the Court and/or
developments with respect to disputed claims. The Company's best estimate of
unsecured claims which will ultimately be allowed by the Court is $28.3
million, $3,991,050 of which was satisfied by the issuance of Series B
Preferred Stock under the Plan. The amount of allowed claims may differ
materially from the Company's estimate.
CONVERSION OF SERIES B PREFERRED STOCK
On March 19, 1998, in response to the Company's motion to modify the Plan
by consolidating certain steps to be taken pursuant to the Plan and with the
support of the Class 7 agent and its counsel, representing the allowed general
unsecured creditors, the Court entered an order to consolidate the treatment of
Class 7 creditors by allowing the issuance of two shares of Common Stock in lieu
of any single share of Series B Preferred Stock, and other intermediate steps
which would otherwise have been required under the Plan. The immediate effect
of the order was to cause the conversion of the previously issued, but
undistributed, 798,210 shares of Series B Preferred Stock into 1,596,420 shares
of Common Stock and the elimination of the Series B Preferred Stock and any
obligation of the Company to issue Series A Conversion Rights (as defined in the
Plan) or Series A Preferred Stock to allowed general
F-12
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unsecured creditors under the Plan effective March 19, 1998. Such shares of
Common Stock are in an escrow account at Continental Stock Transfer & Trust
Company for the benefit of holders of allowed general unsecured claims
pending distribution upon the filing and/or resolution of claims objections.
Future obligations, if any, to the allowed general unsecured creditors (up to
the full face amount of their allowed claims, depending on Net Lawsuits'
Proceeds as defined in the Plan) may be satisfied by the issuance of Common
Stock and/or cash [Excess Net Lawsuits' Proceeds (up to $1.5 million as defined
in the Plan) must be paid in cash].
NOTE 5 - CREDIT FACILITY AND LONG-TERM DEBT
CREDIT FACILITY
On June 16, 1997, the Company, with the approval of the Court, entered
into a credit agreement (as amended on August 28, 1997, December 22, 1997,
February 15, 1998 and April 17, 1998) with GECC providing the Company with a
line of credit through June 16, 2000 of up to $15,000,000, including letters
of credit. Borrowings under the line are 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 is
charged on funds borrowed at the annualized yield of 30-day commercial paper
(currently 5.55%) plus 3%. The line of credit is collateralized by inventory,
accounts receivable and other assets. The credit agreement contains various
restrictive covenants. The agreement also contains minimum availability,
minimum gross margin, minimum EBITDA, minimum inventory, minimum sales,
minimum trade support and maximum capital expenditure financial covenants.
In late 1997, the Company notified GECC that it was in violation of certain
covenants under the credit agreement, including minimum availability. On
December 22, 1997, the Company entered into an amendment to the credit
agreement allowing for additional availability of $1.0 million from December
22 through December 31, 1997 and $2.0 million from January 1 through February
15, 1998. As of January 30, 1998, the Company had approximately $6,330,598
outstanding under the credit facility and had net availability of
approximately $1,853,000, including the additional availability. On February
15, 1998, the Company entered into another amendment to the credit agreement
allowing for additional availability of $1,250,000 from February 15 through
March 1, 1998. On April 17, 1998, the Company entered into a further
amendment to the credit agreement in conjunction with the acquisition by GECC
of a contingent claim on a $10,000,000 portion of the potential net proceeds
from the $148,575,000 judgment against The Chase Manhattan Bank for
$5,800,000, or 58 cents on the dollar. See Note 13. The effect of this
amendment was the waiver of all existing covenant violations and related
defaults under the credit agreement through May 31, 1998. At April 17, 1998
and after giving effect to the transaction with GECC and the related
amendment to the credit agreement, the Company had approximately $4,079,000
outstanding under the credit facility, had approximately $3,893,000 available
for use and was not in default under the credit agreement. The Company and
GECC have agreed to renegotiate the continuing covenants in the credit
agreement in May 1998. See Note 2.
Prior to June 16, 1997, with the approval of the Court, 50-OFF had a
debtor in possession credit agreement with GECC providing the Company with a
line of credit up to $15,000,000, including letters of credit. 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 plus 3%. The
line of credit was collateralized by inventory, accounts receivable and other
assets. The credit agreement contained various restrictive covenants,
including financial covenants.
The Company had total borrowings of $66,471,790, $80,196,626 and
$51,713,410 and repayments of $65,537,771, $86,018,097 and $47,450,384 for
fiscal years 1998, 1997 and 1996, respectively, under its lines of credit.
F-13
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT
Long-term debt for the year ending January 30, 1998 consists of three
general types of obligations, the furniture and fixture note, ad valorem tax
notes and non-ad valorem tax notes. All three are long-term debts settled as
part of the Plan and were classified as liabilities subject to compromise
(see Note 4) for the year ending January 31, 1997.
Long-term debt consists of the following:
<TABLE>
JANUARY 30, 1998 JANUARY 31, 1997
---------------- ----------------
<S> <C> <C>
Promissory notes collateralized by
furniture, fixtures and equipment . . . . . $ 849,559 $ -
Notes to ad valorem taxing
authorities . . . . . . . . . . . . . . . . 414,698 -
Notes to taxing authorities, other
than ad valorem taxing authorities. . . . . 130,559 -
Promissory note collateralized by
land and building . . . . . . . . . . . . . - 266,667
Less: current portion. . . . . . . . . . . . (131,553) (266,667)
---------- ---------
$1,263,263 $ -
---------- ---------
---------- ---------
</TABLE>
In April 1996, 50-OFF restructured its $4,000,000 and $2,775,000 long-term
borrowings with an affiliate of an insurance company into one promissory note
for approximately $4,645,000. The promissory note provided for monthly
installments (including principal and interest) of $94,638 until March 2001.
Interest was charged at a rate of 8.50%. The note was secured by 50-OFF's
furniture and fixtures. Approximately $4,191,000 of such note remained
outstanding at January 31, 1997 and was included in liabilities subject to
compromise. See Note 4. After negotiations with the lender and a Court
approved agreement, at January 30, 1998, the holder of the claim has a $849,559
promissory note collateralized by, effectively, all furniture, fixtures and
equipment of the Company, including any hereafter acquired, and an allowed
general unsecured claim for the remainder of their claim. See Note 4. The note
requires monthly payments of interest through June 1, 1998, then monthly
payments of principal and interest of $15,374 until February 1, 2004. Interest
is fixed at 7.50%.
The 65 notes to ad valorem taxing authorities require quarterly payments of
principal and interest totaling $21,078 beginning March 1, 1998 through maturity
on December 1, 2003 and are collateralized by a statutory tax lien.
The 16 non-ad valorem tax notes require annual payments of principal and
interest (6.62%) over a five or six year period beginning March 9, 1999 and are
collateralized by a statutory tax lien.
As of January 30, 1998, maturities of long-term debt during each of the
next five fiscal years were: 1999 - $131,553; 2000 - $218,680; 2001 - $241,468;
2002 - $259,164; and 2003 - $271,717.
In fiscal 1993, 50-OFF borrowed $1,000,000 from a financial institution.
The note was collateralized by a deed of trust on the land and building used for
the corporate offices. The promissory note provided for outstanding principal
to be paid in monthly installments of $16,666 until January 29, 1998. Interest
was charged at a rate of 7.02%. At January 31, 1997, $266,667 of such note
remained outstanding. In February 1997, with the approval of the Court,
$301,000 was paid to satisfy the outstanding principal, accrued interest and
attorneys' fees.
NOTE 6 - CLOSED STORE COSTS
During fiscal 1998, the Company recorded inventory liquidation markdowns to
cost of sales of $87,000 for the Lawton, Oklahoma store to be closed by May 5,
1998.
F-14
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of fiscal 1997, in connection with its
bankruptcy filing, 50-OFF liquidated inventory at 37 stores in non-strategic
markets through an arrangement with an affiliate of its then lender. 50-OFF
received approximately $5,162,000 representing approximately 45% of the
retail value of the inventory on hand at the 37 stores. During the second
quarter of fiscal 1997, 50-OFF recorded to cost of sales inventory
liquidation markdowns of $2,218,000. Additionally, 50-OFF recorded
reorganization items expense related to fixed asset write-offs of
$12,570,000. During the third quarter of fiscal 1997, 50-OFF recorded
reorganization items expense of approximately $3,956,000 for liabilities
associated with estimated monthly lease payments and $467,000 of other store
closing costs associated with the 37 stores. After a further review, 50-OFF
closed an additional 18 stores during the fourth quarter of fiscal 1997.
Additionally, 50-OFF recorded reorganization items expense for liabilities
associated with estimated monthly lease payments of approximately $1,592,000,
other store closing costs of approximately $266,000 and related goodwill of
approximately $155,000 associated with the 18 stores. 50-OFF also recorded
to reorganization items expense fixed asset write-downs of approximately
$4,776,000 for the 18 closed stores, as well as an impairment of the fixed
assets at the remaining stores and at its corporate offices.
Subsequent to fiscal 1997 year end, 50-OFF closed three stores plus a
clearance center. In connection with these closings, 50-OFF recorded
inventory liquidation markdowns of $302,000 during the fourth quarter of
fiscal 1997. Additionally, 50-OFF recorded to reorganization items expenses
associated with estimated monthly lease payments of approximately $321,000
and other store closing costs of approximately $334,000 associated with the
three stores and the clearance center. The 60 stores and the clearance
center closed in fiscal 1997 and fiscal 1998 contributed approximately
$45,455,000 and $86,632,000 of net sales and $11,534,000 and $273,000 of
operating losses during fiscal 1997 and 1996, respectively, to 50-OFF's
operations.
50-OFF's store consolidation program closed 14 stores during fiscal
1996. The store closings involved exiting certain smaller markets which
proved unable to support a store and certain other markets in which it would
have been cost prohibitive to open the number of stores required to
effectively develop such markets' potential. The amount of the closing costs
associated with the stores closed in fiscal 1996 was approximately $4,942,000
of which approximately $835,000 pertained to inventory liquidation
write-downs charged to cost of sales and approximately $1,372,000 associated
with fixed asset write-downs and was expensed in fiscal 1995 as part of a
formal plan to complete the store consolidation program. 50-OFF recorded
approximately $1,168,000 of liabilities associated with estimated monthly
lease payments and other store closing costs at February 2, 1996. During
fiscal 1996, 50-OFF undertook negotiations with the lessors of 12 of the
stores closed in fiscal 1996 and successfully completed early buyouts of the
remaining lease obligations for 11 stores, resulting in a credit to closed
store costs of $409,000 during the fourth quarter of fiscal 1996. During
fiscal 1997, 50-OFF completed its negotiations and executed terminations on
the remaining obligations from the store consolidation program plus
negotiated other buyouts and recorded income to reorganization items of
approximately $1,295,000.
NOTE 7 - INCOME TAXES
The benefit from (provision for) income taxes consists of the following:
<TABLE>
YEAR ENDED YEAR ENDED YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Federal:
Current. . . . - - -
Deferred . . . - - -
State:
Current. . . . - - $(100,000)
Deferred . . . - $(153,000) 100,000
---- --------- ---------
- $(153,000) $ -
---- --------- ---------
---- --------- ---------
</TABLE>
F-15
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Temporary differences which gave rise to deferred tax assets and
liabilities are as follows:
<TABLE>
YEAR ENDED YEAR ENDED
JANUARY 30, 1998 JANUARY 31, 1997
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards. . . . . . . . . $ 23,537,000 $ 19,269,000
AMT and other credit carryforwards. . . . . . . . 515,000 515,000
Merchandise inventories . . . . . . . . . . . . . - 150,000
Lease obligations . . . . . . . . . . . . . . . . 2,227,000 2,149,000
Property and equipment. . . . . . . . . . . . . . - $ 974,000
Other . . . . . . . . . . . . . . . . . . . . . . 115,000 152,000
------------ ------------
26,394,000 23,209,000
Deferred tax liabilities:
Property and equipment. . . . . . . . . . . . . . 324,000 -
Merchandise inventories . . . . . . . . . . . . . 50,000 -
------------ ------------
374,000 -
Net deferred tax assets before -
valuation allowance. . . . . . . . . . . . . . . . 26,020,000 23,209,000
Valuation allowance . . . . . . . . . . . . . . . . (26,020,000) (23,209,000)
------------ ------------
Net deferred tax assets . . . . . . . . . . . . . . $ - $ -
------------ ------------
------------ ------------
</TABLE>
As of January 30, 1998, the Company had federal tax net operating loss
carryforwards of approximately $58,549,000 ($46,906,000 at January 31,1997)
expiring through 2014, alternative minimum tax credit carryforwards of
approximately $337,000 ($337,000 at January 31,1997), which are available to
offset regular federal income taxes in the future until fully utilized, and
targeted jobs credit carryforwards of approximately $178,000 ($178,000 at
January 31,1997) expiring in 2006 through 2009. As a result of the bankruptcy
proceedings and the related Plan, the net operating loss ("NOL") carryforwards,
tax credit carryforwards and other tax attributes of the Company will be reduced
(perhaps significantly) as a result of debt forgiveness income in accordance
with section 108(b) of the Internal Revenue Code ("IRC") or the receipt of
substantial net lawsuit proceeds in excess of such debt. In addition, IRC
section 382 limits NOL and tax credit carryforwards when an ownership change of
more than fifty percent of the value of stock in a loss corporation occurs
within a three year period. Under the Plan, the ownership of the Company may be
deemed to have changed by more than fifty percent. Accordingly, to the extent
NOL and tax credit carryforwards remain after reduction under IRC section 108(b)
and/or the receipt of any net lawsuit proceeds, the ability to utilize remaining
NOL and tax credit carryforwards may be significantly restricted.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company leases the store facilities, its store support center
(corporate headquarters) and the distribution warehouse used in its operations
under operating leases. Most leases contain escalation clauses for real estate
taxes, renewal options ranging from five to ten years and required additional
payments based on percentages of sales (contingent rentals). Approximate future
minimum lease payments (excluding renewal options) under leases having a
remaining non-cancelable term in excess of 12 months as of January 30, 1998 are
as follows:
F-16
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
YEAR ENDING
-----------
<S> <C>
1999. . . . . . . . . . . . . $4,140,000
2000. . . . . . . . . . . . . $3,869,000
2001. . . . . . . . . . . . . $3,579,000
2002. . . . . . . . . . . . . $2,993,000
2003. . . . . . . . . . . . . $1,914,000
2004 and subsequent . . . . . $6,820,000
</TABLE>
Actual rental expense, including contingent rentals, was as follows:
<TABLE>
<S> <C>
Year Ended January 30, 1998. . . $4,372,000
Year Ended January 31, 1997. . . $7,353,000
Year Ended February 2, 1996. . . $9,743,000
</TABLE>
Under the relevant provisions of the Bankruptcy Code, 50-OFF rejected
executory contracts, including leases. In conjunction with the Company's
restructuring process, a review was performed of all lease obligations.
Rejection of a lease gave the right to assert a claim against the Company.
50-OFF rejected a total of 59 leases. The amounts of the related claims are
included in the loss on closings of stores of approximately $5,869,000 in the
consolidated statements of operations for the year ended January 31, 1997.
Contingent rentals represented approximately 2% in the year ended
February 2, 1996, 0% in the year ended January 31, 1997 and 0% in the year
ended January 30, 1998 of actual rent expense.
Effective April 17, 1998, the Company entered into a guaranty agreement
with GECC under which the Company guaranteed the payment of a portion of
GECC's $5.8 million payment to a limited partnership, controlled by a wholly
owned subsidiary of the Company, that holds the judgment and cause of action
against The Chase Manhattan Bank. See Note 10. The liability under the
guaranty agreement is limited to $3.0 million and is cross-collateralized to
the Company's other indebtedness to GECC. See Note 5. The maximum amount
payable to GECC under the partnership agreement is $10 million. See Note 13
for a description of the contingent claim on certain net lawsuit proceeds
acquired by GECC subsequent to fiscal 1998 year end.
The Company is also party to certain legal proceedings arising in the
ordinary course of business, none of which are believed to be material. See
Note 10.
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company had three store leases in force during fiscal 1996 with
Spigel Properties, the owner of which was a director of 50-OFF through
September 1995. 50-OFF paid an aggregate of approximately $124,000 in minimum
rental and approximately $14,000 in percentage rental for these locations
during fiscal 1996.
The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly
performed legal services as counsel to the Company. Cecil Schenker, a
director of the Company, is a partner with Akin, Gump, Strauss, Hauer & Feld,
L.L.P., which has been paid $1,093,000, $129,000 and $111,000 in fiscal years
1998, 1997 and 1996 respectively for professional fees and reimbursement of
expenses.
F-17
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Charles J. Fuhrmann II, a director of the Company, has performed certain
financial and strategic advisory services for 50-OFF and was compensated
$31,250 and $127,500 during fiscal 1997 and 1996, respectively. In May 1996,
Mr. Fuhrmann was appointed President, Chief Executive and Financial Officer
of the Company and is currently its Chairman, President and Chief Executive
Officer.
NOTE 10 - LITIGATION
In November 1994, 50-OFF received subscriptions for approximately 1,810,000
shares of Old Common Stock in a Regulation S offering to qualified investors.
50-OFF received net proceeds of approximately $861,000 from the sale of 310,000
shares and recorded a subscription receivable for the purchase agreements for
1,500,000 shares for which proceeds have not been received.
On February 21, 1995, 50-OFF 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 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. 50-OFF sought recovery of actual and
punitive damages and pre- and post-judgment interest.
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 $2,400,000 (of which the Company received $1,800,000 after attorneys'
contingent fees but before other related expenses) 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 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. 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 $12,975,000 at 10% per annum from November 18, 1994 until
December 4, 1997 and post-judgment interest on the entire judgment amount at
5.42% from December 4, 1997. Subsequently, Chase filed five post-judgment
motions with the court: motion for new trial; motion to alter or amend the
judgment; renewed motion for judgment as a matter of law; motion to apply a
settlement credit and motion for leave to conduct oral deposition; and motion
for hearing. On February 23, 1998, the court, having considered such
motions, the supplements to such motions, the response of the Company to such
motions and the entire record in the cause, denied all of Chase's
post-judgment motions. Chase has given notice that it will appeal the
judgment entered by the court to the Fifth Circuit Court of Appeals in New
Orleans. The Fifth Circuit Court of Appeals has requested and arranged a
pre-hearing conference among the parties in New Orleans beginning on May 14,
1998.
On April 6, 1998, the court entered default judgments against Betafid S.A.,
Andalucian Villas (Forty-Eight) Limited, Arnass Limited, Brocimast
Enterprises Limited, Howard White and Aries Peak, Inc. on the Company's
F-18
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
claims for violations of Section 10b-5 of the Securities Exchange Act and
common law fraud. Such judgments total $166,275,000, plus pre-judgment
interest on $12,975,000 at 10% per annum from November 18, 1994 until April 6,
1998 and post-judgment interest on the entire amount at 5.31% from April 6,
1998.
The Company intends to vigorously pursue the favorable judgments
obtained against defendants in the above matter. The Company, based upon
advice from counsel, believes that it will obtain a favorable result in the
appeal of the judgment against defendant Chase referenced in the above
proceeding. The Company intends to vigorously pursue all remedies to collect
the sums owing to the Company as per the judgments that have been obtained
against the other defendants although the collectibility of these judgments
is uncertain. Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the
Company in these matters on a contingency fee basis.
On January 9, 1996, 50-OFF 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 alleged that the defendants breached their contracts with 50-OFF
and breached their fiduciary duties to 50-OFF by failing to investigate properly
the qualifications of the purchasers that they introduced to 50-OFF. The
Company also asserted securities fraud claims against the defendants in
connection with the transaction. 50-OFF sought to recover actual and
exemplary damages in excess of $10,000,000, pre- and post-judgment interest,
costs and attorney's fees. On January 16, 1998, the Company reached an
agreed settlement for $4,300,000 with Jefferies & Company, Inc. and Jefferies
International Limited and received $3,000,000 after attorneys' contingent
fees but before other related expenses.
The Company is party to certain other legal proceedings, none of which
are believed to be material.
NOTE 11 - STOCK OPTION PLAN
Upon the Effective Date, the 50-OFF option plan and all outstanding
options under such plan were terminated.
Under the Company's Stock Option Plan effective June 16, 1997 (the
"Option Plan"), stock options may be granted to full-time employees and
directors of the Company for the purchase of up to a maximum of 800,000
shares of common stock. Options (either incentive or nonqualified options)
may be granted for a term not to exceed ten years (primarily five years) and
generally become exercisable after six months. The exercise price of all
incentive stock options must be at least equal to the fair market value of
the Common Stock on the date of grant, or 110% of such fair market value with
respect to any optionee who is more than a 10% stockholder of the Company's
shares. Any nonqualified stock option issued pursuant to the Option Plan
must be at an exercise price equal to at least 85% of the fair market value
of the Common Stock on the date of grant. Shares of unissued Common Stock
reserved for the Option Plan total 800,000 at January 30, 1998.
Through January 30, 1998, the Company incurred expenses (exclusive of attorney
contingent fees) of approximately $821,600 in connection with the two lawsuits
discussed above.
The following table summarizes certain information regarding stock options
granted under the Option Plan:
<TABLE>
WEIGHTED AVERAGE
OPTIONS OUTSTANDING EXERCISE PRICE
------------------- ----------------
<S> <C> <C>
Balance at June 16, 1997..... 425,000 $1.67
Granted.................... 271,700 1.69
Canceled................... 28,600 1.67
------- -----
Balance at January 30, 1998.. 668,100 1.68
------- -----
------- -----
</TABLE>
F-19
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options outstanding at January 30, 1998 have a weighted-average remaining
contractual life of 4.5 years and exercise prices ranging from $1.67 to $3.35.
The 425,000 options exercisable at January 30, 1998 have a weighted-average
remaining contractual life of 4.4 years and an exercise price of $1.67. The
weighted average exercise price for options outstanding at January 30, 1998 was
$1.68.
The Company applies APB No. 25 and related interpretations in accounting
for its Option Plan. Accordingly no compensation expense has been recognized
for stock option transactions. Compensation cost for option awards (granted
after January 29, 1994) in accordance with SFAS No. 123, is not material to the
results of proforma operations for fiscal 1998 and 1997, as the estimated fair
value of the options granted was not significant.
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
PRIOR YEAR
<TABLE>
QUARTER ENDED
-----------------------------------------------------
JANUARY 31, NOVEMBER 1, AUGUST 2, MAY 3,
1997 1996 1996 1996
----------- ----------- --------- ------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $14,959,100 $ 27,111,033 $ 31,708,019 $32,415,409
Gross profit. . . . . . . . . . . . . . . . . . . . . 2,808,199 6,184,961 9,358,359 9,182,013
Net income (loss) applicable to Common Stock. . . . . (6,566,044) (14,540,980) (17,568,457) (4,901,274)
Net income (loss) per share of Common Stock . . . . . $ (0.54) $ (1.19) $ (1.44) $ (0.40)
Average common and common equivalent
shares outstanding. . . . . . . . . . . . . . . . . 12,200,915 12,200,915 12,200,915 12,200,915
Net income (loss) per proforma weighted
average shares. . . . . . . . . . . . . . . . . . . $ (1.59) $ (3.52) $ (4.26) $ (1.19)
Pro forma weighted average shares . . . . . . . . . . 4,128,860 4,128,860 4,128,860 4,128,860
</TABLE>
F-20
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CURRENT YEAR AS RESTATED
<TABLE>
QUARTER ENDED
--------------------------------------------------------
JANUARY 30, OCTOBER 31, AUGUST 1, MAY 2,
1998 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $16,795,973 $ 9,365,822 $10,381,017 $11,919,152
Gross profit (1) . . . . . . . . . . . . . . . . . . . . 4,742,027 2,989,618 3,030,907 4,061,732
Net income (loss) applicable to Common Stock . . . . . . 1,037,256 (3,163,870) (2,484,298) (2,363,196)
Net income (loss) per share of Common Stock - Basic. . . $ 0.72 $ (3.70) $ (0.39) $ (0.19)
Net income (loss) per share of Common Stock - Diluted. . $ 0.23 $ (3.70) $ (0.39) $ (0.19)
Average common and common equivalent shares
outstanding. . . . . . . . . . . . . . . . . . . . . . 1,445,569 856,080 6,341,495 12,200,915
Net income (loss) per proforma weighted
average shares . . . . . . . . . . . . . . . . . . . . $ 0.25 $ (0.77) $ (0.60) $ (0.57)
Pro forma weighted average shares. . . . . . . . . . . . 4,128,860 4,128,860 4,128,860 4,128,860
</TABLE>
(1) Gross profit has been restated to reflect markdowns attributable to prior
quarters.
NOTE 13 - SUBSEQUENT EVENT
On April 17, 1998, as part of a corporate reorganization, involving the
formation of a Delaware limited partnership, the Company assigned
its judgment and cause of action against Chase to such newly formed limited
partnership. The limited partnership was formed on April 17, 1998 by two
wholly-owned subsidiaries of the Company, as the general partner and common
limited partner, and GECC, as the preferred limited partner. GECC acquired
its preferred limited partnership interest for $5.8 million or 58 cents on
the dollar. Such interest represents a contingent claim on a $10 million
portion of the potential net proceeds from the $148,575,000 judgment against
Chase. See Note 10. While the Company has no material present financial
obligation to GECC or the partnership, upon receipt of net proceeds from
Chase, or otherwise, attributable to the judgment, GECC could receive as much
as $9-10,000,000 (but in no event less than a guaranteed $3,000,000),
according to a scheduled payout with respect to its contingent claim. The
$3,000,000 minimum is cross-collateralized to the Company's indebtedness to
GECC (see Note 5) and is payable upon the sooner of the resolution of the
Chase litigation, April 17, 2003 or certain other events. The Company will
recognize a gain of $3.9 million (before transaction related expenses) in the
first quarter of fiscal 1999 and will reflect a $1.9 million (discounted at
10%) liability in the consolidated balance sheet for the minimum guarantee to
GECC.
NOTE 14 - PRO FORMA EARNINGS PER SHARE
The following table shows pro forma earnings per share calculated
assuming that the Company's emergence from bankruptcy and contemporaneous
recapitalization discussed in Notes 2 and 4 occurred at the beginning of each
period.
Pro forma weighted average shares include the Company's common stock
issued as of June 16, 1997 (856,080 common shares) and the dilutive effects
of the Series A Preferred stock (1,676,360 common shares) and the Series B
Preferred stock (1,596,420 common shares).
<TABLE>
YEAR ENDED
------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 2,
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . $(6,915,253) $(43,609,607) $(6,778,428)
Pro forma weighted average shares . . . . . 4,128,860 4,128,860 4,128,860
Net income (loss) per pro forma weighted
average shares. . . . . . . . . . . . . . $ (1.67) $ (10.56) $ (1.64)
</TABLE>
F-21
<PAGE>
<TABLE>
EXHIBIT INDEX
PAGE
----
<S> <C> <C>
2.1 Disclosure Statement, including Joint Plan of
Reorganization, as amended. (F)
3.1 Restated Certificate of Incorporation. (F)
3.2 Amended and Restated Bylaws. (F)
4.1 Certificate of Designation for Series A Preferred Stock. (F)
4.2 Certificate of Designation for Series B Preferred Stock. (F)
10.1 Stock Option Plan. (F)
10.2 Loan with General Electric Capital Corporation (F)
10.3 Note and Security Documents with General Electric Capital
Corporation. (F)
10.4 Certificate of Corporate Resolution Adopting the Company
401K Profit Sharing Plan and Trust. (B)
10.5 Partnership Agreement dated April 17, 1998 (H)
10.6 Guaranty Agreement dated April 17, 1998 (H)
10.7 Assignment and Transfer of Judgment and Cause of Action
dated April 17, 1998 (H)
10.8 Second Amendment to the Revolving Credit Agreement dated
December 22, 1997 (H)
10.9 Third Amendment to the Revolving Credit Agreement dated
February 15, 1998 (H)
10.10 Fourth Amendment to the Revolving Credit Agreement dated
April 17, 1998 (H)
99.1 The Order entered by the Court on March 19, 1998 and related
motion. See Item 5. Conversion of Series B Preferred Stock.
(H)
99.2 The Judgment entered by the court on April 6, 1998 against
certain defendants. See Item 3. Legal Proceedings. (H)
18. Change in Accounting Principles. (D)
21. Subsidiaries of the Registrant. (H)
<PAGE>
23. Consent of Deloitte & Touche LLP (H)
25. Power of attorney appears after signature page in this
report on Form 10-K.
27. Financial Data Schedule (H)
- ------------------
(A) Contained in exhibits to the Registrant's Registration Statement No.
33-48216 on Form S-4 filed with the Securities and Exchange Commission
on July 28, 1992.
(B) Contained in exhibits to the quarterly report on Form 10-Q for the
quarter ended August 3, 1990.
(C) Contained in exhibits to the Annual Report on Form 10-K for the
fiscal year ended January 29, 1993.
(D) Contained in exhibits to the Annual Report on Form 10-K for the fiscal
year ended January 28, 1994.
(E) Contained in exhibits to the current report on Form 8-K filed April
12, 1995.
(F) Contained in exhibits to Registration Statement No. 333-25061 on Form
S-1 filed with the Securities and Exchange Commission on April 11,
1997.
(G) Contained in exhibits to Amendment No. 1 to Registration Statement No.
333-25061 on Form S-1 filed with the Securities and Exchange
Commission on June 11, 1997.
(H) Filed herewith.
</TABLE>
<PAGE>
EXHIBIT 10.5
AGREEMENT OF LIMITED PARTNERSHIP
OF
W3 L.P.
DATED APRIL 17, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I Definitions; General Provisions 1
Section 1.1 Definitions 1
Section 1.2 Partnership Organization and Name 3
Section 1.3 Fiscal Year 4
Section 1.4 Registered Office and Agent 4
Section 1.5 Purpose of the Partnership 4
ARTICLE II Management of Partnership 4
Section 2.1 Management 4
Section 2.2 Authority of General Partner 4
Section 2.3 Reliance by Third Parties 5
Section 2.4 Activities of the General Partner 5
Section 2.5 Indemnification of Indemnified Persons 5
Section 2.6 Payment of Costs and Expenses 6
Section 2.7 Compensation to General Partner 6
Section 2.8 Covenants 6
ARTICLE III Contributions; Distributions; Tax Allocations 8
Section 3.1 Contributions 8
Section 3.2 Distributions 9
Section 3.3 Tax Allocations 9
ARTICLE IV Partnership Composition 9
Section 4.1 Assignments 9
Section 4.2 No Withdrawal of General Partner 10
Section 4.3 Removal of General Partner 10
Section 4.4 Admission of New Partners 10
ARTICLE V Duration and Termination of Partnership 10
Section 5.1 Duration and Event of Withdrawal 10
Section 5.2 Termination 11
ARTICLE VI Representations and Warranties of the General
Partner and LOT$OFF 11
Section 6.1 Due Organization 12
Section 6.2 Due Execution; NonContravention; Enforceability 12
Section 6.3 No Liens 12
Section 6.4 [Intentionally Omitted] 12
Section 6.5 Judgment 12
Section 6.6 Complete and Accurate Information 12
ARTICLE VII Representations and Warranties of the
Preferred Limited Partner 13
Section 7.1 Investment Purpose 13
Section 7.2 Transfer Restriction 13
Section 7.3 Knowledgeable Investor 13
Section 7.4 Accredited Investor 13
Section 7.5 No Public Solicitation 13
Section 7.6 Due Diligence 13
ARTICLE VIII Tax Returns; Reports to Partners 14
Section 8.1 Independent Accountants 14
Section 8.2 Filing of Tax Returns 14
Section 8.3 Tax Matters Partner 14
Section 8.4 Financial Statements: Statements of Account 14
Section 8.5 Annual Reports to Partners 14
ARTICLE IX Miscellaneous 15
Section 9.1 General 15
Section 9.2 Amendments 15
Section 9.3 Notices 15
Section 9.4 Headings 15
Section 9.5 Construction; Severability 15
Section 9.6 Governing Law 16
<PAGE>
Section 9.7 Confidentiality 16
SCHEDULE I PARTNERS
SCHEDULE II CONTRIBUTIONS
SCHEDULE III PREFERENTIAL DISTRIBUTION
</TABLE>
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
This Agreement of Limited Partnership (as the same may hereafter be
modified in accordance with the provisions hereof, this "Agreement") is made
as of the 17th day of April, 1998 by and among Giant Sequoia Corporation (the
"General Partner"), a Delaware corporation having an office at 1201 Austin
Highway, Suite 116, San Antonio, Texas 78209, as general partner, and those
Persons (as defined below) set forth on Schedule I hereto as the limited
partners (collectively, the "Limited Partners"), and provides for the
organization, governance and operation of W3 L.P., a limited partnership (the
"Partnership") pursuant to the provisions of the Delaware Revised Uniform
Limited Partnership Law, as heretofore or hereafter amended (the "Partnership
Law"), and pursuant to the terms and provisions of this Agreement. All
capitalized terms used herein and not otherwise defined shall have the
meanings assigned to them in Section 1.1 below.
W I T N E S S E T H :
WHEREAS, the Partners wish to form a limited partnership for the purpose
of owning, holding and supporting the Judgment and the Cause of Action;
NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Partners hereby agree as
follows:
ARTICLE I
Definitions; General Provisions
Section 1.1 Definitions. For the purposes of this Agreement,
capitalized terms used herein and not otherwise defined shall have the
following meanings:
(a) "50-OFF" or "50-OFF Stores, Inc." shall mean LOT$OFF.
(b) "Affiliate" shall mean, with reference to any Person, a Person
which directly or indirectly, controls, is controlled by or is under common
control with such Person. The term "control," as used herein with respect to
any Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise.
In no event shall any Limited Partner be deemed an Affiliate of the
Partnership as a result of it being a Limited Partner.
(c) "Assignment Agreement" shall mean the Pledge of Partnership
Interest, dated as of April 17, 1998, by the General Partner and the Common
Limited Partner in favor of GECC.
(d) "Cause of Action" shall mean the cause of action which LOT$OFF
has or may have against The Chase Manhattan Bank ("Chase") arising from the
transactions and events which were the basis for the Lawsuit.
(e) "Common Limited Partner" shall mean the Person set forth on
Schedule I hereto who holds a common limited partnership interest in the
Partnership as indicated on such Schedule.
(f) "Contractual Obligation" shall mean, with respect to any
Person, any provision of any debt security or of any preferred stock or other
equity interest issued by such Person or of any contract, agreement,
instrument, arrangement, understanding or other undertaking (in each case,
whether oral, written or otherwise) to which such Person is a party or by
which it or any of its property or assets is bound.
(g) "Contribution" shall mean, with respect to each Partner, the
contribution listed as such opposite its name on Schedule II attached hereto
and made a part hereof.
<PAGE>
(h) "Fourth Amendment" shall mean the Fourth Amendment to Revolving
Credit Agreement, dated as of April 17, 1998.
(i) "Indebtedness" shall mean, with respect to any Person, all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property, assets or services, (iv) all capital lease obligations of such
Person, (v) all obligations of such Person in respect of letters of credit,
bankers' acceptances or similar instruments, (vi) all Indebtedness of others
secured by a Lien on any property or asset of such Person, whether or not such
Indebtedness is assumed by such Person, (vii) all contingent obligations of
such Person, (viii) all liabilities of such Person under any interest rate
cap, swap or collar agreements, foreign currency exchange agreements and other
hedging agreements or arrangements and (ix) all obligations of such Person to
purchase investments which arise out of or in connection with the sale of the
same or substantially similar investments or other similar transactions having
the same economic effect or all obligations of such Person incurred in
connection with any security lending transactions.
(j) "Judgment" shall mean the judgment in favor of LOT$OFF and
against Chase entered on December 4, 1997 by the United States District Court
for the Western District of Texas, San Antonio Division (the "District Court")
in the Lawsuit. On February 19, 1998, an order was entered by the District
Court denying all post-trial motions by Chase. Chase has filed a notice of
appeal with respect to the Judgment.
(k) "Lawsuit" shall mean that action from which the Judgment was
obtained in the United States District Court for the Western District of
Texas, San Antonio Division, order styled "50-OFF Stores, Inc. v. Banque
Paribas (Suisse) S.A., et al" (Docket No. SA-95-CA-0159).
(l) "Lien" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, encumbrance, lien (statutory or other) or
preference, priority or other security interest or preferential arrangement of
any kind or nature whatsoever.
(m) "Limited Partners" shall mean the Common Limited Partner and
the Preferred Limited Partner.
(n) "LOT$OFF" shall mean LOT$OFF Corporation, a Delaware
corporation and the sole shareholder of the General Partner.
(o) "Net Proceeds" shall mean any and all Proceeds from the
Judgment and/or the Cause of Action, net of all contingency fees paid or owing
to counsel for LOT$OFF upon receipt of such Proceeds, including the
reimbursement to such counsel of related litigation expenses now owing to or
hereafter incurred by such counsel, such related litigation expenses not to
exceed $1,000,000 without the prior written consent of the Preferred Limited
Partner.
(p) "Partner" shall mean any or each or all, as the case may be, of
the General Partner and the Limited Partners.
(q) "Permitted Liens" shall mean the following encumbrances and
claims: (i) liens in favor of General Electric Capital Corporation ("GECC")
under LOT$OFF's $15,000,000 Revolving Credit Agreement with GECC, dated as of
June 16, 1997 (as amended, the "Credit Agreement"), and pursuant to the
Security Agreement and the Assignment Agreement; (ii) the Series B Preferred
Stock Lien and the Class 7 Lien (as those terms are defined in 50-OFF Stores,
Inc.'s Joint Plan of Reorganization, as Amended and Modified, dated as of
March 27, 1997) and (iii) all contingent fee interests and claims of counsel
(including, without limitation, Akin, Gump, Strauss, Hauer & Feld, L.L.P.),
including claims for reimbursement of expenses now owing to or hereafter
incurred by such counsel not to exceed $1,000,000 without the prior written
consent of the Preferred Limited Partner.
<PAGE>
(r) "Person" shall mean an individual, partnership, corporation,
limited liability company, trust, unincorporated association or any other
legal entity.
(s) "Preferential Distribution" shall mean the full amount of the
preferential distribution to which the Preferred Limited Partner is entitled
under this Agreement, as set forth on Schedule III hereto.
(t) "Preferred Limited Partner" shall mean the Person set forth on
Schedule I hereto who holds a preferred limited partnership interest in the
Partnership as indicated on such Schedule.
(u) "Proceeds" shall mean any and all proceeds from the Judgment
and/or the Cause of Action, including, but not limited to, proceeds pursuant
to a final, non-appealable judgment or settlement of the Lawsuit based on or
arising out of the Cause of Action, or any foreclosure on the Judgment or the
Cause of Action by any Person who holds a Lien on such Judgment or Cause of
Action, and including, without limitations all interest thereon.
(v) "Security Agreement" shall mean the Security Agreement, dated
as of April 17, 1998, by the General Partner and the Partnership in favor of
GECC.
Section 1.2 Partnership Organization and Name. The Partners hereby
organize the Partnership as a limited partnership pursuant to the Partnership
Law. The General Partner shall have the right, upon notice to and consent of
the Limited Partners, to change the name of the Partnership and, in connection
therewith, may execute and file such amendments to this Agreement, and such
other documentation, as shall be necessary or desirable to effect such name
change. Upon the dissolution and termination of the Partnership, the General
Partner shall retain all rights with respect to the name of the Partnership
and the use of such name.
Section 1.3 Fiscal Year. The fiscal year of the Partnership ("Fiscal
Year") shall end on the Friday closest to January 31st of each year.
Notwithstanding the foregoing, if the General Partner shall determine that a
change in the Fiscal Year of the Partnership would be in the best interest of
the Partnership, the General Partner shall be entitled, upon notice to the
Limited Partners, to make such a change without the consent of the Limited
Partners.
Section 1.4 Registered Office and Agent. The principal office of the
Partnership shall be 1201 Austin Highway, Suite 116, San Antonio, Texas 78209,
or such other place as may from time to time be designated by the General
Partner. The registered office of the Partnership shall be c/o The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, Delaware 19801, or such other place as may from time to time be
designated by the General Partner. The agent for service of process upon the
Partnership within the State of Delaware shall be c/o The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801, or such other agent as may from time to time be designated by the
General Partner.
Section 1.5 Purpose of the Partnership. The Partnership is organized
for the purpose of holding, owning and supporting the Judgment and the Cause
of Action and making distributions to the Partners of the Net Proceeds from
such Judgment and Cause of Action, in accordance with this Agreement.
ARTICLE II
Management of Partnership
Section 2.1 Management. Subject to the further express provisions of
this Agreement, the management of the Partnership shall be vested exclusively
in the General Partner. The Limited Partners shall have no part in the
management of the Partnership, and shall have no authority or right in their
capacity as Limited Partners to act on behalf of the Partnership in connection
with any matter, including, without limitation, any settlement of the Lawsuit.
Section 2.2 Authority of General Partner. Without limiting the
provisions of Section 2.1, but subject to the further provisions of this Article
2, the General Partner shall have the power by itself on behalf and in the name
<PAGE>
of the Partnership, without the consent of the Limited Partners (except as
otherwise explicitly provided in this Agreement), to carry out any and all of
the objectives and purposes of the Partnership set forth in Section 1.5, to
support, pursue, administer and dispose of the Judgment and the Cause of
Action, and to perform all acts and enter into and perform all contracts and
other undertakings which it may deem necessary or advisable in connection
therewith, including the power to:
(a) open, maintain and close bank accounts and draw checks or other
orders for the payment of monies;
(b) make such elections under the Internal Revenue Code of 1986, as
amended (the "Code"), and other relevant tax laws (whether federal, state,
local or foreign) as to the treatment of items of Partnership income, gain,
loss, deduction and credit, and as to all other relevant matters, as the
General Partner deems necessary or appropriate, determinations of which items
of cash outlay are to be capitalized or treated as current expenses and
selection of the method of accounting and bookkeeping procedures to be used;
(c) deposit, withdraw, pay, retain and distribute the Partnership's
funds in a manner consistent with the provisions of this Agreement; and
(d) authorize any officer, director, employee or other agent of the
General Partner, or any employee or agent of the Partnership, to act for and
on behalf of the Partnership in any or all of the foregoing matters and all
matters incidental thereto as fully as if such Person were the General Partner.
Section 2.3 Reliance by Third Parties. Any Person dealing with the
Partnership shall be conclusively protected in relying upon the certificate of
the General Partner to the effect that it is then acting as General Partner,
or in accepting any instrument signed by the General Partner in the name and
on behalf of the Partnership.
Section 2.4 Activities of the General Partner.
(a) The officers, directors, employees and agents of the General
Partner may perform services for Persons other than the Partnership; provided,
however, that the General Partner shall cause its employees, officers,
directors and agents, if any, to devote so much of their time and attention to
the affairs of the Partnership as is reasonably necessary to enable the
General Partner to perform its responsibilities in respect of the
Partnership's business.
(b) Nothing herein contained shall be deemed to preclude the
officers, directors, agents and employees of the General Partner from engaging
directly or indirectly in any other business and from possessing interests in
any other business or businesses.
Section 2.5 Indemnification of Indemnified Persons.
(a) The Partnership, out of its own assets and not out of the
assets of any Limited Partner, shall indemnify and hold harmless each of the
Limited Partners and the shareholders, constituent partners (direct or
indirect), officers, directors, employees, agents and Affiliates of such
Limited Partners (and of such Affiliates) and the legal representatives of
each of the foregoing (collectively, the "Indemnified Persons"), from and
against any loss, expense, judgment, settlement cost, fee and related expenses
(including attorneys' fees and expenses), costs or damages arising out of or
in connection with any act taken or omitted to be taken in respect of the
affairs of the Partnership (including any such act or failure which is
negligent), unless such act or omission resulted from or was attributable to
such Indemnified Person's willful misconduct, bad faith, gross negligence,
violation of law or violation of any provision of this Agreement. The
termination of any action, suit or proceeding by settlement shall not, of
itself, create a presumption that an Indemnified Person did not act in good
faith or was guilty of willful misconduct, bad faith, gross negligence, a
violation of law or a violation of any provision of this Agreement. The
Partnership shall advance to any Indemnified Person reasonable attorneys' fees
and other costs and expenses incurred in connection with the defense of any
action or proceeding which arises out of conduct which is the subject of the
indemnification
<PAGE>
provided hereunder; provided that each Indemnified Person shall agree as a
condition to receiving such advances, that in the event such Indemnified
Person receives any such advance, such Indemnified Person shall reimburse the
Partnership for such advance if it shall be judicially determined, in a final,
non-appealable judgment, that such Indemnified Person was not entitled to
indemnification under this Section 2.5.
(b) Notwithstanding any of the foregoing to the contrary, the
provisions of this Section 2.5 shall not be construed so as to provide for the
indemnification of any Indemnified Person for any liability to the extent (but
only to the extent) that such indemnification would be in violation of
applicable law, but shall be construed so as to effectuate the provisions of
this Section 2.5 to the fullest extent permitted by law.
Section 2.6 Payment of Costs and Expenses. The General Partner shall
pay or cause to be paid all expenses incurred in connection with the business
of the Partnership (including, without limitation, legal, auditors, and tax
accountants' fees and expenses, the cost of complying with applicable laws and
regulations, costs associated with the settlement of disputes, the cost of
preparing and making documentary filings, insurance premiums, taxes payable by
the Partnership and the cost of preparing and distributing reports and
financial statements).
Section 2.7 Compensation to General Partner. Neither the General
Partner nor any Affiliate of the General Partner shall be entitled to any
compensation or reimbursement for services rendered by it to the Partnership
or for costs incurred or time expended by it on behalf of the Partnership
(including, without limitation, any expenses paid by the General Partner
pursuant to Section 2.6 hereof) until after the Preferred Limited Partner has
received the full amount of the Preferential Distribution due to it under this
Agreement.
Section 2.8 Covenants. The General Partner hereby covenants and
agrees that unless the Limited Partners otherwise consent in writing, it
shall, and it shall cause the Partnership to:
(a) Maintain its own deposit account or accounts, separate from
those of any Affiliate, with commercial banking institutions and ensure that
the funds of the Partnership will not be diverted to any other Person or for
uses other than the stated purposes of the Partnership, and not commingle such
funds with the funds of the General Partner;
(b) To the extent that it shares the same officers or other
employees as any of its Partners or Affiliates, fairly allocate the salaries
of and the expenses related to providing benefits to such officers and other
employees among such entities, with each such entity bearing its fair share of
the salary and benefit costs associated with all such common officers and
employees;
(c) Refrain from entering into any Contractual Obligation, whether
currently existing or hereafter entered into, except as otherwise expressly
permitted in this Agreement and in connection with the support of the Lawsuit
against Chase; provided, however, the aggregate amount payable under all such
Contractual Obligations not expressly permitted hereunder shall not exceed
$1,000,000;
(d) Issue separate financial statements from those of any
Affiliate, prepared not less frequently than annually and prepared in
accordance with GAAP;
(e) Conduct its affairs in its own name and strictly in accordance
with this Agreement and observe all necessary, appropriate and customary
partnership formalities, including, but not limited to, approving all consents
necessary to authorize actions taken or to be taken, and maintaining accurate
and separate books, records and accounts, including, but not limited to,
payroll and affiliated transaction accounts;
(f) Refrain from assuming or guaranteeing any liabilities of any
Affiliate thereof other than pursuant to the Security Agreement and the
Assignment Agreement.
<PAGE>
(g) Take, or refrain from taking, as the case may be, all actions
that are necessary to be taken or not to be taken in order to ensure that the
Partnership does not become subject to any bankruptcy or bankruptcy related
proceedings;
(h) Except for (i) the Contributions hereunder, (ii) in connection
with the Security Agreement and the Assignment Agreement, and (iii) as
otherwise expressly provided in this Agreement, not sell, pledge, assign or
otherwise transfer to any Person, or create, incur, assume or suffer to exist
any Lien upon any of its property, assets or revenues, whether now owned or
hereafter acquired, and including, without limitation, the Judgment or the
Cause of Action, except for the Permitted Liens;
(i) Except as otherwise expressly provided in this Agreement, not
become or remain liable, directly or contingently, in connection with any
Indebtedness or other liability of any other Person, whether by guarantee,
endorsement (other than endorsements of negotiable instruments for deposit or
collection in the ordinary course of business), agreement to purchase or
repurchase, agreement to supply or advance funds, or otherwise;
(j) Not enter into any merger, consolidation or amalgamation, or
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or make any material change in its present method of conducting
business, or convey, sell, lease, assign, transfer or otherwise dispose of,
all or any portion of the Judgment or the Cause of Action, except to the
extent that such conveyance, sale, lease, assignment, transfer or other
disposition is (i) pursuant to the Security Agreement and Assignment
Agreement, or (ii) subject to and does not adversely affect the rights of the
Preferred Limited Partner under this Agreement;
(k) Not make any distribution in respect of any of the
Partnership's assets, either directly or indirectly, whether in cash or
property or in obligations of the Partnership, other than pursuant to this
Agreement;
(l) Not engage at any time in any business or business activity
other than the transactions contemplated by this Agreement;
(m) Not make any advance, loan, extension of credit or capital
contribution to, or purchase any stock, bonds, notes, debentures or other
securities of or any assets constituting a business unit of, or make any other
investment in, any Person;
(n) Except as otherwise expressly provided in this Agreement, not
create, incur, assume or suffer to exist any Indebtedness, except: (i)
Indebtedness representing fees, expenses and indemnities payable pursuant to
and in accordance with this Agreement, and (ii) Indebtedness for services
supplied or furnished to the Partnership in an amount not to exceed $10,000 at
any one time outstanding;
(o) Unless and until the Preferred Limited Partner has received the
full amount of the Preferential Distribution due to it under this Agreement,
not distribute more than $1,500,000 in cash from the Net Proceeds to satisfy
the Class 7 and Series B Preferred Stock Liens; and
(p) Conduct its business in a separate space within, but segregated
from, the office of any Affiliate, and maintain telephone numbers, mailing
address, stationery and other business forms that are separate and distinct
from those of any Affiliate.
ARTICLE III
Contributions; Distributions; Tax Allocations
Section 3.1 Contributions. Concurrent with the execution of this
Agreement, LOT$OFF shall contribute to the Partnership all of its right, title
and interest in and to the Judgment and the Cause of Action, pursuant to
documentation satisfactory to the Preferred Limited Partner and subject only
to the Permitted Liens, in exchange for a 99% common limited partnership
interest and 1% general partnership interest in the Partnership. Immediately
<PAGE>
thereafter, LOT$OFF shall contribute its 99% common limited partnership
interest to the Common Limited Partner and its 1% general partnership interest
to the General Partner. Concurrent with the contribution of the Judgment and
the Cause of Action by LOT$OFF to the Partnership, the Preferred Limited
Partner shall make its Contribution to the Partnership, in cash, in the amount
set forth opposite its name on Schedule II hereto, in exchange for a 100%
preferred limited partnership interest in the Partnership. To the extent
reasonably necessary, LOT$OFF agrees to execute, acknowledge and deliver, and
cause to be executed, acknowledged and delivered, such other and further
documents and take, or cause to be taken, such other action as may be
necessary to effectuate the terms of this Agreement, and to ensure the valid
transfer of the Judgment and the Cause of Action into the Partnership.
Section 3.2 Distributions. Promptly after receipt by the Partnership
of the Contribution of the Preferred Limited Partner, the total amount of such
Contribution shall be distributed in cash to the Common Limited Partner.
Within two business days after the payment of the Proceeds, the Preferential
Distribution shall be made to the Preferred Limited Partner, out of the Net
Proceeds, in cash, by wire transfer of immediately available funds, pursuant
to the formula set forth on Schedule III. Except as provided in the first
sentence of this Section 3.2, no distributions shall be made to the General
Partner or the Common Limited Partner until the Preferred Limited Partner has
received the full amount of the Preferential Distribution to which it is
entitled pursuant to Schedule III. Thereafter, all remaining amounts shall be
distributed to the General Partner and the Common Limited Partner according to
their respective common partnership interests as set forth on Schedule I.
Section 3.3 Tax Allocations. For federal income tax purposes, no
amount of income shall be allocated to the Preferred Limited Partner except to
the extent that distributions shall have been made to the Preferred Limited
Partner in excess of the amount contributed by the Preferred Limited Partner
to the Partnership, and the General Partner agrees to prepare all Partnership
tax returns in a manner consistent with the foregoing. Any loss of the
Partnership shall be allocated in the manner that as closely as possible
results in the Partners' capital accounts being equal to the distributions
they would receive on termination of the Partnership. Any income not
allocable to the Preferred Limited Partner shall be allocated among the
remaining Partners in accordance with their respective common partnership
interests.
ARTICLE IV
Partnership Composition
Section 4.1 Assignments. Unless otherwise provided in this Agreement,
except pursuant to the Security Agreement or the Assignment Agreement or with
the express written consent of the Limited Partners, which may be withheld in
their sole and absolute discretion, and, in each case (if applicable), subject
to compliance with applicable securities laws, the General Partner may not
assign, sell, transfer, pledge, hypothecate or otherwise dispose of all or any
of the portion of its interest in the Partnership or any interest (including a
beneficial interest) in such interest. Unless otherwise provided in this
Agreement, except pursuant to the Assignment Agreement or with the express
written consent of the General Partner, which may not be unreasonably withheld
or delayed, and subject to compliance with applicable securities laws, none of
the Limited Partners may assign, sell, transfer, pledge, hypothecate or
otherwise dispose of all or any portion of its interest in the Partnership or
any interest (including a beneficial interest) in such interest. Any
assignment, sale, transfer, pledge, hypothecation or other disposition made in
violation of this Section 4.1 shall be void and of no effect.
Section 4.2 No Withdrawal of General Partner. Without the prior
written consent of the Limited Partners, the General Partner shall not
withdraw or resign from the Partnership.
Section 4.3 Removal of General Partner. In the event that the General
Partner has committed gross negligence or willful misconduct in the
performance of its duties hereunder or has violated the provisions of this
Agreement and such gross negligence, willful misconduct or violation has had a
material adverse effect on the Partnership, then at the sole and absolute
discretion of the Preferred Limited Partner, the General Partner shall be
removed as general partner of the Partnership and the Limited Partners may
appoint a new general partner; provided,
<PAGE>
however, the Preferred Limited Partner shall provide the General Partner with
a notice and an opportunity to cure, if curable, such material adverse effect,
within thirty (30) days of the receipt by the General Partner of such notice.
The removed General Partner's interest in the Partnership shall be treated as
follows: (a) such interest shall be converted into a common limited
partnership interest in the Partnership and shall remain subject to the liens
under the Assignment Agreement and (b) the removed General Partner shall
retain, with respect to such common limited partnership interest, its right to
distributions under this Agreement.
Section 4.4 Admission of New Partners. Unless otherwise permitted by
this Agreement, except with the express written consent of the Limited
Partners, which may be withheld in their sole and absolute discretion, no
Person may be admitted to the Partnership as a new partner. Notwithstanding
anything to the contrary in this Agreement, one or more new common limited
partners may be admitted to the Partnership in the General Partner's
discretion, provided (i) the General Partner provides the Preferred Limited
Partner with ten (10) days prior written notice (including all documentation
to be entered into); (ii) each such new partner's interest does not adversely
affect the rights of the Preferred Limited Partner and (iii) each such new
partner agrees in writing to be bound by the terms and conditions of this
Agreement to the same extent as the existing Common Limited Partner. Each of
the Limited Partners and the General Partner hereby consent to GECC or its
agent or designee, or any other Person purchasing an interest in the
Partnership in connection with GECC's remedies under the Assignment Agreement,
being admitted as a new partner of the Partnership, subject to compliance with
clause (iii) of the preceding sentence.
ARTICLE V
Duration and Termination of Partnership
Section 5.1 Duration and Event of Withdrawal.
(a) The Partnership shall dissolve and terminate on the earliest to
occur of: (i) at any time at the election of the General Partner, upon the
receipt by the Preferred Limited Partner of the full amount of its
Preferential Distribution, in accordance with Schedule III or (ii) the date
that the General Partner becomes bankrupt or insolvent; provided, however,
that upon the occurrence of such bankruptcy or insolvency of the General
Partner, the Partnership may continue its operations if, within ninety (90)
days, the Preferred Limited Partner (or, if the Preferred Limited Partner has
received the full amount of the Preferential Distribution to which it is
entitled under this Agreement, then the Common Limited Partners) shall elect
to continue the business of the Partnership and shall elect a new general
partner for the Partnership.
(b) If a new general partner is elected as provided in Section
5.1(a), then the withdrawn General Partner's interest in the Partnership shall
automatically be converted into a common limited partnership interest therein
and the General Partner shall be entitled to retain its beneficial interest in
the Partnership with respect to such interest.
Section 5.2 Termination. Upon termination of the Partnership, the
Partnership shall wind up its affairs and the property and assets of the
Partnership shall be liquidated as promptly as possible, but in an orderly
manner so as not to involve undue sacrifice. The General Partner shall be the
liquidator to wind up the affairs of the Partnership and to continue to manage
the Partnership's assets during such winding-up; provided that if the General
Partner is removed or withdrawn, the Limited Partners may appoint another
Person to act as liquidator. Any proceeds of the sale or other disposition of
the Partnership's assets shall be applied and distributed in the following
manner and order:
(a) to the payment of the debts and liabilities of the Partnership
and the expenses of liquidation including, to the extent payable, obligations
secured by the Permitted Liens;
(b) to the setting up of any reserves which the liquidator
determines are reasonably necessary for any contingent unforeseen liabilities
or obligations of the Partnership. Such reserves may, in the discretion of
the liquidator, be paid over to an escrow agent selected by it to be held by
such escrow agent for the purpose of disbursing
<PAGE>
such reserves in payment of any of the aforementioned contingencies, and, at
the expiration of such period as the liquidator may deem advisable, to
distribute the balance thereafter remaining, if any, to the General Partner;
(c) to the payment of the Preferential Distribution to the
Preferred Limited Partner; and
(d) with respect to all remaining amounts, to the payment to the
Common Limited Partner and the General Partner in accordance with their
respective percentage interests in the Partnership.
ARTICLE VI
Representations and Warranties of
the General Partner and LOT$OFF
The General Partner and LOT$OFF hereby jointly and severally represent
and warrant to the Preferred Limited Partner as follows:
Section 6.1 Due Organization. Each of the General Partner, the Common
Limited Partner and LOT$OFF is (a) a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization and (b) is duly qualified as a foreign corporation and is in good
standing under the laws of each jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification. Each of
the General Partner, the Common Limited Partner and LOT$OFF has the requisite
corporate power and authority and the legal right to own, pledge, mortgage or
otherwise encumber and operate its properties and to conduct its business as
now, heretofore and proposed to be conducted.
Section 6.2 Due Execution; Non-Contravention; Enforceability. The
execution, delivery and performance by the General Partner, the Common Limited
Partner and LOT$OFF of this Agreement and all instruments and documents to be
delivered by such party in connection herewith and the contribution to the
Partnership of the Judgment and the Cause of Action provided for herein and in
the documentation assigning such Judgment and Cause of Action: (a) are within
the applicable party's corporate power; (b) have been duly authorized by all
necessary or proper corporate action; (c) are not in contravention of any
provision of the applicable party's constituent documents; (d) will not
violate any law or regulation, or any judgment, order or decree of any court
or governmental instrumentality; and (e) do not require the consent or
approval of, notice to or filing with any governmental authority or any other
Person other than such consents, approvals, notices or filings which have
already been obtained or made. This Agreement has been duly executed and
delivered by the General Partner, the Common Limited Partner and LOT$OFF, and
constitutes a legal, valid and binding obligation of such party, enforceable
against such party in accordance with its terms, subject to applicable
bankruptcy, insolvency, moratorium, reorganization and other similar laws
affecting creditors' rights and to equitable principles of general
applicability.
Section 6.3 No Liens. The Judgment and the Cause of Action are
contributed to the Partnership free and clear of all Liens other than the
Permitted Liens.
Section 6.4 [Intentionally Omitted]
Section 6.5 Judgment. The Judgment has been finally entered by the
District Court. The total amount of damages awarded to LOT$OFF under such
Judgment is $148,575,000.00 (plus cost of court and all interest accrued
thereon).
Section 6.6 Complete and Accurate Information. All documents
delivered by or on behalf of the General Partner, the Common Limited Partner,
LOT$OFF or any Affiliate thereof in connection with this Agreement or the
transactions contemplated hereby are true, complete and authentic in all
material respects. No representation or warranty of the General Partner, the
Common Limited Partner or LOT$OFF contained in this Agreement and no document
furnished by or on behalf of the General Partner, the Common Limited Partner,
LOT$OFF or any Affiliate
<PAGE>
thereof pursuant to this Agreement or any transaction contemplated hereby
contains an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements made,
in the context in which made, not materially false or misleading.
ARTICLE VII
Representations and Warranties of the Preferred Limited Partner
The Preferred Limited Partner hereby represents and warrants to the
General Partner and the Common Limited Partner as follows:
Section 7.1 Investment Purpose. The Preferred Limited Partner is
acquiring its interest in the Partnership solely for investment, solely for
its own account and not with a view to or for the resale or distribution
thereof in violation of applicable securities laws.
Section 7.2 Transfer Restriction. The Preferred Limited Partner may
sell or otherwise transfer its interest in the Partnership, or any portion
thereof, only if such transaction is duly registered under the Securities Act
of 1933, as amended, or if it shall have received the favorable opinion of
counsel to it, which opinion shall be reasonably satisfactory to counsel to
the Partnership, to the effect that such sale or other transfer may be made in
the absence of registration under the Securities Act of 1933, as amended, and
registration or qualification in every applicable state.
Section 7.3 Knowledgeable Investor. The Preferred Limited Partner has
not relied upon the advice of a "Purchaser Representative" (as defined in
Regulation D of the Securities Act) in evaluating the risks and merits of this
investment. The Preferred Limited Partner has the knowledge and experience to
evaluate the Partnership and the risks and merits relating thereto.
Section 7.4 Accredited Investor. The Preferred Limited Partner is an
"accredited investor" as such term is defined in Rule 501 of Regulation D
Promulgated pursuant to the Securities Act of 1933, as amended; the Preferred
Limited Partner is able to bear the economic risk of losing its entire
investment in the Partnership and understands that an investment in the
Partnership involves substantial risks including the potential liquidation of
the Partnership. The Preferred Limited Partner has the power and authority to
enter into this Agreement. This Agreement is a valid and binding obligation
of the Preferred Limited Partner and the execution and delivery of, and
performance under this Agreement does not and shall not contravene or result
in a default under any bylaw, charter, rule, regulation, judgment or agreement
applicable to the Preferred Limited Partner.
Section 7.5 No Public Solicitation. The Preferred Limited Partner has
not received any public solicitation or advertisement regarding an investment
in the Partnership and is not aware of any such public solicitation or
advertisement.
Section 7.6 Due Diligence. The Preferred Limited Partner represents
that it has been furnished by LOT$OFF during the course of this transaction
with all information regarding LOT$OFF, its Affiliates, the Judgment, the
Cause of Action, the Lawsuit and this transaction which the Preferred Limited
Partner has requested or desired to know, and that copies of all documents
requested have been made available for inspection and review. The Preferred
Limited Partner further represents that it has been afforded the opportunity
to ask questions of and receive answers from officers of LOT$OFF and its
Affiliates concerning LOT$OFF, its Affiliates, the Judgment, the Cause of
Action, the Lawsuit and this transaction.
<PAGE>
ARTICLE VIII
Tax Returns; Reports to Partners
Section 8.1 Independent Accountants. The books and records of the
Partnership shall be reviewed as of the end of each Fiscal Year by
independent certified accountants selected by the General Partner.
Section 8.2 Filing of Tax Returns. The General Partner shall prepare
and file, or cause the accountants of the Partnership to prepare and file, a
U.S. federal information tax return in compliance with Section 6031 of the
Code and any required state and local income tax and information returns for
each tax year of the Partnership.
Section 8.3 Tax Matters Partner. The General Partner shall be
designated on the Partnership's annual U.S. federal information tax return as
the tax matters partner of the Partnership (the "Tax Matters Partner") as
provided in Section 6231(a)(7) of the Code. In the event the Partnership
shall be the subject of an income tax audit by any federal, state or local
authority, to the extent the Partnership is treated as an entity for purposes
of such audit, including administrative settlement and judicial review, the
Tax Matters Partner shall be authorized to act for, and its decision shall be
final and binding upon, the Partnership and each Partner thereof. All
expenses incurred in connection with any such audit, investigation,
settlement or review shall be borne by the General Partner. The General
Partner shall promptly respond to all reasonable inquiries of any Limited
Partner with respect to any tax matters and shall, to the extent commercially
reasonable, use its best efforts to obtain all tax refunds to which the
Partnership may be entitled.
Section 8.4 Financial Statements: Statements of Account. Within
ninety (90) days after the end of each Fiscal Year, the General Partner shall
send to each Person who was a Partner in the Partnership at any time during
the Fiscal Year then ended a statement of assets, liabilities and Partners'
capital as of the end of such Fiscal Year and related audited statements of
income or loss and changes in assets, liabilities and Partners' capital. The
General Partner shall make available, from time to time, such information as
may be reasonably requested by any Limited Partner.
Section 8.5 Annual Reports to Partners. Within ninety days after the
end of each Fiscal Year, the General Partner shall prepare and mail, or cause
the Partnership's accountants to prepare and mail, to each Partner (or such
Partner's legal representatives), a report setting forth in sufficient detail
such information relating to the Partnership and its activities as shall
enable such Partner (or such Partner's legal representatives) to prepare
their respective federal, state and local income tax returns in accordance
with the laws, rules and regulations then prevailing.
ARTICLE IX
Miscellaneous
Section 9.1 General. This Agreement: (i) shall be binding on, and
inure to the benefit of, the successors, permitted assigns and legal
representatives of the Partners; and (ii) may be executed, through the use of
separate signature pages or in any number of counterparts, with the same
effect as if the parties executing such counterparts had all executed one
counterpart.
Section 9.2 Amendments. The terms and provisions of this Agreement
may be modified or amended at any time and from time to time only with the
written consent of the Limited Partners and the written consent of the
General Partner; provided, however, the General Partner may, in its own
discretion, amend this Agreement to reflect changes validly made in the
composition of the Partnership in accordance with the terms of this
Agreement. Notwithstanding any provision in this Agreement to the contrary,
no amendment to this Agreement shall increase the liability of a Limited
Partner.
<PAGE>
Section 9.3 Notices. All notices, consents, approvals and other
communications required or permitted by this Agreement shall be in writing
and (a) delivered by hand against receipt, (b) transmitted by telecopy with
transmission confirmed, (c) sent by registered or certified mail, postage
prepaid, with return receipt requested, or (d) sent by nationally-recognized
overnight courier, postage prepaid; provided that routine communications such
as reports and financial statements may be sent by first-class mail. All
notices to the Partnership and to the General Partner shall be addressed c/o
the General Partner to the General Partner's principal office. All notices
addressed to a Limited Partner shall be addressed to such Partner at the
address set forth in Schedule II. Any Partner may designate a new address by
notice to that effect given to the Partnership. Unless otherwise
specifically provided in this Agreement, a notice shall be deemed to have
been effectively given when received if received on a business day during
normal business hours and otherwise shall be effective on the next business
day. Refusal to accept delivery shall be deemed to constitute delivery at
the time so refused.
Section 9.4 Headings. The titles of the Articles and the headings of
the Sections of this Agreement are for convenience, of reference only and are
not to be considered in constructing the terms and provisions of this
Agreement.
Section 9.5 Construction; Severability. The language in all parts of
this Agreement shall in all cases be construed simply according to its fair
meaning and not strictly for or against any Limited Partner or the General
Partner. Whenever possible, the provisions of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be unenforceable or invalid
under said applicable law, such provision shall be ineffective only to the
extent of such unenforceability or invalidity, and the remaining provisions
of this Agreement shall continue to be binding and in full force and effect.
Section 9.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made wholly within such state, without regard to the conflict of
law provisions thereof.
Section 9.7 Confidentiality. Except as may be required by applicable
law or the rules of any national securities exchange or national market, none
of the General Partner, the Common Limited Partner, LOT$OFF or any Affiliate
thereof may issue a publicity release or announcement or otherwise make any
public disclosure concerning this Agreement or any of the transactions
contemplated hereby without prior approval by the Preferred Limited Partner.
If any announcement is required by law to be made by the General Partner, the
Common Limited Partner, LOT$OFF or any Affiliate thereof, prior to making
such announcement, the General Partner, the Common Limited Partner, LOT$OFF
or any Affiliate thereof, as the case may be, will deliver a draft of such
announcement to the Preferred Limited Partner as soon as practicable after
such draft has been prepared and shall give the Preferred Limited Partner
sufficient opportunity (in no event to be less than one (1) business day) to
comment thereon.
[Remainder of page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the date first set forth above.
GENERAL PARTNER:
GIANT SEQUOIA CORPORATION
By: /s/ Charles J. Fuhrmann II
--------------------------------------------
Printed Name: Charles J. Fuhrmann II
Title: President and Chief Executive Officer
COMMON LIMITED PARTNER:
MOUNTAIN LAUREL CORPORATION
By: /s/ Joan Dobrzynski
--------------------------------------------
Printed Name: Joan Dobrzynski
Title: President
PREFERRED LIMITED PARTNER:
GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Timothy C. Huban
--------------------------------------------
Printed Name: Timothy C. Huban
Title: Senior Vice President of Commercial Finance
<PAGE>
LOT$OFF hereby covenants and agrees (i) to cause the General Partner to
fulfill all of its obligations under Sections 2.8 and 3.1 of this Agreement,
and if the General Partner fails to fulfill such obligations, to fulfill such
obligations on behalf of the General Partner; (ii) that the representations
and warranties of the General Partner and LOT$OFF as set forth in Article VI
of this Agreement are joint and several; (iii) that it shall not, and shall
cause each Affiliate to not, hold itself out, or permit itself to be held
out, as having agreed to pay or be liable for the debts of the Partnership;
and (iv) to prepare its financial statements in a manner that reflects (x)
that the Judgment and the Cause of Action are owned and held by the
Partnership and (y) the interests of the Preferred Limited Partner and of
LOT$OFF's Affiliates in the Partnership.
LOT$OFF CORPORATION
By: /s/ Charles J. Fuhrmann II
--------------------------------------------
Printed Name: Charles J. Fuhrmann II
Title: President and Chief Executive Officer
<PAGE>
SCHEDULE I
PARTNERS
Preferred:
Percentage of
Type of Preferred Partnership
Name Interest Interest
General Electric Capital Corporation Limited 100%
Common:
Percentage of
Type of Common Partnership
Name Interest Interest
Mountain Laurel Corporation Limited 99%
Giant Sequoia Corporation General 1%
<PAGE>
SCHEDULE II
CONTRIBUTIONS
Name and Address Contribution
Common Limited Partner:
Mountain Laurel Corporation Contribution of the
900 Market Street Judgment and the Cause of
Suite 200 Action by LOT$OFF
Wilmington, Delaware 19801
Fax: (302) 421-7378
General Partner:
Giant Sequoia Corporation Contribution of the
1201 Austin Highway Judgment and the Cause of
Suite 116 Action by LOT$OFF
San Antonio, Texas 78209
Fax: (210) 804-4980
Preferred Limited Partner:
General Electric Capital Corporation $5,800,000
3379 Peachtree Road, N.E.
Suite 600
Atlanta, Georgia 30326
Fax: (404) 262-9034
<PAGE>
SCHEDULE III
PREFERENTIAL DISTRIBUTION
If the aggregate amount of the Then the total amount of the
Net Proceeds is: Preferential Distribution is:
Less than or equal to $1.5 million $0
Greater than $1.5 million but less 100% multiplied by the amount
than or equal to $11.5 million of Net Proceeds in excess of
$1.5 million
Greater than $11.5 million * $10 million
* In no event shall the aggregate amount of the Preferential Distribution
made to the Preferred Limited Partner exceed $10 million.
In the event that the entire Preferential Distribution occurs on or before
July 15, 1998, and if, and only if, the Proceeds received prior to that time
represent the entire settlement from the Judgment and/or Cause of Action, the
Net Proceeds will be disbursed as follows:
If the aggregate amount of the Then the total amount of the
Net Proceeds is: Preferential Distribution is:
Less than or equal to $1.5 million $0
Greater than $1.5 million but less 100% multiplied by the amount
than or equal to $10.5 million of Net Proceeds in excess of
$1.5 million
Greater than $11.5 million ** $9 million
** In no event shall the aggregate amount of the Preferential Distribution
made to the Preferred Limited Partner exceed $9 million.
<PAGE>
EXHIBIT 10.6
GUARANTY AGREEMENT
This GUARANTY AGREEMENT (this "Guaranty") is made and entered into as of
April 17, 1998, by LOT$OFF CORPORATION, a Delaware corporation (the
"Guarantor"), in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a New York
corporation having an office at 3379 Peachtree Road, N.E., Suite 600, Atlanta,
Georgia 30326 ("Lender").
W I T N E S S E T H:
WHEREAS, pursuant to and subject to the terms and conditions of that
certain $15,000,000 Revolving Credit Agreement dated as of June 16, 1997, by and
among the Guarantor, 50-OFF Texas Stores, L.P., a Texas limited partnership,
50-OFF Multistate Operations, Inc., a Nevada corporation, and 50-OFF
Operating Company, a Nevada corporation (collectively referred to as
"Borrowers", and individually as a "Borrower") and Lender (as the same may be
amended, restated, supplemented or otherwise modified from time to time, the
"Credit Agreement"), Lender has agreed, among other things, to make Advances
to Borrowers pursuant to the Credit Agreement (except as otherwise defined
herein, all other capitalized terms used herein shall have the respective
meanings given to such terms in the Credit Agreement); and
WHEREAS, Lender and Giant Sequoia Corporation, a Delaware corporation (the
"General Partner") and Mountain Laurel Corporation, a Delaware corporation (the
"Limited Partner"), each a wholly-owned Subsidiary of the Guarantor, have
entered into that certain Agreement of Limited Partnership of W(3) L.P., dated
as of April 17, 1998 (the "Partnership Agreement"), and formed W(3), L.P., a
Delaware limited partnership (the "Partnership"); and
WHEREAS, Lender has made a capital contribution to the Partnership in the
amount of $5,800,000 (the "Capital Contribution") and is the sole "Preferred
Limited Partner", as that term is defined in the Partnership Agreement, of the
Partnership; and
WHEREAS, as the "Preferred Limited Partner", Lender is entitled to receive
a preferential distribution from the Partnership as set forth in the Partnership
Agreement (the "Preferential Distribution"); and
WHEREAS, as a condition to entering into the Partnership Agreement and
making the Capital Contribution, Lender has required that the Guarantor execute
and deliver this Guaranty in favor of Lender; and
WHEREAS, the making of the Capital Contribution will result in a direct and
indirect benefit to the Guarantor;
NOW, THEREFORE, in consideration of the premises set forth above and in
order to induce Lender to execute the Partnership Agreement and make the Capital
Contribution, the Guarantor hereby agrees with Lender, for the benefit of
Lender, as follows:
SECTION 1. THE GUARANTY. The guaranty of the Guarantor hereunder is as
follows:
SECTION 1.1 Limited Guaranty of Capital Contribution. The Guarantor
hereby unconditionally and irrevocably guarantees to Lender and its successors,
endorsees, transferees and assigns, the full, prompt and complete repayment by
the Partnership to Lender of the Capital Contribution, whether pursuant to the
making of the Preferential Distribution or otherwise (the "Guaranteed
Obligation"). Notwithstanding anything to the contrary contained herein, the
maximum liability of the Guarantor under this Guaranty is limited to the
principal amount of $3,000,000, plus all costs (including, without limitation,
attorney's fees and expenses) incurred by Lender in collecting any amount due
Lender under this Guaranty or in prosecuting any action against the Partnership,
the Guarantor or any other guarantor with respect to all or any part of the
Guaranteed Obligation. For example,
<PAGE>
<TABLE>
If the aggregate Then the maximum
Preferential Distribution liability of Guarantor
received by Lender is: under this Guaranty is:
---------------------- -----------------------
<S> <C>
$00.00 $3,000,000*
$2,000,000.00 $3,000,000*
$3,000,000.00 $2,800,000*
$4,000,000.00 $1,800,000*
$5,800,000.00 $00.00
</TABLE>
* plus all costs of collection.
SECTION 1.2 Absolute Guarantee of Payment and Performance. The Guarantor
agrees that this Guaranty is a guaranty of payment and performance and not of
collection, and that its obligations under this Guaranty shall be joint and
several with every other guarantor and any other Persons which may at any time
or from time to time be or become directly or indirectly financially responsible
to Lender with respect to the Guaranteed Obligation and shall be under all
circumstances primary, absolute and unconditional, irrespective of, and
unaffected by:
(a) the genuineness, validity, regularity, enforceability or any future
amendment of, or change in this Guaranty, the Partnership Agreement or other
agreement, document or instrument to which the Partnership or the Guarantor is
or may become a party;
(b) the absence of any action to enforce this Guaranty or the Partnership
Agreement, or the waiver or consent by Lender with respect to any of the
provisions thereof;
(c) the existence, value or condition of, or failure of Lender to perfect
its Lien against any security for the Guaranteed Obligation or any action, or
the absence of any action, by Lender in respect thereof (including, without
limitation, the release of any such security);
(d) any bankruptcy, insolvency, reorganization, arrangement, adjustment,
composition, liquidation or the like of the Partnership or the Guarantor;
(e) any merger or consolidation of the Partnership or the Guarantor into
or with any other Person, or any sale, lease or transfer of any or all of the
assets of the Partnership or the Guarantor to any other Person;
(f) any circumstance other than full and final payment which might
constitute a defense available to, or a discharge of, the Partnership or the
Guarantor;
(g) absence of any notice to, or knowledge by, the Guarantor of the
existence or occurrence of any of the matters or events set forth in the
foregoing subdivisions (a) through (f);
<PAGE>
(h) any sale, transfer or other disposition by the Guarantor of any stock
of the General Partner or the Limited Partner, or any sale, transfer or other
disposition by the General Partner or the Limited Partner of any interest in the
Partnership; or
(i) the amount of the Preferential Distribution;
it being agreed by the Guarantor that its obligations under this Guaranty
shall not be discharged until (i) the payment in full of the Guaranteed
Obligation (whether by payment from the Guarantor pursuant to this Guaranty or
receipt by Lender of the Preferential Distribution in an aggregate amount equal
to the Capital Contribution) or (ii) the release in writing of the Guarantor by
Lender of the Guarantor's obligations hereunder, whichever shall occur first.
The Guarantor shall be regarded, and shall be in the same position, as principal
debtor with respect to the Guaranteed Obligation and specifically agrees that,
notwithstanding any discharge of the Partnership or any other Person or the
operation of any provision of the Bankruptcy Code with respect to the Guaranteed
Obligation or any such Persons, the Guarantor shall be fully responsible for
paying the Guaranteed Obligation and all costs of enforcement which may at any
time accrue with respect to the Guaranteed Obligation. The Guarantor expressly
waives all rights it may have now or in the future under any statute, or at
common law, or at law or in equity, or otherwise, to compel Lender to proceed in
respect of the Guaranteed Obligation against the Partnership or any other Person
or against any security for the payment and performance of the Guaranteed
Obligation before proceeding against, or as a condition to proceeding against,
the Guarantor. The Guarantor agrees that any notice or directive given at any
time to Lender which is inconsistent with the waiver in the immediately
preceding sentence shall be null and void and may be ignored, and, in addition,
may not be pleaded or introduced as evidence in any litigation relating to this
Guaranty for the reason that such pleading or introduction would be at variance
with the written terms of this Guaranty unless Lender has specifically agreed
otherwise in writing. It is agreed between the Guarantor and Lender that the
foregoing waivers are of the essence of the transaction contemplated by the
Partnership Agreement and that, but for this Guaranty and such waivers, Lender
would decline to execute the Partnership Agreement and make the Capital
Contribution.
SECTION 1.3 Enforcement of Guaranty. In no event shall Lender have any
obligation (although it is entitled, at its option) to proceed against the
Partnership or any other Person or any real or personal property pledged to
secure the Guaranteed Obligation before seeking satisfaction from the Guarantor,
and Lender may proceed, prior or subsequent to, or simultaneously with, the
enforcement of Lender's rights hereunder, to exercise any right or remedy which
it may have against any property, real or personal, as a result of any Lien it
or they may have as security for all or any portion of the Guaranteed
Obligation.
SECTION 1.4 Events of Default. Upon the occurrence of any of the
following events (each, an "Event of Default"), Lender may, without notice to
the Partnership or the Guarantor, declare the Guaranteed Obligation, whether or
not then due, immediately due and payable by the Guarantor under the Guaranty,
and Lender shall be entitled to enforce the obligations of the Guarantor
hereunder:
(a) There shall occur any Event of Default (as defined in the Credit
Agreement) under the Credit Agreement;
(b) Any of the assets of the Partnership shall be attached, seized,
levied upon or subjected to a writ or distress warrant, or come within the
possession of any receiver, trustee, custodian or assignee for the benefit of
creditors of the Partnership and shall remain unstayed or undismissed for
thirty (30) consecutive days; or any Person other than the Partnership shall
apply for the appointment of a receiver, trustee or custodian for the
Partnership's assets and shall remain unstayed or undismissed for thirty (30)
consecutive days; or the Partnership shall have concealed, removed or
permitted to be concealed or removed, any part of its property, with intent
to hinder, delay or defraud its creditors or any of them or made or suffered
a transfer of any of its property or the incurring of an obligation which may
be fraudulent under any bankruptcy, fraudulent conveyance or other similar
law;
(c) A case or proceeding shall have been commenced against the
Partnership in a court having competent jurisdiction seeking a decree or
order (i) under the Bankruptcy Code, as now constituted or hereafter
<PAGE>
amended, or any other applicable federal, state or foreign bankruptcy or
other similar law, (ii) appointing a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) of the Partnership or
of any substantial part of its properties, or (iii) ordering the winding up
or liquidation of the affairs of the Partnership and such case or proceeding
shall remain undismissed or unstayed for sixty (60) consecutive days or such
court shall enter a decree or order granting the relief sought in such case
or proceeding;
(d) The Partnership (i) shall file a petition seeking relief under the
Bankruptcy Code, as now constituted or hereafter amended, or any other
applicable federal, state or foreign bankruptcy or other similar law, (ii) shall
consent to the institution of proceedings thereunder or to the filing of any
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee or sequestrator (or similar official) of
the Partnership or of any substantial part of the Partnership's properties,
(iii) shall fail generally to pay its debts as such debts become due, or (iv)
shall take any corporate action in furtherance of any such action;
(e) The General Partner or the Limited Partner shall sell, assign,
transfer, convey, pledge or otherwise encumber any of its partnership interests
in the Partnership (except pursuant to the Loan Documents);
(f) There shall occur a sale, transfer or other disposition of, or a Lien
or other encumbrance shall be placed upon, any of the Judgment, the Cause of
Action or the Proceeds(each as defined in the Partnership Agreement) other than
Permitted Liens (as defined in the Partnership Agreement);
(g) The Judgment (as defined in the Partnership Agreement) shall be
reversed by any final, non-appealable judgment or order of any court;
(h) There shall occur any material violation or default by the
Partnership, the General Partner or the Limited Partner under the Partnership
Agreement which adversely affects the Partnership or the rights of the Preferred
Limited Partner (as defined in the Partnership Agreement);
(i) The Guarantor fails to perform any of its material obligations under
this Guaranty or any agreement under which security is given therefor, or this
Guaranty is revoked or terminated by the Guarantor, or any representation or
warranty made or given by the Guarantor to Lender proves to be false or
misleading in any material respect; or
(j) The Partnership shall not have repaid to Lender the full amount of
the Capital Contribution (whether pursuant to the making of the Preferential
Distribution or otherwise) on or before April 17, 2003, or the Partnership
shall have received all Proceeds (as defined in the Partnership Agreement),
and such Proceeds shall result in an aggregate Preferential Distribution to
Lender in an amount less than the Capital Contribution.
SECTION 1.5 Waiver. The Guarantor hereby waives diligence, presentment
and demand (whether for nonpayment or protest or of acceptance, maturity,
extension of time, change in nature or form of the Guaranteed Obligation,
acceptance of further security, release of further security, composition or
agreement arrived at as to the amount of, or the terms of, the Guaranteed
Obligation, notice of adverse change in the Partnership's financial condition or
any other fact which might materially increase the risk to the Guarantor) with
respect to the Guaranteed Obligation or all other demands whatsoever and waives
the benefit of all provisions of law which are or might be in conflict with the
terms of this Guaranty. Lender will use reasonable efforts to mitigate the
damages resulting from any default under the Guaranteed Obligation.
Notwithstanding the foregoing, however, the Guarantor hereby waives any defense
based on the failure of Lender or any holder of the Guaranteed Obligation to
mitigate the damages resulting from any default with respect to the Guaranteed
Obligation. The Guarantor represents, warrants and agrees that, as of the date
of this Guaranty, its obligations under this Guaranty are not subject to any
offsets or defenses of any kind against Lender, the Partnership or any other
Person that executes the Partnership Agreement. The Guarantor hereby waives, to
the extent permitted by applicable law: (a) defenses and offsets of any kind
which may arise in the future against Lender, the Partnership or any other
Person that executes the Partnership Agreement, and (b) the right to interpose
any counterclaim or cross-claim, except to the extent that the failure to assert
any such counterclaim or
<PAGE>
cross-claim would permanently preclude the prosecution of or recovery upon
same; provided that the Guarantor agrees that any such counterclaim will not
be used as an offset against any recovery by Lender hereunder.
SECTION 1.6 Benefit of Guaranty. The provisions of this Guaranty are
for the benefit of Lender and its respective successors, transferees, endorsees
and assigns. In the event all or any part of the Guaranteed Obligation is
transferred, endorsed or assigned by Lender to any Person or Persons, any
reference to "Lender" herein shall be deemed to refer equally to such Person or
Persons.
SECTION 1.7 Modification of Obligations. If Lender shall at any time or
from time to time, with or without the consent of, or notice to, the Guarantor:
(a) change or extend the manner, place or terms of payment of, or
renew or alter all or any portion of, the Guaranteed Obligation;
(b) take any action under or in respect of the Partnership Agreement in
the exercise of any remedy, power or privilege contained therein or available to
it at law, equity or otherwise, or waive or refrain from exercising any such
remedies, powers or privileges;
(c) amend or modify, in any manner whatsoever, the Partnership Agreement;
(d) extend or waive the time for the Guarantor's or any other Person's
performance of, or compliance with, any term, covenant or agreement on the
Guarantor's or any other Person's part to be performed or observed under the
Partnership Agreement, or waive such performance or compliance or consent to a
failure of, or departure from, such performance or compliance;
(e) take and hold security or collateral for the payment of the
Guaranteed Obligation, or sell, exchange, release, dispose of, or otherwise
deal with, any property pledged, mortgaged or conveyed, or in which Lender
has been granted a Lien, to secure any indebtedness of the Guarantor or the
Partnership to Lender;
(f) release or limit the liability of anyone who may be liable in any
manner for the payment of any amounts owed by the Guarantor or the Partnership
to Lender;
(g) modify or terminate the terms of any intercreditor or subordination
agreement pursuant to which claims of other creditors of the Guarantor or the
Partnership are subordinated to the claims of Lender; and/or
(h) apply any sums by whomever paid or however realized to any amounts
owing by the Guarantor or the Partnership to Lender in such manner as Lender
shall determine in its discretion;
then Lender shall not incur any liability to the Guarantor pursuant hereto
as a result thereof and no such action shall impair or otherwise affect or
release the obligations of the Guarantor under this Guaranty.
SECTION 1.8 Reinstatement. This Guaranty shall remain in full force and
effect and continue to be effective in the event any petition is filed by or
against the Guarantor for liquidation or reorganization, in the event the
Guarantor becomes insolvent or makes an assignment for the benefit of creditors
or in the event a receiver or trustee is appointed for all or any significant
part of the Guarantor's assets, and shall continue to be effective or be
reinstated, as the case may be, if at any time payment and performance of the
Guaranteed Obligation, or any part thereof, is, pursuant to applicable law,
rescinded or reduced in amount, or must otherwise be restored or returned by
Lender, whether as a "voidable preference," "fraudulent conveyance," or
otherwise, all as though such payment or performance had not been made. In the
event that any payment, or any part thereof, is rescinded, reduced, restored or
returned, the Guaranteed Obligation shall be reinstated and deemed reduced only
by such amount paid and not so rescinded, reduced, restored or returned.
<PAGE>
SECTION 1.9 No Subrogation. Notwithstanding any payment or payments
made by the Guarantor hereunder, or any set-off or application of funds of the
Guarantor by Lender, the Guarantor shall not be entitled to be subrogated to any
of the rights of Lender against the Partnership or against any collateral
security or guaranty or right of offset held by Lender for the payment of the
Guaranteed Obligation, nor shall the Guarantor seek any reimbursement from the
Partnership in respect of payments made by the Guarantor hereunder, until the
Guaranteed Obligation has been paid in full and Lender shall no longer be a
partner in the Partnership. If any amount shall be paid to the Guarantor on
account of such subrogation rights at any time prior to time that the Guaranteed
Obligation has been paid in full and Lender is no longer a partner in the
Partnership, such amount shall be held by the Guarantor in trust for Lender,
segregated from other funds of the Guarantor, and shall, forthwith upon receipt
by the Guarantor, be turned over to Lender in the exact form received by the
Guarantor (duly indorsed by the Guarantor to Lender, if required), to be applied
against the Guaranteed Obligation, whether matured or unmatured.
SECTION 1.10 Continuing Guaranty. This Guaranty is a continuing
guaranty and shall (i) remain in full force and effect until the Guaranteed
Obligation has been paid in full and Lender shall no longer be a partner in
the Partnership, (ii) be binding upon the Guarantor and its respective
successors and permitted assigns, and (iii) inure, together with the rights
and remedies of the Lender hereunder, to the benefit of Lender and its
respective successors, transferees and assigns.
SECTION 2. INTENTIONALLY OMITTED
SECTION 3. REPRESENTATIONS WARRANTIES AND COVENANTS.
(a) The Guarantor hereby makes all representations and warranties, and
agrees to comply with all of the obligations, requirements and restrictions in
the representations, warranties and covenants contained in the Partnership
Agreement, to the extent such obligations, requirements and restrictions are
expressly applicable to the Guarantor.
(b) The Guarantor further represents and warrants to Lender that: (i) the
execution, delivery and performance by the Guarantor of this Guaranty are within
the Guarantor's corporate powers, have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
governmental authority, do not contravene, or constitute a default under, any
provision of applicable law or regulation or of the certificate of incorporation
or bylaws of the Guarantor, or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Guarantor and will not result in the
creation or imposition of any Lien on any asset of the Guarantor (other than
pursuant to the Loan Documents); and (ii) this Guaranty has been duly
authorized, executed and delivered by the Guarantor and constitutes a legal,
valid and binding obligation of the Guarantor, enforceable against the Guarantor
in accordance with its terms, except as such enforceability may be limited by
the effect of any applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally and general
principles of equity.
SECTION 4. FURTHER ASSURANCES. The Guarantor agrees, upon the written
request of Lender, and at the Guarantor's expense, to execute and deliver to
Lender, from time to time, any additional instruments or documents considered
reasonably necessary by Lender to cause this Guaranty to be, become or remain
valid and effective in accordance with its terms.
SECTION 5. RIGHT OF SET-OFF. In addition to and not in limitation of
all rights of offset that Lender or any other holder of the Guaranteed
Obligation may have under applicable law or under the Credit Agreement, Lender
or any other holder of the Guaranteed Obligation shall, upon the occurrence of
any Event of Default and whether or not Lender or such holder has made any
demand or whether the Guarantor's obligations are matured, have the right to
appropriate and apply to the payment of the Guarantor's obligations hereunder,
all deposits (general or special, time or demand, provisional or final) then or
thereafter held by, and other indebtedness or property then or thereafter owing,
Lender whether or not related to this Guaranty or any transaction hereunder.
SECTION 6. MISCELLANEOUS PROVISIONS.
<PAGE>
SECTION 6.1 Amendments. Any amendment or waiver of any provision of
this Guaranty and any consent to any departure by the Guarantor from any
provision of this Guaranty, shall be effective only if made pursuant to a
written instrument executed by the Guarantor and Lender (or, if a waiver or a
consent, a written letter or agreement executed by Lender).
SECTION 6.2 Defined Terms. All capitalized terms used herein shall have
the meanings ascribed thereto in the Credit Agreement unless otherwise defined
or limited herein.
SECTION 6.3 Loan Document. This Guaranty shall be deemed to be a Loan
Document for all purposes.
SECTION 6.4 Headings. The headings in this Guaranty are for purposes of
reference only and shall not otherwise affect the meaning or construction or any
provision of this Guaranty.
SECTION 6.5 Severability. The provisions of this Guaranty are
severable, and if any clause or provision shall be held invalid or unenforceable
in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction, or any other clause or provision of this
Guaranty in any jurisdiction.
SECTION 6.6 Notices. Except as otherwise provided herein, whenever it
is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other party, or whenever either of the parties desires to
give or serve upon any communication with respect to this Guaranty, each such
notice, demand, request, consent, approval, declaration or other communication
shall be in writing and shall be given in the manner provided for in Section
10.9 of the Credit Agreement.
SECTION 6.7 Remedies Cumulative. Each right, power and remedy of Lender
provided in this Guaranty or now or hereafter existing at law or in equity or by
statute or otherwise shall be cumulative and concurrent and shall be in addition
to every other right, power or remedy provided for in this Guaranty or now or
hereafter existing at law or in equity or by statute or otherwise. The exercise
or partial exercise by Lender of any one or more of such rights, powers or
remedies shall not preclude the simultaneous or later exercise by Lender of all
such other rights, powers or remedies, and no failure or delay on the part of
Lender to exercise any such right, power or remedy shall operate as a waiver
thereof.
SECTION 6.8 Statute of Limitations. To the full extent permitted by
applicable law, the Guarantor hereby waives the right to plead any statute of
limitations as a defense to performance of its obligations under, or enforcement
of, this Guaranty.
SECTION 6.9 Final Expression. This Guaranty, together with any other
agreement executed in connection herewith, is intended by the parties as a final
expression of this Guaranty and is intended as a complete and exclusive
statement of the terms and conditions thereof. Acceptance of or acquiescence in
a course of performance rendered under this Guaranty shall not be relevant to
determine the meaning of this Guaranty even though the accepting or acquiescing
party had knowledge of the nature of the performance and opportunity for
objection.
SECTION 6.10 Financial Status. The Guarantor hereby assumes
responsibility for keeping itself informed of the financial condition of the
Partnership and any and all endorsers and/or other guarantors of any instrument
or document evidencing all or any part of the Guaranteed Obligation and of all
other circumstances bearing upon the risk of nonpayment of the Guaranteed
Obligation or any part thereof that diligent inquiry would reveal, and the
Guarantor hereby agrees that Lender shall have no duty to advise the Guarantor
of information known to Lender regarding such condition or any such
circumstances.
<PAGE>
SECTION 6.11 Assignability. This Guaranty shall be binding on the
Guarantor and its respective successors and shall inure to the benefit of Lender
and its respective successors and assignees. This Guaranty may not be assigned
by the Guarantor without the prior written consent of Lender.
SECTION 6.12 Non-Waiver. The failure of Lender to enforce any right or
remedy hereunder, or promptly to enforce any such right or remedy, shall not
constitute a waiver thereof, nor give rise to any estoppel against Lender, nor
excuse the Guarantor from its obligations hereunder.
SECTION 6.13 Governing Law. CONSENT TO JURISDICTION AND VENUE. EXCEPT
AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS GUARANTY
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA. THE GUARANTOR HEREBY CONSENTS AND AGREES THAT THE
STATE OR FEDERAL COURTS LOCATED IN THE STATE OF GEORGIA, SHALL HAVE JURISDICTION
TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND LENDER
PERTAINING TO THIS GUARANTY OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS
GUARANTY, THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, PROVIDED,
THAT NOTHING IN THIS GUARANTY SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO ENFORCE
A JUDGEMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. THE GUARANTOR EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND THE GUARANTOR HEREBY WAIVES ANY OBJECTION WHICH
THE GUARANTOR MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE
OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. THE GUARANTOR HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL OR BY FEDERAL EXPRESS
OR OTHER COURIER SERVICE ADDRESSED TO THE GUARANTOR AT ITS ADDRESS SET FORTH FOR
NOTICES IN THE CREDIT AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE GUARANTOR'S ACTUAL RECEIPT THEREOF.
SECTION 6.14 Mutual Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN
CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY
RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE
STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES
DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.
THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL
SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY
IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER
SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE PARTIES ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THEM IN CONNECTION WITH, THIS GUARANTY, THE CREDIT AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTION THERETO.
SECTION 6.15 Acknowledgments. The Guarantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and
delivery of this Guaranty;
(b) Lender has no fiduciary relationship to the Guarantor, and the
relationship between Lender, on the one hand, and the Guarantor, on the other
hand, is solely that of creditor and debtor, respectively; and
<PAGE>
(c) no joint venture exists among Lender or among the Guarantor and
Lender.
[Remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly
executed and delivered as of the date first above written.
GUARANTOR: LOT$OFF CORPORATION
By: /s/ Charles J. Fuhrmann II
--------------------------------
Charles J. Fuhrmann II
President
<PAGE>
EXHIBIT 10.7
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
50-OFF STORES, INC. )
Plaintiff, )
)
v. )
)
BANQUE PARIBAS (SUISSE) S.A., ) CIVIL ACTION NO. SA-95-CA-0159
et al., )
Defendants )
ASSIGNMENT AND TRANSFER OF JUDGMENT AND CAUSE OF ACTION
STATE OF TEXAS
BEXAR COUNTY
LOT$OFF Corporation ("LOT$OFF"), a Delaware corporation, in
consideration of $1.00 and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, by this Assignment and
Transfer grants and conveys to W3 L.P., a Delaware limited partnership, (a)
one hundred percent (100%) of LOT$OFF's right, title and interest in and to
that certain judgment, dated December 4, 1997, rendered in favor of LOT$OFF,
as plaintiff, and against The Chase Manhattan Bank, as a defendant, in Civil
Action No. SA-95-CA-0159 in the United States District Court for the Western
District of Texas, San Antonio Division, entitled 50-OFF STORES, INC. V.
BANQUE PARIBAS (SUISSE) S.A., ET AL. ("Federal Lawsuit")(the "Judgment"),
and (b) one hundred percent (100%) of LOT$OFF's right, title and interest in
and to any cause of action which LOT$OFF has or may have against The Chase
Manhattan Bank arising from the transaction and events which were the basis
for the Federal Lawsuit (the "Cause of Action"); with the foregoing grant and
conveyance made subject to (y) existing liens, claims and encumbrances on the
Judgment, the Cause of Action and/or any proceeds therefrom (collectively
referred to as the "Liens"), and (z) the obligations secured by or related to
the Liens.
<PAGE>
SIGNED AND DELIVERED this 17 day of April, 1998.
LOT$OFF Corporation
By: /s/ Charles J. Fuhrmann II
----------------------------------
Charles J. Fuhrmann II, President
and Chief Executive Officer
SIGNED AND ACCEPTED this 17 day of April, 1998.
W3 L.P.
By: Giant Sequoia Corporation
Its General Partner
By: /s/ Charles J. Fuhrmann II
----------------------------------
Charles J. Fuhrmann II, President
WITNESSES:
/s/ Douglas R. Sims
--------------------------------------
Name: Douglas R. Sims
Address: 320 Shangrila Ln.
New Braunfels, TX
/s/ Tom Lazenby
--------------------------------------
Name: Tom Lazenby
Address: 1807 Split Oak
San Antonio, TX
<PAGE>
ACKNOWLEDGMENT
STATE OF TEXAS
BEXAR COUNTY
This Assignment and Transfer was acknowledged before me on April 17,
1998, by Charles J. Fuhrmann, II, as President and Chief Executive Officer of
LOT$OFF Corporation and as President of Giant Sequoia Corporation the General
Partner of W3 L.P.
/s/ Nancy Landrebe
-------------------------------------------
Name: Nancy Landrebe
Notary Public in and for the State of Texas
My commission expires
June 13, 2000
CERTIFICATE OF SERVICE
I certify that a true and correct copy of the foregoing was served by
First Class Mail upon the counsel of record listed below on April 20, 1998.
Joseph Latting, Esq.
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P.
700 Lavaca, Suite 800
Austin, Texas 78701-3102
Keith E. Kaiser, Esq.
Cox & Smith
112 E. Pecan, Suite 1800
San Antonio, Texas 78205-1521
/s/ Saul H. Perloff
-------------------------------------------
Saul H. Perloff
<PAGE>
EXHIBIT 10.8
SECOND AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Second Amendment to Revolving Credit Agreement (this
"Amendment"), made as of the 22 day of December, 1997, among LOT$OFF
CORPORATION, 50-OFF TEXAS STORES, L.P., 50-OFF OPERATING COMPANY, and 50-OFF
MULTISTATE OPERATIONS, INC., as Borrowers (collectively, the "Borrowers"),
and GENERAL ELECTRIC CAPITAL CORPORATION, as Lender (the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lender are parties to that certain
Revolving Credit Agreement dated as of June 16, 1997, as amended by that
certain First Amendment to Revolving Credit Agreement dated as of August 28,
1997 (as further amended, modified, restated or supplemented from time to
time, the "Credit Agreement"); and
WHEREAS, the Borrowers have requested that certain terms of the Credit
Agreement be amended, and the Lender has agreed to the requested amendments
on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree that all capitalized terms used but not otherwise defined
herein shall have the meanings ascribed thereto in the Credit Agreement, and
further agree as follows:
1. AMENDMENTS TO ARTICLE 1. Article 1 of the Credit Agreement is
hereby amended by:
(a) deleting the definitions of "BORROWING BASE" and "LOAN" set forth
therein in the entirety and replacing such definitions, respectively, with
the following:
"'BORROWING BASE' shall mean, at any time, the lesser of (i) the
Commitment and (ii) the sum of:
(a) (i) from August 15 through December 15 in any year, up
to sixty-five percent (65%) of Eligible Inventory valued at the
lower of
<PAGE>
fair market value or cost (on a first-in, first-out basis), and (ii)
from December 16 through August 14 in any year, up to sixty percent
(60%) of Eligible Inventory valued at the lower of fair market value
or cost (on a first-in, first-out basis); PLUS
(b) the Over Advance Amount as of such time; __
MINUS
(c) the sum of: (i) a sales tax reserve equal to the outstanding sales
tax liability of Borrowers as of the date of such calculation and
(ii) the Reserves.
"LOAN" shall mean the aggregate amount of Advances outstanding at
any time (including Letter of Credit Obligations and the Funded Over
Advance Amount), made on behalf of any Borrower."
(b) adding the following definitions of "ADJUSTED BORROWING BASE",
"FUNDED OVER ADVANCE AMOUNT", "LAWSUIT PROCEEDS", "MARGIN" and "OVER ADVANCE
AMOUNT", respectively, in appropriate alphabetical order, thereto:
"'ADJUSTED BORROWING BASE' shall mean, at any particular time,
the Borrowing Base MINUS the Over Advance Amount.
"FUNDED OVER ADVANCE AMOUNT" shall mean, at any particular time,
the outstanding principal balance of the Loan MINUS the Adjusted
Borrowing Base.
"LAWSUIT PROCEEDS" shall mean the aggregate amount of cash due to
the Borrowers in connection with any settlement, judgment, order or
otherwise, in favor of the Borrowers in those certain litigation cases
pending against Chase Manhattan Bank, Jefferies International, Ltd.
and Jefferies & Company, as more fully described in the definition of
"Lawsuit" set forth in the Reorganization Plan.
"MARGIN" shall mean the per annum interest rate determined in
accordance with Section 2.6(b).
"OVER ADVANCE AMOUNT" shall mean (a) from December 22, 1997
through December 31, 1997, the amount of $1,000,000; (b) from January
1, 1998 through February 15, 1998, the amount of $2,000,000; and (c)on
February 16, 1998 and at all times thereafter, zero."
(c) deleting the definition of "STATED INDEX RATE" set forth therein
in the entirety.
2. AMENDMENT TO SECTION 2.6. Section 2.6 of the Credit Agreement,
INTEREST ON LOAN, is hereby amended by deleting paragraphs (a) and (b)
thereof in the entirety and replacing such paragraphs, respectively, with the
following:
<PAGE>
"(a) Borrowers shall be obligated to pay interest on the unpaid
principal amounts of the Loan owing to Lender from the Funding Date
until the Loan is paid in full at a floating rate per annum
equal (i) the Index Rate in effect from month to month, PLUS (ii) the
applicable Margin, payable monthly in arrears and due on the first day
of each calendar month commencing on July 1, 1997 and on the date the
Loan shall be repaid in full; provided, however, that upon the
occurrence of a Default, interest on the Loan shall be calculated at a
default rate per annum equal to (i) the Index Rate in effect from
month to month, PLUS (ii)the applicable Margin, PLUS (iii) 2.00%
per annum, and shall be payable upon demand.
(b) The Margin shall be 5.00% per annum in connection with the
Funded Over Advance Amount, and the Margin shall be 3.00% per annum in
connection with all other unpaid principal amounts of the Loan."
3. AMENDMENT TO SECTION 2.8. Section 2.8 of the Credit Agreement,
APPLICATION OF PAYMENTS, is hereby deleted in the entirety and replaced with
the following:
"2.8 APPLICATION OF PAYMENTS. Except to the extent that Lender
has agreed to a specific application of payments in this Agreement,
each Borrower irrevocably waives the right to direct the application
of any and all payments at any time or times hereafter received by
Lender from or on behalf of any Borrower, and each Borrower
irrevocable agrees that Lender shall have the continuing exclusive
right to apply any and all such payments against the then due and
payable Obligations of Borrowers and in repayment of the Loan and any
other Obligations of Borrowers as Lender may reasonably deem
advisable. In the absence of a specific determination by Lender with
respect thereto and except as required by Section 2.18, the same shall
be applied in the following order: (i) then due and payable fees and
expenses; (ii) then due and payable interest payments on the Loan;
(iii) then due and payable principal payments on the Loan (other than
the Funded Over Advance Amount); (iv) then due and payable Funded Over
Advance Amount; and (v) then to any other unpaid Obligations. Lender
is authorized to, and at its option may, make advances on behalf of
any Borrower for payment of all fees, expenses, charges, costs,
principal and interest incurred by any Borrower hereunder. Such
advances shall be made when and as any Borrower fails to pay promptly
such fees, expenses, charges, costs, principal and interest and, at
Lender's option and to the extent permitted by law, shall be deemed
Advances constituting part of the Loan hereunder."
4. AMENDMENT TO SECTION 2.14. Section 2.14 of the Credit Agreement,
CLOSING, ADMINISTRATION, AND NON-USE FEES, is hereby amended by adding the
following paragraph(d) at the end thereof:
"(d) As additional compensation for Lender's costs and risks in
making the total amount of the Commitment and the
<PAGE>
Over Advance Amount available to Borrowers, and whether or not the
Borrowers ever utilize the Over Advance Amount, Borrowers hereby
agree to pay to Lender on January 1, 1998, a fee in the amount of
$125,000. Such fee shall be fully earned on December 22, 1997 and
non-refundable when paid. Additionally, the Borrowers hereby agree
to pay to the Lender on February 16, 1998, a fee in the amount of
2.5% of the Lawsuit Proceeds by executing and delivering to the
Lender on February 16, 1998, such documents and agreements
(including opinions of counsel) as may be necessary or requested
by the Lender to convey to the Lender 2.5% of the Borrowers'
right, title and interest in and to the Lawsuit Proceeds, in form
and substance satisfactory to the Lender; provided, however, the
Borrowers shall not be required to pay such fee if, on February
16, 1998, the Borrowers make the mandatory repayment of the Funded
Over Advance Amount required by Section 2.18 hereof."
5. AMENDMENT TO ARTICLE 2. Article 2 of the Credit Agreement,
AMOUNT AND TERMS OF CREDIT, is hereby amended by adding the
following Section 2.18 at the end thereof:
"2.18 MANDATORY REPAYMENT OF FUNDED OVER ADVANCE AMOUNT. On
February 16, 1997, the Borrowers shall make a mandatory repayment of
the Loan in the amount of the then outstanding principal balance of
the Funded Over Advance Amount, together with accrued interest
thereon, and such repayment shall be applied to the Funded Over
Advance Amount of the Loan."
6. NO OTHER AMENDMENT. Except for the amendments expressly set forth
above, the text of the Credit Agreement and all other Loan Documents shall
remain unchanged and in full force and effect. The Borrowers acknowledge and
expressly agree that the Lender reserves the right to, and does in fact,
require strict compliance with all terms and provisions of the Credit
Agreement and the other Loan Documents.
7. CONSENT TO PARTICIPATION OR ASSIGNMENT. Pursuant to Section 10.10 of
the Credit Agreement, the Borrowers hereby consent to Lender's sale of
participations, assignment, transfer or other disposition, at any time or
times, of any interest in the Funded Over Advance Amount or of any portion
thereof or interest therein, including Lender's rights, title, interests,
remedies, powers or duties thereunder, whether evidenced by a writing or not.
Each Borrower agrees that it will use its best efforts to assist and
cooperate with Lender in any manner reasonably requested by Lender to effect
any such sale of participations or assignment.
8. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and
warrants in favor of the Lender as follows:
(a) Such Borrower has the corporate power and authority (i) to
enter into this Amendment and (ii) to do all acts and things as are
required or contemplated hereunder to be done, observed and performed
by it;
<PAGE>
(b) This Amendment has been duly authorized, validly executed
and delivered by one or more authorized signatories of such Borrower,
and constitutes the legal, valid and binding obligation of such
Borrower, enforceable against it in accordance with its terms;
(c) The execution and delivery of this Amendment and performance
by such Borrower under the Credit Agreement, as amended hereby, do not
and will not require the consent or approval of any regulatory
authority or governmental authority or agency having jurisdiction over
such Borrower which has not already been obtained, nor contravene or
conflict with the charter documents of such Borrower, or the provision
of any statute, judgment, order, indenture, instrument, agreement, or
undertaking, to which such Borrower is party or by which any of its
properties are or may become bound;
(d) As of the date hereof, and after giving effect to this
Amendment (i) no Default or Event of Default exists under the Credit
Agreement or is caused by this Amendment other than as disclosed on
Schedule 1 attached hereto (and the Borrowers acknowledge that no
Default or Event of Default disclosed on such Schedule 1 has been
waived by the Lender and that the Lender reserves all rights and
remedies with respect to such Defaults or Events of Default) and, and
(ii) to the best of the Borrowers' knowledge, each representation and
warranty set forth in Article 4 of the Credit Agreement is true and
correct in all material respects, except (x) to the extent previously
fulfilled in accordance with the terms of the Credit Agreement, as
amended hereby, or (y) to the extent relating specifically to the
Closing Date.
9. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall
become effective on the date that the Lender shall have received a duly
executed original signature page to this Amendment from the Borrowers.
10. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Georgia, without
reference to the conflicts or choice of law principles thereof.
11. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan
Document for all purposes.
12. EXPENSES. The Borrowers agree to pay all reasonable
expenses of the Lender incurred in connection with this Amendment, including,
without limitation, all fees and expenses of counsel to the Lender.
13. COUNTERPARTS. This Amendment may be executed by one or more
of the parties hereto on any number of separate counterparts, each of which
shall be deemed an original and all of which, taken together, shall be deemed
to constitute one and the same instrument. Delivery of an executed
counterpart of this Amendment by facsimile transmission shall be as effective
as delivery of a manually executed counterpart hereof.
<PAGE>
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their respective
duly authorized officers or representatives to execute and deliver this
Amendment as of the day and year first written above.
BORROWERS: LOT$OFF CORPORATION, a Delaware corporation
By: /s/ Charles J. Fuhrmann II
------------------------------
Charles J. Fuhrmann, II
President
50-OFF MULTISTATE OPERATIONS, INC., a Nevada
corporation
By: /s/ Charles J. Fuhrmann II
------------------------------
Charles J. Fuhrmann, II
President
50-OFF OPERATING COMPANY, a Nevada corporation
By: /s/ Charles J. Fuhrmann II
------------------------------
Charles J. Fuhrmann, II
President
50-OFF TEXAS STORES, L.P., a Texas limited
partnership
By: 50-OFF Texas Management, Inc.,
a Nevada corporation,
its managing general partner
By: /s/ Charles J. Fuhrmann II
------------------------------
Charles J. Fuhrmann, II
President
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Timothy C. Huban
------------------------------
Timothy C. Huban
Its: Senior Vice President
------------------------------
<PAGE>
Schedule 1
<PAGE>
EXHIBIT 10.9
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Third Amendment to Revolving Credit Agreement (this "Amendment"),
effective as of the 15th day of February, 1998, among LOT$OFF CORPORATION,
50-OFF TEXAS STORES, L.P., 50-OFF OPERATING COMPANY, and 50-OFF MULTISTATE
OPERATIONS, INC., as Borrowers (collectively, the "Borrowers"), and GENERAL
ELECTRIC CAPITAL CORPORATION, as Lender (the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lender are parties to that certain
Revolving Credit Agreement dated as of June 16, 1997, as amended by that
certain First Amendment to Revolving Credit Agreement dated as of August 28,
1997 and by that certain Second Amendment to Revolving Credit Agreement dated
as of December 22, 1997(as further amended, modified, restated or
supplemented from time to time, the "Credit Agreement"); and
WHEREAS, the Borrowers have requested that certain terms of the Credit
Agreement be amended, and the Lender has agreed to the requested amendments
on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree that all capitalized terms used but not otherwise defined
herein shall have the meanings ascribed thereto in the Credit Agreement, and
further agree as follows:
1. AMENDMENTS TO ARTICLE 1. Article 1 of the Credit Agreement is hereby
amended by deleting the definition of "OVER ADVANCE AMOUNT" set forth therein
in its entirety and replacing such definition with the following:
"OVER ADVANCE AMOUNT" shall mean (a) from December 22, 1997
through December 31, 1997, the amount of $1,000,000; (b) from January 1,
1998 through February 26, 1998, the amount of $2,000,000; and (c) on
February 27, 1998 and at all times thereafter, zero.
<PAGE>
2. AMENDMENT TO SECTION 2.14. Section 2.14 of the Credit
Agreement, CLOSING, ADMINISTRATION, AND NON-USE FEES, is hereby amended by
deleting the last sentence in subsection (d) thereof in its entirety and
replacing such sentence with the following:
Additionally, the Borrowers hereby agree to pay to the Lender
on February 27, 1998, a fee in the amount of 2.5% of the Lawsuit Proceeds
by executing and delivering to the Lender on February 27, 1998, such
documents and agreements (including opinions of counsel) as may be
necessary or requested by the Lender to convey to the Lender 2.5% of the
Borrowers' right, title and interest in and to the Lawsuit Proceeds, in
form and substance satisfactory to the Lender; provided, however, the
Borrowers shall not be required to pay such fee if, on February 27, 1998,
the Borrowers make the mandatory repayment of the Funded Over Advance
Amount required by Section 2.18 hereof.
3. AMENDMENT TO SECTION 2.18. Section 2.18 of the Credit
Agreement, MANDATORY REPAYMENT OF FUNDED OVER ADVANCE AMOUNT, is hereby
deleted in its entirety and replaced with the following:
2.18 MANDATORY REPAYMENT OF FUNDED OVER ADVANCE AMOUNT. On
February 27, 1997, the Borrowers shall make a mandatory repayment of the
Loan in the amount of the then outstanding principal balance of the Funded
Over Advance Amount, together with accrued interest thereon, and such
repayment shall be applied to the Funded Over Advance Amount of the Loan.
4. NO OTHER AMENDMENT. Except for the amendments expressly
set forth above, the text of the Credit Agreement and all other Loan
Documents shall remain unchanged and in full force and effect. The Borrowers
acknowledge and expressly agree that the Lender reserves the right to, and
does in fact, require strict compliance with all terms and provisions of the
Credit Agreement and the other Loan Documents.
5. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and
warrants in favor of the Lender as follows:
(a) Such Borrower has the corporate power and authority (i)
to enter into this Amendment and (ii) to do all acts and things as are
required or contemplated hereunder to be done, observed and performed by
it;
(b) This Amendment has been duly authorized, validly executed
and delivered by one or more authorized signatories of such Borrower, and
constitutes the legal, valid and binding obligation of such Borrower,
enforceable against it in accordance with its terms;
(c) The execution and delivery of this Amendment and
performance by such Borrower under the Credit Agreement, as amended hereby,
do not and will not require the consent or
<PAGE>
approval of any regulatory authority or governmental authority or agency
having jurisdiction over such Borrower which has not already been
obtained, nor contravene or conflict with the charter documents of such
Borrower, or the provision of any statute, judgment, order, indenture,
instrument, agreement, or undertaking, to which such Borrower is party
or by which any of its properties are or may become bound;
(d) As of the date hereof, and after giving effect to this
Amendment (i) no Default or Event of Default exists under the Credit
Agreement or is caused by this Amendment other than as disclosed on
Schedule 1 attached hereto (and the Borrowers acknowledge that no Default
or Event of Default disclosed on such Schedule 1 has been waived by the
Lender and that the Lender reserves all rights and remedies with respect
to such Defaults or Events of Default) and, and (ii) to the best of the
Borrowers' knowledge, each representation and warranty set forth in
Article 4 of the Credit Agreement is true and correct in all material
respects, except (x) to the extent previously fulfilled in accordance with
the terms of the Credit Agreement, as amended hereby, or (y) to the extent
relating specifically to the Closing Date.
6. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment
shall become effective on the date that the Lender shall have received a duly
executed original signature page to this Amendment from the Borrowers.
7. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Georgia, without
reference to the conflicts or choice of law principles thereof.
8. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan Document
for all purposes.
9. EXPENSES. The Borrowers agree to pay all reasonable expenses of the
Lender incurred in connection with this Amendment, including, without
limitation, all fees and expenses of counsel to the Lender.
10. COUNTERPARTS. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts, each of which shall be
deemed an original and all of which, taken together, shall be deemed to
constitute one and the same instrument. Delivery of an executed counterpart
of this Amendment by facsimile transmission shall be as effective as delivery
of a manually executed counterpart hereof.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their respective
duly authorized officers or representatives to execute and deliver this
Amendment as of the day and year first written above.
BORROWERS: LOT$OFF CORPORATION, a Delaware corporation
By: /s/ Charles J. Fuhrmann II
------------------------------------------
Charles J. Fuhrmann, II
President
50-OFF MULTISTATE OPERATIONS, INC.,a Nevada corporation
By: /s/ Charles J. Fuhrmann II
------------------------------------------
Charles J. Fuhrmann, II
President
50-OFF OPERATING COMPANY, a Nevada corporation
By: /s/ Charles J. Fuhrmann II
------------------------------------------
Charles J. Fuhrmann, II
President
50-OFF TEXAS STORES, L.P., a Texas limited partnership
By: 50-OFF Texas Management, Inc.,
a Nevada corporation,
its managing general partner
By: /s/ Charles J. Fuhrmann II
------------------------------------------
Charles J. Fuhrmann, II
President
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Timothy C. Huban
------------------------------------------
Timothy C. Huban
Its: Senior Vice President
------------------------------------------
<PAGE>
SCHEDULE 1 - EXISTING DEFAULTS AND EVENTS OF DEFAULT
<PAGE>
EXHIBIT 10.10
FOURTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Fourth Amendment to Revolving Credit Agreement (this "Amendment"),
effective as of the 17th day of April, 1998, among LOT$OFF CORPORATION (the
"Parent"), 50-OFF TEXAS STORES, L.P., 50-OFF OPERATING COMPANY, and 50-OFF
MULTISTATE OPERATIONS, INC., as Borrowers (together with the Parent
collectively, the "Borrowers"), and GENERAL ELECTRIC CAPITAL CORPORATION, as
Lender (the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lender are parties to that certain Revolving
Credit Agreement dated as of June 16, 1997, as amended by that certain First
Amendment to Revolving Credit Agreement dated as of August 28, 1997, by that
certain Second Amendment to Revolving Credit Agreement dated as of December 22,
1997 and by that certain Third Amendment to Revolving Credit Agreement dated as
of February 15, 1998 (as further amended, modified, restated or supplemented
from time to time, the "Credit Agreement"); and
WHEREAS, the Borrowers have requested that certain terms of the Credit
Agreement be waived and amended, and the Lender has agreed to the requested
waivers and amendments on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree that
all capitalized terms used but not otherwise defined herein shall have the
meanings ascribed thereto in the Credit Agreement, and further agree as follows:
1. AMENDMENT TO ARTICLE 1. Article 1 of the Credit Agreement,
DEFINITIONS, is hereby amended by adding the following sentence to the end of
the definition of "Obligations":
"Notwithstanding anything to the contrary contained herein or in any
other Loan Document, "Obligations" shall also include the Guaranteed
Obligation (as defined therein) of Parent pursuant to that certain Guaranty
Agreement dated as of April 17, 1998, by Parent in favor of Lender."
<PAGE>
2. AMENDMENT TO SECTION 2.14. Section 2.14 of the Credit Agreement,
CLOSING, ADMINISTRATION, AND NON-USE FEES, is hereby amended by deleting the
last sentence in subsection (d) thereof in its entirety.
3. AMENDMENT TO ARTICLE 7. Article 7 of the Credit Agreement is hereby
amended by adding the following Section 7.27:
"Section 7.27 MINIMUM AVAILABILITY. Borrowers will not permit Availability
at any time to be less than $1,500,000.00."
4. CONSENTS.
(a) The Lender hereby consents to the formation by the Borrowers of
Giant Sequoia Corporation, a Delaware corporation (the "General Partner") and
Mountain Laurel Corporation, a Delaware corporation (the "Limited Partner"),
each of which shall be wholly-owned Subsidiaries of the Parent. The Lender
hereby further consents to (a) the formation of W3 L.P., a Delaware limited
partnership (the "Partnership"), by the General Partner and the Limited Partner,
together with Lender as the Preferred Limited Partner (as defined in that
certain Agreement of Limited Partnership of W3 L.P., dated as of April 17, 1998,
(the "Partnership Agreement")), (b) the transfer of the Judgment and the Cause
of Action (each as defined in the Partnership Agreement) to the Partnership, (c)
the Parent's guaranty of the performance of the General Partner and the Limited
Partner under the Partnership Agreement and (d) the Partnership's making the
Preferential Distribution (as defined in the Partnership Agreement) as required
by the Partnership Agreement. In consideration for the consent contained in
this Section 4, Parent agrees to cause the General Partner and the Limited
Partner to make distributions to Parent of all amounts received by them in
respect of the Judgment or the Cause of Action (as defined in the Partnership
Agreement) or otherwise in respect of their interests in the Partnership.
(b) The Lender hereby consents to the Borrowers' delayed delivery of
those reports required to be delivered to the Lender pursuant to Section 5.1(a)
of the Credit Agreement with respect to the Fiscal Period ended March 27, 1998,
PROVIDED that the Lender shall have received such reports not later than May 5,
1998.
5. WAIVERS. The Lender hereby waives (i) each Event of Default listed on
Schedule 1 attached hereto as of the Fiscal Period ended March 27, 1998, (ii)
the Event of Default existing as of the date hereof caused by the Borrowers'
failure to make a mandatory repayment of the Loan on March 2, 1998, in the
amount of the Funded Over Advance Amount pursuant to Section 2.18 of the Credit
Agreement (the "Overadvance Default"), and (iii) all of its rights and remedies
under the Credit Agreement which may arise as a result of such Events of
Default; provided, that the failure of the Borrowers to comply with all of the
terms and conditions of the Credit Agreement at all times after the Fiscal
Period ending March 27, 1998 (other than with respect to the Overadvance
Default), shall result in the occurrence of an Event of Default under the Credit
Agreement which is not waived hereby and, further provided, that the waivers
expressly set forth herein
<PAGE>
shall not hinder, restrict or otherwise modify the rights and remedies of the
Lender following the occurrence of any other Default or Event of Default
under the Credit Agreement.
6. AMENDMENT FEE. In consideration for (i) the amendments and waivers
contained herein, (ii) the Lender's consent to the transfer of certain assets to
the Partnership in exchange for a general and limited partner interest
concurrently deemed contributed to the General Partner and the Limited Partner,
respectively, which are newly formed Subsidiaries of the Parent, as set forth in
Section 4 hereof, and (iii) the time, effort and expense of the Lender in
connection with review by the Lender of this Amendment, various documents
previously prepared by Amroc Investments, Inc., the Partnership Agreement and
various Loan Documents, including, without limitation, a Guaranty Agreement, a
Security Agreement, Pledge of Partnership Interest and a First Amendment to
Stock Pledge Agreement, each dated as of the date hereof (respectively, the
"Guaranty", the "Security Agreement", the "Pledge Agreement" and the "Amendment
to Pledge Agreement", and collectively, the "Partnership Collateral Documents"),
to be executed in connection with this Amendment, the Borrowers hereby agree
that, as additional compensation for Lender's costs and risks in agreeing to the
terms and conditions of this Amendment, the Borrowers shall pay to the Lender
(x) upon its execution and delivery of this Amendment, a fee in the amount of
$50,000 (the "Amendment Fee") and (y) upon the execution of an amendment to the
Credit Agreement pursuant to which the Borrowers and the Lender shall amend the
financial covenants contained therein, a fee in the amount of $25,000. Such
fees shall be fully earned when due and non-refundable when paid.
7. NO OTHER AMENDMENT OR WAIVER. Except for the consents, amendments and
waivers expressly set forth above, the text of the Credit Agreement and all
other Loan Documents shall remain unchanged and in full force and effect. Other
than as expressly set forth in this Amendment, no consent, amendment or waiver
contained in this Agreement, shall, by implication or otherwise, limit, impair
or otherwise affect the rights and remedies of the Lender. The Borrowers
acknowledge and expressly agree that the Lender reserves the right to, and does
in fact, require strict compliance with all terms and provisions of the Credit
Agreement and the other Loan Documents.
8. PARTNERSHIP COLLATERAL DOCUMENTS. Each Borrower hereby acknowledges
and agrees that the obligations of Parent under the Guaranty are secured by the
Collateral Documents and the Partnership Collateral Documents, and that the
Partnership Collateral Documents shall each constitute "Loan Documents" under
the Credit Agreement.
9. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and
warrants in favor of the Lender as follows:
(A) Such Borrower has the corporate power and authority (i)
to enter into this Amendment and (ii) to do all acts and things
as are required or contemplated hereunder to be done, observed
and performed by it;
<PAGE>
(B) This Amendment has been duly authorized, validly
executed and delivered by one or more authorized signatories of
such Borrower, and constitutes the legal, valid and binding
obligation of such Borrower, enforceable against it in accordance
with its terms;
(C) The execution and delivery of this Amendment and
performance by such Borrower under the Credit Agreement, as
amended hereby, do not and will not require the consent or
approval of any regulatory authority or governmental authority or
agency having jurisdiction over such Borrower which has not
already been obtained, nor contravene or conflict with the
charter documents of such Borrower, or the provision of any
statute, judgment, order, indenture, instrument, agreement, or
undertaking, to which such Borrower is party or by which any of
its properties is bound;
(D) As of the date hereof, and after giving effect to this
Amendment (i) no Default or Event of Default exists under the
Credit Agreement or is caused by this Amendment other than as
disclosed on Schedule 1 attached hereto, and (ii) to the best of
the Borrowers' knowledge, each representation and warranty set
forth in Article 4 of the Credit Agreement is true and correct in
all material respects, except (x) to the extent previously
fulfilled in accordance with the terms of the Credit Agreement,
as amended hereby, or (y) to the extent relating specifically to
the Closing Date.
10. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall become
effective on the date the Lender shall have received (i) a duly executed
original signature page to this Amendment from each of the Borrowers, (ii) a
duly executed Guaranty, Security Agreement, Pledge Agreement and Amendment to
Pledge Agreement, together with related UCC-1 financing statements and stock
certificates, and (iii) payment in full of the Amendment Fee.
11. GOVERNING LAW. This Amendment shall be governed by and construed in
accordance with the laws of the State of Georgia, without reference to the
conflicts or choice of law principles thereof.
12. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan Document
for all purposes.
13. EXPENSES. The Borrowers agree to pay all reasonable expenses of the
Lender incurred in connection with this Amendment and the Partnership Agreement,
and other documents executed in connection therewith, including, without
limitation, all fees and expenses of counsel to the Lender.
14. COUNTERPARTS. This Amendment may be executed by one or more of the
parties hereto on any number of separate counterparts, each of which shall be
deemed an original and all of which, taken together, shall be deemed to
constitute one and the same instrument. Delivery of an executed counterpart of
this Amendment by facsimile transmission shall be as effective as delivery of a
manually executed counterpart hereof.
<PAGE>
15. PERFORMANCE BY LENDER. If any grantor under the Security Agreement
fails to perform or comply with any of its agreements contained therein or in
any of the other Loan Documents to which it is a party, and the Lender, as
provided for by the terms of the Security Agreement or such other Loan Document,
shall itself perform or comply, or otherwise cause performance or compliance
with the Security Agreement or such other Loan Document, as applicable, the
expenses, including, without limitation, reasonable attorneys' fees of the
Lender incurred with such performance or compliance, together with interest
thereon at the Default Rate, shall be payable by the Borrowers to the Lender on
demand and shall constitute part of the Obligations.
16. INDEMNIFICATION. The Borrowers agree to protect, indemnify and save
harmless the Lender from and against all liabilities, obligations, claims,
damages, penalties, causes of action, costs and expenses, including, without
limitation, attorneys' fees and expenses (except as may arise from the gross
negligence or willful misconduct of the Lender) imposed upon or incurred by the
Lender by reason of the pledge pursuant to the Pledge Agreement and any claim
and demand whatsoever which may be asserted against the Lender by reason of any
alleged obligation or undertaking to be performed or discharged by the Lender
under the Pledge Agreement. In the event the Lender incurs any liability, loss
or damage by reason of such pledge, or in curing any default or breach by the
General Partner or the Limited Partner of its obligations under the Partnership
Agreement, or in the defense of any claims or demands arising out of or in
connection with the pledge pursuant to the Pledge Agreement, the amount of such
liability, loss or damage shall be added to the Obligations.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their respective duly
authorized officers or representatives to execute and deliver this Amendment as
of the day and year first written above.
BORROWERS: LOT$OFF CORPORATION, a Delaware corporation
By: /s/ CHARLES J. FUHRMANN II
----------------------------------------
Charles J. Fuhrmann II
President
50-OFF MULTISTATE OPERATIONS, INC.,a Nevada
corporation
By: /s/ CHARLES J. FUHRMANN II
----------------------------------------
Charles J. Fuhrmann II
President
50-OFF OPERATING COMPANY, a Nevada corporation
By: /s/ CHARLES J. FUHRMANN II
----------------------------------------
Charles J. Fuhrmann II
President
50-OFF TEXAS STORES, L.P., a Texas limited
partnership
By: 50-OFF Texas Management, Inc.,
a Nevada corporation,
its managing general partner
By: /s/ CHARLES J. FUHRMANN II
----------------------------------------
Charles J. Fuhrmann II
President
<PAGE>
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ TIMOTHY C. HUBAN
----------------------------------------
Its: Senior Vice President of
Commercial Finance
SCHEDULE 1 - EXISTING DEFAULTS AND EVENTS OF DEFAULT
<PAGE>
EXHIBIT 99.1
UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
In re: )
)
50-OFF STORES, INC., ) Case No. 96-54430-C through
a Delaware corporation; ) Case No. 96-54433-K, respectively,
50-OFF MULTISTATE OPERATIONS, INC., )
a Nevada corporation; ) Jointly Administered under
50-OFF TEXAS STORES, L.P., ) Case No. 96-54430-C
a Texas limited partnership; and )
50-OFF OPERATING COMPANY, INC., ) Chapter 11
a Nevada corporation, )
)
Debtors. )
ORDER GRANTING LEAVE TO CONSOLIDATE CERTAIN
STEPS TO BE TAKEN PURSUANT TO CONFIRMED PLAN OF REORGANIZATION
At San Antonio, Texas, on the date noted below, the Court considered the
Motion for Leave to Consolidate Certain Steps to Be Taken Pursuant to
Confirmed Plan of Reorganization (the "MOTION FOR LEAVE") filed by LOT$OFF
Corporation ("LOT$OFF"). The Motion sought to consolidate certain steps to
be taken pursuant to the Debtors' Joint Plan of Reorganization as amended and
modified confirmed by this Court June 3, 1997 (the "CONFIRMED PLAN"). The
Court has determined that adequate notice of the Motion for Leave has been
given and that the Court may appropriately considered the Motion for Leave
without a hearing. The Court has determined that the Motion is well-founded
and should be granted.
Accordingly, it is hereby
ORDERED that subject to the terms and conditions herein, LOT$OFF, as a
distribution agent to Class 7 Creditors within the Confirmed Plan, is
authorized to consolidate the treatment of Class 7 Creditors by the issuance
of 2 shares of Common Stock in lieu of any single share of Series B Preferred
Stock, Series A
<PAGE>
Conversion Rights or Series A Preferred Stock, as the case may be, which
would otherwise have been issued pursuant to the Confirmed Plan. It is further
ORDERED that LOT$OFF's leave to consolidate such steps within the
Confirmed Plan shall exist for such periods during which the Common Stock is
trading at a price in excess of $3 per share. It is further
ORDERED that LOT$OFF's obligations under the Confirmed Plan to issue
Series B Preferred Stock, Series A Conversion Rights, and/or Series A
Preferred Stock, as the case may be, shall be deemed satisfied and fulfilled
by the issuance in lieu thereof of 2 shares of Common Stock, and Allowed
Class 7 Creditors shall credit $5 to the amount of such Allowed Claim for
each 2 shares of Common Stock so issued. It is further
ORDERED that nothing herein shall affect LOT$OFF's obligation to
distribute the Excess Net Lawsuits' Proceeds in cash as required by the
Confirmed Plan. It is further
ORDERED that, so long as the other terms and conditions of the Confirmed
Plan and this Order are satisfied, LOT$OFF may continue to issue such 2
shares of Common Stock in lieu of 1 share of Preferred Stock to holders of
Class 7 Allowed Claims, until all such Allowed Claims are paid in full with
Common Stock and/or cash, at which time LOT$OFF's obligations to the holders
of Allowed Class 7 Claims shall be fully satisfied.
DATED: March 19, 1998.
/s/ Leif M. Clark
--------------------------------
Leif M. Clark
United States Bankruptcy Judge
AFTER ENTRY, PLEASE TRANSMIT A CONFORMED COPY TO:
Samuel M. Stricklin
Richard G. Grant
SHEINFELD, MALEY & KAY, P.C.
1700 Pacific, Suite 4400
Dallas, Texas 75201-4618
Telephone: 214-953-0700
Facsimile: 214-953-1189
<PAGE>
UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
In re: )
)
50-OFF STORES, INC., ) Case No. 96-54430-C through
a Delaware corporation; ) Case No. 96-54433-K, respectively,
50-OFF MULTISTATE OPERATIONS, INC., )
a Nevada corporation; ) Jointly Administered under
50-OFF TEXAS STORES, L.P., ) Case No. 96-54430-C
a Texas limited partnership; and )
50-OFF OPERATING COMPANY, INC., ) Chapter 11
a Nevada corporation, )
)
Debtors. )
MOTION FOR LEAVE TO CONSOLIDATE CERTAIN STEPS
TO BE TAKEN PURSUANT TO CONFIRMED PLAN OF REORGANIZATION
TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:
LOT$OFF Corporation ("LOT$OFF") respectfully submits as follows:
I. On June 3, 1997, this Court confirmed the Debtors' Joint Plan
of Reorganization, As Amended and as modified (the "CONFIRMED PLAN").
II. At the time that this Court considered and ruled upon
confirmation of the Confirmed Plan, the Debtors in the above captioned
bankruptcy cases were plaintiffs in certain lawsuits, including specifically
(a) 50-OFF STORES, INC. V. BANQUE PARIBAS (SUISSE), S.A., ET AL., Case No.
SA95-CA-0159, pending in the United States District Court, Western District
of Texas, San Antonio Division, and (b) 50-OFF STORES, INC. V. JEFFERIES &
COMPANY, INC. & JEFFERIES INT'L. LTD., Cause No. 96-CI-00349, pending in the
Texas District Court for Bexar County, Texas, (collectively the "LAWSUITS").
III. The Confirmed Plan separately classified general unsecured
creditors not otherwise classified into Class 7. The treatment for Class 7
included a mechanism for general unsecured creditors to receive certain
benefits derived from the Net Lawsuits Proceeds (as such term is defined
within the Confirmed Plan). Very generally described, the Confirmed Plan
provided for the issuance of Series B Preferred Stock in the amount of
$3,991,050 on a
<PAGE>
pro-rata basis to Allowed Class 7 Claims.(1) $3,991,050 is the amount at
which the Debtors carried the Lawsuits upon their books and records. Because
the Series B Preferred Stock was and is to be issued with a $5.00 face
liquidation preference, 798,210 of such shares are slated to be issued, which
is $3,991,050 divided by $5.
IV. Upon LOT$OFF actually receiving Net Lawsuits' Proceeds, Series
A Conversion Rights are to be issued to the holders of such Series B
Preferred Stock. Upon receipt of such Series A Conversion Rights, the holder
would then be capable of converting the Series B Preferred Stock to Series A
Preferred Stock.
V. The Confirmed Plan further generally provided that upon
receipt of Net Lawsuits' Proceeds in excess of $3,991,050, the Reorganized
Debtors would begin issuing Series A Preferred Stock on a pro-rata basis to
holders of Allowed Class 7 Claims. Such stock would be issued in the amount
of $5.00 face liquidation value for each $5 of Net Lawsuits' Proceeds
together with cash (see paragraph 6 below) up to the full face amount of the
Allowed Class 7 Claim.
VI. Furthermore, the Confirmed Plan required cash sharing for at
least certain portions of the Net Lawsuits' Proceeds if certain amounts were
achieved.
VII. The Confirmed Plan further provided that Series A Preferred
Stock would be redeemable. Specifically, at page P-23, the Confirmed Plan
provided as follows:
Subject to restrictions imposed by Delaware law, Reorganized 50-OFF
may, at its option, redeem the shares of the Series A Preferred Stock
in whole or in part, at any time, in exchange for the payment of the
Series A Liquidation Preference; provided, however, at the time of
providing the notice of redemption the New Common Stock must have
closed at a price of at least $3.00 per share for at least five
consecutive days. Redemption shall be accomplished using the
procedures set forth within the Series A Preferred Stock Certificate
of Designation.
I. Certain aspects of the Lawsuits have now been settled.
Specifically, LOT$OFF's claims against Bank Paribas (Suisse) were settled in
November 1997 for $2.4 million. LOT$OFF's claims against Jefferies were
settled in January 1998 for approximately $4.3 million. In addition, on
November 20, 1997, a jury returned a verdict for approximately $13 million in
actual damages and $138 million in punitive damages against the Chase
Manhattan Bank, N.A. Judgment has been entered upon such verdict. All
post-judgment motions were denied last week by the presiding Federal District
Judge (the Honorable H.F. Garcia).
- -------------------------------------------------------------------------------
(1) This Motion is intended to provide only a general overview of the Confirmed
Plan. Reference should be made to the Confirmed Plan for its specific terms
<PAGE>
II. Due in part to the success that LOT$OFF has had in connection
with the Lawsuits, the price of LOT$OFF Common Stock has exceeded $3 per
share for at least the last ninety days. At $3 per share and above, no Class
7 Creditor would be economically served from any action other than immediate
conversion of their preferred shares to Common Stock and trading such Common
Stock in the open market. The Common Stock is the only security of LOT$OFF
that is publicly traded (OTC Bulletin Board). LOT$OFF has already redeemed
all shares of previously issued Series A Preferred Stock and such stock is no
longer available to be traded on the Bulletin Board.
III. By this Motion, LOT$OFF requests the Court's permission to
consolidate the steps described within the Confirmed Plan. Specifically,
instead of issuing Series B Preferred Stock, then issuing Series A Conversion
Rights, then allowing the parties to convert their stock to Series A
Preferred Stock, and/or then redeeming such Series A Preferred Stock, LOT$OFF
requests leave of this Court to issue 2 shares of Common Stock for each share
of Series B Preferred Stock or Series A Preferred Stock which would otherwise
be issued to Class 7 Creditors. LOT$OFF requests that such leave be granted
only for such periods during which the Common Stock is trading at a price in
excess of $3 per share.
IV. This Court may grant the relief requested within this Motion.
Because of the Claims Objection process, no Series B Stock or Series A
Conversion Rights have been issued to date to holders of Allowed Class 7
Claims. LOT$OFF expects that the first issuance will be made within the next
30 days upon this Court's ruling upon certain objections to claims or other
resolutions thereto. Accordingly, the portions of the Confirmed Plan that
LOT$OFF seeks to consolidate have not yet been consummated to the point which
would make such consolidation imprudent.
V. The consolidation of such portions of the Confirmed Plan is in
the best economic interests of the Class 7 Creditors. Furthermore, it will
reduce steps which are cumbersome and which generate fees to transfer agents
and other third parties.
VI. A declaration of Charles Fuhrmann in support of this Motion is
attached hereto as Exhibit "A."
WHEREFORE, LOT$OFF requests that this Court enter an order authorizing
LOT$OFF, as a distribution agent to Class 7 Creditors within the Confirmed
Plan, to consolidate the treatment of Class 7 Creditors by the issuance
<PAGE>
of 2 shares of Common Stock in lieu of any single share of Series B Preferred
Stock, Series A Conversion Rights or Series A Preferred Stock, as the case
may be, which would otherwise have been issued pursuant to the Confirmed
Plan. LOT$OFF requests that such leave be granted only for such periods
during which the Common Stock is trading at a price in excess of $3 per
share. LOT$OFF respectfully requests that this Court grant the relief set
forth on the proposed form of order attached hereto as Exhibit "B." LOT$OFF
further requests that it be granted such other and further relief to which it
may show itself justly entitled.
Date: March 3, 1998
Respectfully Submitted,
SHEINFELD, MALEY & KAY, P.C.
By: /s/ Samuel M. Stricklin
------------------------------------------
Samuel M. Stricklin
Texas Bar No. 19397050
Richard G. Grant
Texas Bar No. 08302650
1700 Pacific Avenue, Suite 4400
Dallas, TX 75201-4618
Telephone: (214) 953-0700
Facsimile: (214) 953-1189
ATTORNEYS FOR LOT$OFF CORPORATION
Exhibits:
- ---------
EXHIBIT "A" - Declaration of Charles Fuhrmann
EXHIBIT "B" - Proposed Form of Order
<PAGE>
CERTIFICATE OF SERVICE
I certify that a true and correct copy of the foregoing document (but not the
attached service list) was transmitted via Federal Express, Priority
Overnight, prepaid, on March 3, 1998 to the addresses below:
Nancy Ratchford
United States Trustee's Office
615 East Houston Street, Suite 533
San Antonio, Texas 78295-1539
Jack M. Partain, Jr.
Fulbright & Jaworksi, L.L.P.
300 Convent Street, Suite 2200
San Antonio TX 78205
/s/ Samuel M. Stricklin
----------------------------------
Samuel M. Stricklin
<PAGE>
EXHIBIT 99.2
UNITED STATES BANKRUPTCY COURT
FOR THE WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
In re: )
)
50-OFF STORES, INC., ) Case No. 96-54430-C through
a Delaware corporation; ) Case No. 96-54433-K, respectively,
50-OFF MULTISTATE OPERATIONS, INC., )
a Nevada corporation; ) Jointly Administered under
50-OFF TEXAS STORES, L.P., ) Case No. 96-54430-C
a Texas limited partnership; and )
50-OFF OPERATING COMPANY, INC., ) Chapter 11
a Nevada corporation, )
)
Debtors. )
DECLARATION OF CHARLES J. FUHRMANN II IN SUPPORT OF
(1) MOTION TO SHORTEN AND LIMIT NOTICE OF MOTION FOR
LEAVE TO CONSOLIDATE CERTAIN STEPS TO BE TAKEN
PURSUANT TO CONFIRMED PLAN OF REORGANIZATION; AND
(2) MOTION FOR LEAVE TO CONSOLIDATE CERTAIN STEPS
TO BE TAKEN PURSUANT TO CONFIRMED PLAN OF REORGANIZATION
--------------------------------------------------------
My name is Charles J. Fuhrmann II. I am over the age of 21. I have never
been convicted of a felony or crime involving dishonesty. I have personal
knowledge of the matters set forth herein. I obtained such knowledge in my
capacity as the chief executive officer of the above-captioned debtors in their
bankruptcy cases and as the President of LOT$OFF Corporation ("LOT$OFF"). In
such capacities, I was heavily involved in the formulation, drafting and
implementation of the Debtors' Joint Plan of Reorganization, As Amended and as
modified, which this Court confirmed on June 3, 1997 (the "CONFIRMED PLAN").
At the time that this Court considered and ruled upon confirmation of
the Confirmed Plan, the Debtors in the above captioned bankruptcy cases were
plaintiffs in certain lawsuits, including specifically (a) 50-OFF STORES,
INC. V. BANQUE PARIBAS (SUISSE), S.A., ET AL., Case No. SA95-CA-0159, pending
in the United States District Court, Western District of Texas, San Antonio
Division, and (b) 50-OFF STORES, INC. V. JEFFERIES & COMPANY, INC. &
JEFFERIES INT'L. LTD., Cause No. 96-CI-00349, pending in the Texas District
Court for Bexar County, Texas, (collectively the "LAWSUITS"). The Confirmed
Plan separately classified general unsecured creditors not otherwise
classified into Class 7. The treatment for Class 7 included a mechanism for
general unsecured creditors to receive certain benefits derived from the Net
Lawsuits Proceeds (as such term is defined within the Confirmed Plan). Very
generally described, the Confirmed Plan provided for the issuance of Series B
Preferred Stock in the amount of $3,991,050 on a pro-rata basis to Allowed
Class 7 Claims.(2) $3,991,050 is the amount at which the Debtors carried the
Lawsuits upon their books and records. Because the Series B Preferred Stock
was and is to be issued with a $5.00 face liquidation preference, 798,210 of
such shares are slated to be issued, which is $3,991,050 divided by $5. Upon
LOT$OFF actually receiving Net Lawsuits' Proceeds, Series A Conversion
- --------------------------------------------------------------------------------
(2) This Declaration is intended to provide only a general overview
of the Confirmed Plan. Reference should be made to the Confirmed Plan for its
specific terms
<PAGE>
Rights are to be issued to the holders of such Series B Preferred Stock.
Upon receipt of such Series A Conversion Rights, a holder would then be
capable of converting Series B Preferred Stock to Series A Preferred Stock.
The Confirmed Plan further generally provided that upon receipt of Net
Lawsuits' Proceeds in excess of $3,991,050, the Reorganized Debtors would begin
issuing Series A Preferred Stock on a pro-rata basis to holders of Allowed Class
7 Claims. Such stock would be issued in the amount of $5.00 face liquidation
value for each $5 of Net Lawsuits' Proceeds together with cash (see the next
sentence) up to the full face amount of the Allowed Class 7 Claim. Furthermore,
the Confirmed Plan required cash sharing for at least certain portions of the
Net Lawsuits' Proceeds if certain amounts were achieved.
The Confirmed Plan further provided that Series A Preferred Stock would be
redeemable. Specifically, at page P-23, the Confirmed Plan provided as follows:
Subject to restrictions imposed by Delaware law, Reorganized 50-OFF
may, at its option, redeem the shares of the Series A Preferred Stock
in whole or in part, at any time, in exchange for the payment of the
Series A Liquidation Preference; provided, however, at the time of
providing the notice of redemption the New Common Stock must have
closed at a price of at least $3.00 per share for at least five
consecutive days. Redemption shall be accomplished using the
procedures set forth within the Series A Preferred Stock Certificate
of Designation.
Certain aspects of the Lawsuits have now been settled. Specifically,
LOT$OFF's claims against Bank Paribas (Suisse) were settled in November 1997 for
$2.4 million. LOT$OFF's claims against Jefferies were settled in January 1998
for approximately $4.3 million. In addition, on November 20, 1997, a jury
returned a verdict for approximately $13 million in actual damages and $138
million in punitive damages against the Chase Manhattan Bank, N.A. Judgment has
been entered upon such verdict. All post-judgment motions were recently denied
by the presiding Federal District Judge (the Honorable H.F. Garcia).
Due in part to the success that LOT$OFF has had in connection with the
Lawsuits, the price of LOT$OFF Common Stock has exceeded $3 per share for at
least the last ninety days. At $3 per share and above, no Class 7 Creditor
would be economically served from any action other than immediate conversion of
their preferred shares to Common Stock and trading such Common Stock in the open
market. The Common Stock is the only security of LOT$OFF that is publicly
traded (OTC Bulletin Board). LOT$OFF has already redeemed all shares of
previously issued Series A Preferred Stock, and such stock is no longer
available to be traded on the Bulletin Board.
I have reviewed the Motion for Leave to Consolidate Certain Steps to be
Taken Pursuant to Confirmed Plan of Reorganization, including the proposed form
of order granting the motion (the "MOTION FOR LEAVE"). The facts stated therein
are true to the best of my knowledge. Specifically, the consolidation of such
portions of the Confirmed Plan is in the best economic interests of the Class 7
Creditors. Furthermore, it will reduce steps which are cumbersome and which
generate fees to transfer agents and other third parties.
The steps which LOT$OFF seeks to consolidate in the Motion for Leave are
steps which LOT$OFF will be taking in connection with the Confirmed Plan. At
or above a trading price of $3 per share for the Common Stock, LOT$OFF has
the right to redeem all Series A Preferred Stock at $5 per share; upon
providing notice of such redemption any holder of such Preferred Stock would
be ill-advised to take any action other than to exercise its right to convert
a single share of Series A Preferred Stock to 2 shares of Common Stock.
Certainly, converting to 2 shares of Common Stock valued at $3+ per share
(for a total of $6+) would be better than
<PAGE>
allowing a redemption for $5. Thus, the issuance, directly, of 2 shares of
Common Stock in lieu of 1 share of Preferred Stock makes economic and
substantive sense for the creditors within Class 7 so long as the Common
Stock is trading at or above the $3 per share redemption threshold.
Accordingly, the consolidation of the steps as requested by the Motion for
Leave is merely ministerial and administrative in nature.
Based upon my knowledge of who would (or rather would not be) effected by
reducing notice and shortening the time for consideration, and based upon my
belief that the relief requested is merely ministerial in nature, I firmly
believe that it is appropriate for this Court to limit notice of the Motion for
Leave to the United States Trustee's Office and Jack R. Partain, Jr., counsel
for the Class 7 Agent in these cases, and to shorten notice such that the Motion
for Leave is considered by the Court at the Court's earliest convenience without
the need of a hearing. Such shortening and limiting of notice will accelerate
the time by which shares may be issued and reduce expenses to LOT$OFF.
I declare under penalty of perjury that the foregoing is true and correct
to the best of my knowledge.
Date: March 3, 1998
/s/ Charles J. Fuhrmann II
------------------------------------
Charles J. Fuhrmann II
<PAGE>
EXHIBIT 21
LOT$OFF CORPORATION
SUBSIDIARIES OF REGISTRANT
<TABLE>
State of
Incorporation Business
Subsidiaries of Registrant or Jurisdiction Name
- -------------------------- --------------- --------
<S> <C> <C>
1. 50-Off Operating Company Nevada LOT$OFF
2. 50-Off Multistate Operations, Inc. Nevada LOT$OFF
3. You Pay Half Investments, Inc. Nevada N/A
4. 50-Off Texas Management, Inc. Nevada LOT$OFF
5. 50-Off Texas Stores, L.P. Texas LOT$OFF
6. Giant Sequoia Corporation Delaware N/A
7. W3 L.P. Delaware N/A
8. Mountain Laurel Corporation Delaware N/A
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-43783 of LOT$OFF Corporation on Form S-8 of our report dated May 5, 1998,
appearing in this Annual Report on Form 10-K of LOT$OFF Corporation for the
fiscal year ended January 30, 1998.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Antonio, Texas
May 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
LOT$OFF CORPORATION'S FINANCIAL STATEMENTS AS OF JANUARY 30, 1998 AND FOR
THE YEAR ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1998
<PERIOD-END> JAN-30-1998
<CASH> 474
<SECURITIES> 0
<RECEIVABLES> 113
<ALLOWANCES> 0
<INVENTORY> 15,310
<CURRENT-ASSETS> 16,163
<PP&E> 7,647
<DEPRECIATION> 4,014
<TOTAL-ASSETS> 20,344
<CURRENT-LIABILITIES> 15,575
<BONDS> 1,263
0
0
<COMMON> 41
<OTHER-SE> 3,464
<TOTAL-LIABILITY-AND-EQUITY> 20,344
<SALES> 48,462
<TOTAL-REVENUES> 48,462
<CGS> 33,638
<TOTAL-COSTS> 33,638
<OTHER-EXPENSES> 24,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787
<INCOME-PRETAX> (6,915)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,915)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,915)
<EPS-PRIMARY> (1.69)
<EPS-DILUTED> (1.69)
</TABLE>
