<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13076
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LOT$OFF CORPORATION
DELAWARE 74-2640559
- ------------------------------------------ ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1201 Austin Highway, #116, San Antonio, TX 78209-4859
- ------------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
Telephone: (210) 805-9300
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes X No:
--- ---
- ------------
4,202,610 shares of the Registrant's Common Stock were outstanding at August
31, 1998, which includes 832,697 shares held in escrow and awaiting
distribution to holders of allowed general unsecured claims and 763,723
shares distributed to holders of allowed general unsecured claims on
September 14, 1998.
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<PAGE>
<TABLE>
<CAPTION>
FORM 10-Q INDEX
PAGE
PART I
<S> <C>
ITEM 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets: July 31, 1998
(unaudited); January 30, 1998; and August 1, 1997 (unaudited) . . . 3
Condensed Consolidated Statements of Operations: thirteen
and twenty-six weeks ended July 31, 1998 (unaudited) and
thirteen and twenty-six weeks ended August 1, 1997 (unaudited). . . 5
Condensed Consolidated Statements of Cash Flows: twenty-
six weeks ended July 31, 1998 (unaudited) and twenty-six
weeks ended August 1, 1997 (unaudited). . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (unaudited). . 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 13
PART II
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .19
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .19
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .19
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .20
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .20
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .20
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
July 31, 1998 January 30, 1998 August 1, 1997
------------- ---------------- --------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 526,272 $ 473,533 $ 453,388
Accounts receivable 992,586 113,463 616,469
Merchandise inventories 14,771,043 15,309,715 10,801,656
Prepaid and other current assets 309,448 265,814 548,792
----------- ----------- -----------
TOTAL CURRENT ASSETS 16,599,349 16,162,525 12,420,305
----------- ----------- -----------
PROPERTY AND
EQUIPMENT-NET 3,163,579 3,632,965 3,816,739
OTHER ASSETS 750,824 548,464 431,184
---------- ---------- ----------
TOTAL ASSETS $20,513,752 $20,343,954 $16,668,228
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
July 31, 1998 January 30, 1998 August 1, 1997
------------- ---------------- --------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $6,539,495 $6,330,598 $3,400,369
Accounts payable-trade 3,357,763 3,132,965 1,267,041
Accounts payable-other 1,751,441 3,333,093 2,119,447
Accrued expenses and
other current liabilities 1,671,025 1,597,859 1,721,594
Bank checks outstanding 960,069 1,048,855 1,088,575
Current portion of long-term debt 186,136 131,553 -
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 14,465,929 15,574,923 9,597,326
LONG-TERM DEBT AND OTHER
OBLIGATIONS, less current portion 4,066,902 1,263,263 1,444,762
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A Preferred Stock - - 4,280,400
Series B Preferred Stock - 3,991,050 3,991,050
Common Stock 42,026 25,325 8,561
Additional paid-in capital 65,136,349 60,447,467 56,147,275
Accumulated deficit (63,197,454) (60,958,074) (58,801,146)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,980,921 3,505,768 5,626,140
----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $20,513,752 $20,343,954 $16,668,228
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------- ---------------------------------
July 31, 1998 August 1, 1997 July 31, 1998 August 1, 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
NET SALES $11,130,934 $10,381,017 $23,365,837 $22,300,169
COST OF SALES 7,818,327 7,350,110 16,489,006 15,207,530
----------- ----------- ----------- -----------
GROSS PROFIT 3,312,607 3,030,907 6,876,831 7,092,639
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, advertising, general
and administrative 5,765,543 4,980,380 11,572,240 10,785,809
Depreciation and amortization 201,282 177,285 402,564 354,570
Pre-opening expenses 70,123 - 70,123 -
Store closing costs 597,610 - 723,256 -
Reorganization items 100,000 200,000 100,000 500,000
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 6,734,558 5,357,665 12,868,183 11,640,379
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (3,421,951) (2,326,758) (5,991,352) (4,547,740)
OTHER (INCOME) EXPENSE:
Non-operating (income) expense, net (392,317) - (4,208,054) -
Interest (income) expense, net 229,643 127,225 456,082 269,439
----------- ----------- ----------- -----------
TOTAL OTHER (INCOME) EXPENSE (162,674) 127,225 (3,751,972) 269,439
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (3,259,277) (2,453,983) (2,239,380) (4,817,179)
(BENEFIT FROM) INCOME TAXES - - - -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(3,259,277) $(2,453,983) $(2,239,380) $(4,817,179)
----------- ----------- ----------- -----------
PREFERRED DIVIDENDS - (30,315) - (30,315)
----------- ----------- ----------- -----------
EARNINGS APPLICABLE TO
COMMON STOCK $(3,259,277) $(2,484,298) $(2,239,280) $(4,847,494)
INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.78) $ (0.39) $ (0.54) $ (0.52)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES:
Basic 4,190,741 6,341,495 4,162,663 9,271,205
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
---------------------------------
July 31, 1998 August 1, 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(2,239,380) $(4,817,179)
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation and amortization 402,564 354,570
Asset impairment charges 119,912 -
Reorganization items 100,000 500,000
Non-cash interest expense on long-term debt 53,035 -
Changes in assets and liabilities:
Accounts receivable (329,123) 101,383
Merchandise inventories 538,672 2,173,302
Prepaid and other current assets (43,634) (155,266)
Other assets (14,510) (72,841)
Accounts payable-trade 224,798 108,072
Accounts payable-other (1,581,652) (828,555)
Accrued expenses and other current liabilities (26,834) 98,384
----------- -----------
Net cash provided by (used in) operating
activities 2,796,152 (2,538,130)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures, net (53,090) (182,549)
----------- -----------
Net cash provided by (used in) investing activities (53,090) (182,549)
----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
---------------------------------
July 31, 1998 August 1, 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit facility 32,525,530 28,251,967
Payments on credit facility (32,316,633) (30,248,178)
Bank checks outstanding (88,786) 520,865
Payments on long-term debt (58,750) (266,667)
Proceeds from long-term debt and warrants 2,719,369 -
Net proceeds from sale of Common and Preferred Stock - 4,094,783
Net proceeds from exercise of stock options 121,251 -
Cash in escrow - 330,000
----------- -----------
Net cash provided by (used in) financing
activities 2,901,981 2,682,770
----------- -----------
Increase (decrease) in cash and cash equivalents $ 52,739 $ (37,909)
Cash and cash equivalents at beginning of period 473,533 491,297
----------- -----------
Cash and cash equivalents at end of period $ 526,272 $ 453,388
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 385,618 $ 311,629
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES:
Conversion of liabilities subject to compromise to:
- Long-term debt $ - $ 1,394,816
- Accounts payable-other $ - $ 458,111
- Series B Preferred Stock $ - $ 3,991,050
- Additional paid-in capital $ - $24,349,075
Conversion of Series B Preferred Stock to:
- Common Stock $ 15,964 $ -
- Additional paid-in capital $ 3,975,086 $ -
Warrants issued $ 187,850 $ -
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
-7-
<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated balance sheet at January 30, 1998 has been
condensed from the audited consolidated balance sheet at January 30,
1998.
The condensed consolidated balance sheets at July 31, 1998 and August
1, 1997, the condensed consolidated statements of operations and cash
flows for the thirteen and twenty-six weeks ended July 31, 1998 and
August 1, 1997 and the condensed consolidated statements of cash flows
for the thirteen and twenty-six weeks ended July 31, 1998 and August
1, 1997 have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present fairly the
condensed consolidated financial position, results of operations and
cash flows have been made. The results of operations for the
twenty-six week period ended July 31, 1998 are not necessarily
indicative of the operating results for a full year or of future
operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in
the Registrant's annual report on Form 10-K for the year ended
January 30, 1998.
The Company is a regional, extreme value retailer specializing in
close-out merchandise. 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 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 designed to
promote overall profitability, and on being a major factor in extreme
value retailing in Texas. The key elements of this strategy include
the geographic consolidation of the chain and the liquidation and
closing of under-performing stores and stores located outside of the
reduced market area. The management team is concentrating on
optimizing the contribution from store operations while maintaining
only the absolute minimum amount of corporate overhead necessary to
support store operations, on expanding its presence in Texas, on
collecting on judgments from significant litigation (see Note 5) and
on maximizing shareholder value.
The Company's ability to continue as a going concern will be affected
by a number of factors, including, but not limited to, the need to
remain in compliance with the terms, covenants and conditions of it
revolving credit facility, the degree of success in continuing to
increase sales, the ability to achieve an operating profit and the
ability to maintain trade credit and merchandise flows to its stores.
While management believes that the downsizing of stores 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, the receipt of
contingent claim proceeds from GECC (see Note 4) and the recent note
financing (see Note 4), 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 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.
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<PAGE>
If the Company's plans to improve operations are not successful in
producing results which comply with the covenants of its revolving
credit facility (see Note 4), which the Company and GECC amended July
24, 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 believes that borrowings available under its revolving
credit facility, available trade credit, its restructuring of certain
obligations under the Plan, the $5.8 million in proceeds received 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 (see Notes 4 and 5), net proceeds from the
recent note financing, anticipated proceeds from outstanding
litigation, its operating cash flow and its cash on hand will be
adequate to finance its operations, including the opening of 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
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 liquidity and capital resources. See
Note 5.
NOTE 2: On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc.
("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 then 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. 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").
The Plan required that the Company's existing senior secured revolving
credit facility lender, General Electric Capital Corporation ("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 4. The Plan also provided for the restructure of
the Company's collateralized obligation to MetLife Capital Corporation
[recently acquired by an affiliate of GECC and now known as GE Capital
Business Asset Funding ("GEC-BAF")] at a face amount of $850,000; and
the Plan provided for the payment of such amount over approximately
seven years. GEC-BAF agreed to such treatment with the balance of its
claim (approximately $3.3 million) becoming an allowed general
unsecured claim. See Note 3.
The Plan also provided for the cancellation of all non-priority
unsecured indebtedness of the Company. Such cancellation caused the
elimination of over $25 million of unsecured debt and the $3.3 million
of collateralized debt which was converted to unsecured debt from the
Company's balance sheet. Under the Plan, as further modified by Court
order on March 19, 1998 (see Note 3), 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 holders of allowed
general unsecured claims are secured under the Plan by a lien up to
the full face amount of the balance of their allowed claims against
potential
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<PAGE>
net lawsuit proceeds over $3,991,050 from significant litigation being
prosecuted by the Company. See Note 5. 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 additional shares of Common Stock and/or
cash (provided that at least the Excess Net Lawsuits' 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 the Company's 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 Notes 3
and 5.
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 at $100.00 per Unit. The record date for
determining which holders of 50-OFF common stock ("Old Common Stock")
were entitled to vote on the Plan and receive such rights was March
21, 1997. Persons who acquired Old Common Stock after such record
date were not entitled to vote on the Plan or subscribe for Units
pursuant to the Rights Offering. The Rights Offering expired on May
22, 1997. At the confirmation hearing on June 3, 1997, the Company
announced it had received more than enough subscriptions for Units for
the required minimum in the Rights Offering to be met. Subscriptions
received in the Rights Offering were held in escrow with Bank One,
Texas N. A. pending the Effective Date of the Plan.
Contemporaneously with its filing of the Plan on February 6, 1997, the
Company filed the Disclosure Statement With Respect to the Debtors'
Joint Plan of Reorganization ("the Disclosure Statement") setting
forth more detailed information regarding the Company and the Plan.
Under applicable Court rules and procedures, a hearing was held to
review and approve the Disclosure Statement, which was approved as
containing adequate information in accordance with section 1125 of the
Bankruptcy Code on March 20, 1997. Upon approval of the Disclosure
Statement by the Court, the Plan and Disclosure Statement were
furnished to all creditors of the bankruptcy estates and all holders
of Old Common Stock as of March 21, 1997 and were also filed with the
SEC. Votes in support of the Plan were solicited, and, at the
confirmation hearing on June 3, 1997, the Company announced that the
Plan had been approved by both creditors and stockholders.
On the Effective Date, certain key elements of the Plan were
implemented, including: the Company's corporate name was changed from
50-OFF to LOT$OFF Corporation ("LOT$OFF" or the "Company"); the Old
Common Stock was canceled, along with all then existing options and
warrants to buy Old Common Stock; and 856,080 shares of LOT$OFF Series
A Preferred Stock (each such share was convertible into two shares of
Common Stock and was entitled to a 5.5%, $0.275, cumulative annual
dividend) and 856,080 shares of Common Stock (LOTS: CUSIP #
545674103) were issued to subscribers to the Rights Offering for gross
proceeds of $4,280,400. Also on the Effective Date, LOT$OFF entered
into a $15,000,000 revolving credit agreement maturing on June 16,
2000 with GECC. See Note 4. The proceeds of the facility, together
with the net proceeds from the Rights Offering, were used to
refinance the Company's debtor in possession facility, also with GECC,
and to provide post-confirmation working capital for increased
inventories for its then 41 stores and selected other general
corporate purposes, including financing LOT$OFF's exit from
bankruptcy.
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<PAGE>
NOTE 3: Prior to the Effective Date, liabilities in existence at October 9,
1996 were reflected as liabilities subject to compromise in the
Company's consolidated balance sheet. The principal categories of
claims included in such liabilities subject to compromise were as
follows:
<TABLE>
<S> <C>
Secured debt, 8.5%, collateralized by furniture,
fixtures and equipment...................................$ 4,179,942
Secured debt (capital leases), collateralized by signs... 88,498
Trade and other miscellaneous claims,
including costs of lease rejections of
approximately $5,869,000................................. 25,924,612
-----------
$30,193,052
-----------
-----------
</TABLE>
Under the Plan, these $30,193,052 of liabilities subject to compromise
were converted to: long-term debt - $1,394,816 (see Note 4); accounts
payable other - $458,111; Series B Preferred Stock - $3,991,050; and
additional paid in capital - $24,349,075. These amounts may be
subject to adjustments as a result of actions of the Court and/or
developments with respect to disputed claims. The procedures used to
determine the amount of any additional liabilities or of any
elimination of liabilities have not been completed.
On May 12, 1998, a decision and order was entered by Judge Leif M.
Clark in the Company's bankruptcy proceeding in the Court effectively
denying creditors in the bankruptcy proceeding leave to file late
proofs of claim or, alternatively, excuse from filing proofs of claim
by finding that the confirmation of the Company's Plan, operates as
RES JUDICATA to bar the allowance of any late claims that have been or
might be filed in the Company's bankruptcy case. The Company
estimates that at least $5.9 million of claims were eliminated by such
order. The Company's best estimate of the maximum amount of unsecured
claims which will ultimately be allowed by the Court is $28.3 million,
$3,991,050 of which were 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; additional amounts may
arise from the Court's fixing of allowed claims for disputed amounts.
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 undelivered, 798,210 shares of Series B
Preferred Stock into 1,596,420 shares of Common Stock and the
cancellation 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 unsecured creditors
under the Plan effective March 19, 1998. Of such shares of Common
Stock, 832,697 are now in an escrow account at Continental Stock
Transfer & Trust Company for the benefit of holders of allowed general
unsecured claims pending delivery upon the resolution of claims
objections; an initial distribution of 763,723 of such shares was made
September 14, 1998. Future obligations, if any, to the allowed
general unsecured creditors (up to the full face amount of their
allowed claims, depending only on Net Lawsuits' Proceeds as defined in
the Plan) may be satisfied by the issuance of additional shares of
Common Stock and/or cash (provided that at least the Excess Net
Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be
paid in cash).
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<PAGE>
NOTE 4: 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, April 17, 1998, June 12, 1998 and July 24,
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 5.56%) plus 3%. The line of credit is
collateralized by inventory, accounts receivable and other assets.
The credit agreement, as amended, contains certain reserve
requirements, various restrictive covenants, including restrictions
on the payment of dividends on Common Stock, and various financial
covenants, including minimum availability, minimum working capital
ratio and minimum EBITDA. On July 31, 1998, the Company had
approximately $8,347,000 available for borrowings under the credit
facility (after reserves of $749,000) of which $6,539,000 was
committed, leaving a net availability of $1,059,000, and was not in
default under the credit agreement.
LONG-TERM DEBT
Long-term debt at July 31, 1998 consists of five general types of
obligations. The furniture and fixture note, ad valorem tax notes and
non-ad valorem tax notes are long-term debts settled as part of the
Plan. Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, 1998 JANUARY 30, 1998
------------- ----------------
<S> <C> <C>
Promissory notes collateralized by
furniture, fixtures and equipment . . . . $819,516 $849,559
Notes to ad valorem taxing
authorities . . . . . . . . . . . . . . . 385,992 414,698
Notes to taxing authorities, other
than ad valorem taxing authorities. . . . 130,559 130,559
Guarantee to GECC . . . . . . . . . . . . 1,877,403 -
Senior subordinated notes . . . . . . . . 1,039,568 -
Less: current portion. . . . . . . . . . (186,136) (131,553)
---------- ----------
$4,066,902 $1,263,263
---------- ----------
---------- ----------
</TABLE>
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, resulting in a gain of
$3,815,737 net of certain related expenses. 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 5.
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
$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 Credit Facility, above) and is payable upon
the sooner of the resolution of the Chase litigation, April 17, 2003
or certain other events. As of July 31, 1998, the Company reflects a
$1,877,403 (discounted at 10%) liability in the consolidated balance
sheet for the minimum guarantee to GECC.
Effective July 31, 1998, the Company completed a private placement of
$1,445,000 principal amount of senior subordinated notes (the "Notes")
with detachable warrants to purchase up to 216,750 shares of
-12-
<PAGE>
Common Stock at $4.83 per share. The proceeds will be used to
facilitate and accelerate the Company's plans to open additional
stores in Texas and for working capital. The Notes accrue interest at
9.25% which is paid semi-annually and are specifically subordinated to
only GECC. There is no prepayment penalty on the Notes which mature
August 15, 2000 or at the option of the holder if a change in control
of the Company occurs (defined as an accumulation of 51% of the
Company's Common Stock by any person or group) after August 1, 1999.
The warrants to purchase Common Stock expire at the end of July 2002.
The Notes may be used in satisfaction of the warrant exercise price.
In conjunction with the placement, the Company issued an additional
72,250 warrants and paid $77,250 for fees and expenses.
NOTE 5: 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 were never 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"), Yanni Koutsoubos, Chase, Howard White 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 breaches of contracts, securities fraud,
conspiracy and conversion. The conversion claim related to actions of
the defendants in the transferring, selling and trading of 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' contingency 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 appealed the judgment entered by the
court to the Fifth Circuit Court of Appeals in New Orleans. The Fifth
Circuit Court of Appeals requested and arranged a pre-hearing
conference among the parties in New Orleans on May 14, 1998. The
parties were unable to reach a resolution at such conference, and,
while discussions have continued, there is no sign of resolution by
settlement. On August 6, 1998, Chase filed its appeal brief with the
Fifth Circuit Court o Appeals, and the Company has until October 8,
1998 to file its response.
-13-
<PAGE>
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. On May 19,
1998, the Company entered into a Settlement Agreement and Full and
Final General Release with Howard White and Aries Peak, Inc. As part
of the settlement, Howard White agreed to pay the Company $150,000 (of
which the Company received $100,000 after attorneys' contingency fees
but before other related expenses) in exchange for which the Company
agreed to dismiss all claims against Howard White and Aries Peak, Inc.
with prejudice.
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. To the extent reasonable, the
Company intends to vigorously pursue the collection of the sums owing
to the Company as per the judgments that have been obtained against
the other defendants, although the collection of these judgments is
uncertain. Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the
Company in these matters on a contingency fee basis.
The Company is party to certain other legal proceedings, none of which
are believed to be material.
NOTE 6: The following table shows pro forma earnings per share calculated
assuming that the Company's emergence from bankruptcy and the
resulting recapitalization discussed in Note 2 occurred as of the
beginning of each period.
<TABLE>
<CAPTION>
13 WEEKS ENDED 13 WEEKS ENDED 26 WEEKS ENDED 26 WEEKS ENDED
JULY 31, 1998 AUGUST 1, 1997 JULY 31, 1998 AUGUST 1, 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $(3,259,277) $(2,453,983) $(2,239,280) $(4,817,179)
Weighted average
number of shares 4,190,741 4,190,741 4,162,663 4,162,663
Earnings per share $(0.78) $(0.59) $(0.54) $(1.16)
</TABLE>
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth (i) certain items in the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated
and (ii) the percentage change in such items from the comparable period of the
prior year.
<TABLE>
<CAPTION>
Percentage of Sales
-------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------- ---------------------------
July 31, August 1, July 31, August 1,
1998 1997 1998 1997
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . 70.2 70.8 70.6 68.2
Selling, advertising, general and
administrative . . . . . . . . . . . . . . 51.8 48.0 49.5 48.4
Depreciation and amortization. . . . . . . . 1.8 1.7 1.7 1.6
Pre-opening expenses . . . . . . . . . . . . 0.6 - 0.3 -
Store closing costs. . . . . . . . . . . . . 5.4 - 3.1 -
Reorganization items . . . . . . . . . . . . 0.9 1.9 0.4 2.2
----- ----- ----- -----
Operating income (loss). . . . . . . . . . . (30.7) (22.4) (25.6) (20.4)
Other expense (income), net. . . . . . . . . (1.5) 1.2 (16.1) 1.2
----- ----- ----- -----
Total expenses . . . . . . . . . . . . . . . 129.3 123.6 109.6 121.6
----- ----- ----- -----
Income (loss) before income taxes. . . . . . (29.3) (23.6) (9.6) (21.6)
Net income (loss). . . . . . . . . . . . . . (29.3)% (23.6)% (9.6)% (21.6)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
Percentage Change
-------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
July 31, 1998 compared to July 31, 1998 compared to
Thirteen Weeks Ended Twenty-six Weeks Ended
August 1, 1997 August 1, 1997
--------------------------- --------------------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . 7.2% 4.8%
Cost of sales. . . . . . . . . . . . . . . . 6.4% 8.4%
Selling, advertising, general
and administrative. . . . . . . . . . . . 15.8% 7.3%
Depreciation and amortization. . . . . . . . 13.5% 13.5%
Reorganization items . . . . . . . . . . . . (50.0)% (80.0)%
Operating income (loss). . . . . . . . . . . 47.1% 31.7%
Other expense (income), net. . . . . . . . . NC NC
Income (loss) before income taxes. . . . . . 32.8% (53.5)%
Net income (loss). . . . . . . . . . . . . . 32.8% (53.5)%
</TABLE>
-15-
<PAGE>
THIRTEEN WEEKS ENDED JULY 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 1,
1997:
The net sales increase of 7.2% for the thirteen weeks ended July 31, 1998
compared to the thirteen weeks ended August 1, 1997 is attributable primarily to
a 6.3% increase in the weighted average number of stores in operation (from
41.0 stores to 43.6 stores ) and a 5% increase in comparable store merchandise
sales (due primarily to improved inventory balance at the store level and the
increased resources to promote customer traffic to the stores) and is partially
offset by a decline in other income, including income from leased shoe
departments.
Cost of sales as a percentage of net sales decreased from 70.8% for the thirteen
weeks ended August 1, 1997 to 70.2% for the thirteen weeks ended July 31, 1998,
due primarily to higher maintained margins compared to the prior year, offset
by a $150,000 charge for inventory markdowns anticipated at a closing store.
Without such charge, cost of sales as a percentage of net sales would have
been 68.9% for the fiscal 1999 period.
Selling, advertising, general and administrative expense increased from 48.0% of
net sales for the thirteen weeks ended August 1, 1997 to 51.8% of net sales for
the thirteen weeks ended July 31, 1998 due primarily to a substantial increase
in advertising expenses from approximately $219,000 (approximately 2.1% of
sales) for the thirteen weeks ended August 1, 1997 to $951,000 (approximately
8.5% of sales) for the thirteen weeks ended July 31, 1998. The 15.8% increase
in the amount of selling, advertising, general and administrative expense
compared to the thirteen weeks ended August 1, 1997 was the result of the 6.3%
increase in the weighted average number of stores in operation and the
substantial increase in advertising expenses.
Depreciation and amortization expense increased by 13.5% in the thirteen weeks
ended July 31, 1998 compared to the comparable period of fiscal 1998, due
primarily to capital expenditures associated with the increased number of
stores in operation and the second-half fiscal 1998 conversions of existing
stores to the LOT$OFF format.
Other (income) expense increased approximately $290,000, from an expense of
$127,000 in the thirteen weeks ended August 1, 1997 to income of $163,000 in the
comparable period of fiscal 1999, due primarily to income from litigation
partially offset by higher interest expense caused by a higher average
outstanding loan balance for the period ended July 31, 1998 and the cessation of
interest accrual on liabilities subject to compromise through June 16, 1997 of
the fiscal 1998 period.
The increase in the Company's loss before income taxes for the thirteen weeks
ended July 31, 1998 compared to the loss for the thirteen weeks ended August 1,
1997 is primarily due to store closing expenses, higher advertising and interest
expenses and pre-opening expenses.
Income tax benefits related to the losses for the fiscal 1998 and 1999 periods
were not recognized because the utilization of such benefits were not assured.
TWENTY-SIX WEEKS ENDED JULY 31, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
1, 1997:
The net sales increase of 4.8% for the twenty-six weeks ended July 31, 1998
compared to the twenty-six weeks ended August 1, 1997 is attributable primarily
to a 5.8% increase in the weighted average number of stores in operation (from
41.3 stores to 43.7 stores ) and a 4.1% increase in comparable store merchandise
sales (due primarily to improved inventory balance at the store level and the
increased resources to promote customer traffic to the stores) and is partially
offset by a decline in other income, including income from leased shoe
departments.
Cost of sales as a percentage of net sales increased from 68.2% for the
twenty-six weeks ended August 1, 1997 to 70.6% for the twenty-six weeks ended
July 31, 1998, due primarily to inventory markdowns taken primarily in April
1998 as part of an effort to liquidate aged merchandise, especially apparel
inconsistent with the Company's current merchandising philosophy, and a
$150,000 charge for inventory markdowns, anticipated at a closing store,
partially offset by otherwise higher maintained margins compared to the prior
year. Excluding the $342,091 of revenue realized on the sale of such aged
merchandise and the related cost of sales of $761,281 (including $423,400 of
markdowns) and the $150,000 charge, the cost of sales as a percentage of net
sales would have been 67.7% for the recent period reflecting the otherwise
higher maintained margins.
Selling, advertising, general and administrative expense increased from 48.4% of
net sales for the twenty-six weeks ended August 1, 1997 to 49.5% of net sales
for the twenty-six weeks ended July 31, 1998 due primarily to a substantial
increase in advertising expenses from approximately $1,149,000 (approximately
5.2% of sales) for the twenty-six weeks
-16-
<PAGE>
ended August 1, 1997 to $1,868,000 (approximately 8.0% of sales) for the
twenty-six weeks ended July 31, 1998. The 7.3% increase in the amount of
selling, advertising, general and administrative expense compared to the
twenty-six weeks ended August 1, 1997 was the result of the 5.8% increase in the
weighted average number of stores in operation and the substantial increase in
advertising expenses.
Depreciation and amortization expense increased by 13.5% in the twenty-six
weeks ended July 31, 1998 compared to the comparable period of fiscal 1998,
due primarily to capital expenditures associated with the increased number of
stores in operation and the second-half fiscal 1998 conversions of existing
stores to the LOT$OFF format.
Other (income) expense improved $4,021,000 from an expense of $269,000 in the
twenty-six weeks ended August 1, 1997 to income of approximately $3,752,000 in
the comparable period of fiscal 1999, due primarily to the corporate
reorganization described in Note 4 of Notes to Condensed Consolidated Financial
Statements and the related receipt of $5.8 million of proceeds from GECC
partially offset by higher interest expense caused by a higher average
outstanding loan balance for the period ended July 31, 1998 and the cessation of
interest accrual on liabilities subject to compromise through June 16, 1997 of
the fiscal 1998 period.
The decrease in the loss before income taxes for the twenty-six weeks ended July
31, 1998 compared to the loss for the twenty-six weeks ended August 1, 1997 is
due to the corporate reorganization described above and in Note 4 to Notes to
Condensed Consolidated Financial Statements.
Income tax benefits related to the losses for the fiscal 1998 and 1999 periods
were not recognized because the utilization of such benefits were not assured.
INCOME TAX
As of January 30, 1998, the Company had a federal tax net operating loss ("NOL")
carryforward of approximately $58,549,000 expiring through 2014, an alternative
minimum tax credit carryforward of approximately $337,000, which is available to
offset regular federal income taxes in the future until fully utilized, and a
targeted jobs credit carryforward of approximately $178,000 expiring in 2006
through 2009. As a result of the bankruptcy proceedings and the related Plan,
the NOL carryforward, tax credit carryforward 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")
and/or the receipt of substantial net lawsuit proceeds in excess of such debt.
In addition, IRC section 382 limits a NOL and a tax credit carryforward 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 and through
subsequent transactions by investors in the Company's Common Stock, the
ownership of the Company may be deemed to have changed by more than fifty
percent. Accordingly, to the extent NOL and tax credit carryforwards remain
after reduction under IRC section 108(b) and /or the receipt of any net lawsuit
proceeds, the ability to utilize remaining NOL and tax credit carryforwards may
be significantly restricted.
STORE DEVELOPMENT PLANS
While the Company will concentrate near term principally on developing existing
stores to full maturity, it is management's intention to expand the Company's
regional presence in existing and new markets, especially in Texas. The Company
currently expects to be operating over 50 stores by this fiscal year's
Christmas/holiday shopping season after the opening of new stores (limited to
existing and new markets in Texas) and the closing of certain stores (the
Lawton, Oklahoma store closed on April 25, 1998, the store in Shreveport,
Louisiana closed on July 23, 1998, the store in Lubbock, Texas closed on July
22, 1998, and the store in Amarillo, Texas is expected to close on September 23,
1998) through negotiated lease cancellations or lease expirations. New stores
are expected to be smaller than the Company's current stores which average
25,900 square feet (22,120 square feet of selling space). Consistent with its
store development plan, the Company opened a 13,800 square foot store in San
Angelo, Texas on June 6, 1998, a 19,200 square foot store in Lubbock, Texas on
July 25, 1998 and a 6,493 square foot store in Killeen, Texas on August 14,
1998. New stores are expected to open by the week of September 21, 1998 in
Carrollton (8,041 square feet) and Mesquite (8,506 square feet), Texas, by the
week of September 28, 1998 in Dallas (11,020 square feet), Bedford (12,616
square feet) and San Antonio (15,143 square feet), Texas, and by the week of
October 12, 1998 in Dallas (12,548 square feet), Irving (11,200 square feet) and
Lewisville (15,000 square feet), Texas.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company began fiscal 1998 with cash of $473,533. During the twenty-six
weeks ended July 31, 1998, the Company generated $2,901,981 from financing
activities ($121,251 from the exercise of stock options under the Company's
stock option plan, $1,829,369 from the obligation to GECC related to the
corporate reorganization discussed in Note 4 of Notes to Condensed Consolidated
Financial Statements, $895,000 from a private placement of Notes and warrants
also discussed in Note 4 and $208,897 from an increase in the Company's
outstanding balance under its credit agreement with GECC net of an $88,786
decrease in bank checks outstanding and $58,750 in payments on long term debt),
used $2,796,152 in operating activities, used $53,090 for capital expenditures
and ended the period with cash on hand of $526,272.
On June 16, 1997, the Company entered into a credit agreement with GECC
providing the Company with a revolving credit facility through June 16, 2000
of up to $15,000,000. The credit facility bears interest at a floating rate
equal to the published rate for thirty-day commercial paper issued by major
corporations (5.53% at July 31, 1998) plus 3% per annum and provides for an
unused facility fee of 0.5% per annum. Borrowings under the facility are
available in aggregate amounts up to 65% of LOT$OFF's eligible inventory for
the period from August 15 through December 15 and up to 60% for the period
from December 16 through August 14, subject to certain required reserves.
The credit facility is collateralized by inventory, accounts receivable and
other assets. The credit agreement, as amended, contains certain reserve
requirements, various restrictive covenants, including restrictions on the
payment of dividends on Common Stock, and various financial covenants,
including minimum EBITDA, minimum working capital and minimum availability.
See Notes 1 and 4 of Notes to Condensed Consolidated Financial Statements.
As of August 25, 1998, LOT$OFF had approximately $8,035,000 available for
borrowings under the credit facility (after reserves of $727,000) of which
$6,958,000 was committed, leaving a net availability of $1,077,000.
Management believes that borrowings available under its revolving credit
facility, available trade credit, its restructuring of certain obligations
under the Plan, 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 $5.8 million (see
Notes 3 and 5 of Notes to Condensed Consolidated Financial Statements), net
proceeds from the recent Note financing, anticipated proceeds from
outstanding litigation, its operating cash flow and its cash on hand will be
adequate to finance its operations, including the opening of new stores in
Texas, through fiscal 1999. No assurance can be given, however, that such
sources of capital will be sufficient or, in the case of anticipated proceeds
from important litigation, timely received or that the Company will be
successful in its continuing efforts to attain profitability. For these
reasons, any investment in Common Stock should be considered speculative, and
additional external financing may be necessary. The receipt of additional
proceeds from the significant litigation brought by the Company could add
significantly to the Company's liquidity and capital resources. See Notes 1
and 5 of Notes to Condensed Consolidated Financial Statements.
SIGNIFICANT LITIGATION
The Company has received a jury verdict and substantial judgments in its
favor from a lawsuit, under appeal, related to certain parties' breaches of
contractual obligations to purchase 1,500,000 shares of Old Common Stock and
actions in misappropriating and removing these shares from an escrow account
prior to payment for such shares. The Company intends to vigorously pursue
all reasonable available avenues to effect the receipt of payment for actual
and punitive damages. The matter is being handled by counsel on a
contingency fee basis. The Company, based upon advice of counsel, believes
that it will obtain a favorable result in this lawsuit. See Note 5 of Notes
to Condensed Consolidated Financial Statements for further discussion of this
matter.
SEASONALITY AND QUARTERLY FLUCTUATIONS
As with most retailers, highest net sales and operating income are experienced
during the fourth quarter, which includes the Christmas/holiday selling season.
Otherwise, LOT$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 results
of operations for an entire fiscal year.
-18-
<PAGE>
In addition to seasonality, the Company's results of operations may fluctuate
from quarter to quarter as a result of the timing of store openings and/or
closings, including the level of advertising and pre-opening expenses associated
with store openings and inventory markdowns and other expenses associated with
store closings, as well as other factors.
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.
YEAR 2000 COMPLIANCE
The Company is evaluating its information systems for Year 2000 compliance,
which refers to its having information systems that will accurately process date
and time data for the Year 2000 and beyond. The Company currently expects to
replace certain software programs, modify other software programs and complete
testing of all programs prior to July 1999 in order to achieve Year 2000
compliance. While a complete cost analysis cannot be done prior to completion
of the evaluation phase, the Company does not currently expect these costs to
have a material adverse effect on the Company's financial condition, results of
operations or liquidity. The Company is communicating with its suppliers of
products and services in order to assess the extent of those companies' Year
2000 compliance.
FORWARD-LOOKING INFORMATION
This Form 10-Q, including Management's Discussions and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, 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 set forth below and identified
elsewhere 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 and in Note 1 of Notes to Condensed
Consolidated Financial Statements, 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, the result and timing of resolution of significant litigation the
Company is pursuing and the ability of the Company to fund its continuing
operations in the event of disappointing operating performance or adverse
industry or economic conditions, including economic conditions along the
border of Texas and Mexico.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of Notes to Condensed Consolidated Financial Statements regarding a
lawsuit filed in February 1995. Such lawsuit was also reported in the Company's
annual reports on Form 10-K for the fiscal years ended February 3, 1995,
February 2, 1996, January 31, 1997 and January 30, 1998 and was the subject of a
report on Form 8-K dated December 9, 1997.
The Company is a party to certain other legal proceedings arising in the
ordinary course of business, none of which are believed to be material.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
-19-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held July 14, 1998 in San
Antonio, Texas. The record date for the Annual Meeting was May 28, 1998. At
May 28, 1998, there were 4,159,210 shares of Common Stock outstanding, 1,596,420
shares of which were held in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections under
the Company's confirmed Plan of Reorganization, as Amended and Modified. Such
escrowed shares were not entitled to vote at the Annual Meeting. During the
Annual Meeting, the Company's five directors were re-elected for one year terms.
ITEM 5. OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10 - Fifth Amendment to the General Electric Capital
Corporation Revolving Credit Agreement
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
LOT$OFF CORPORATION
By: /s/ CHARLES J. FUHRMANN II
-------------------------------------------------------
Charles J. Fuhrmann II, Chairman, President and
Chief Executive Officer (Principal Executive Officer)
By: /s/ JEFF SEIDEL
-------------------------------------------------------
Jeff Seidel, Vice President-Finance and Chief Financial
Officer (Principal Financial and Accounting Officer)
-20-
<PAGE>
EXHIBIT INDEX
Page
Exhibit 10
Exhibit 27
21
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EXHIBIT 10
SIXTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Sixth Amendment to Revolving Credit Agreement (this "Amendment"),
made as of the 24th of July, 1998, among LOT$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, 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, by that certain Third Amendment to Revolving Credit Agreement dated as
of February 15, 1998, by that certain Fourth Amendment to Revolving Credit
Agreement dated as of April 17, 1998, and by that certain Fifth Amendment to
Revolving Credit Agreement dated as of June 12, 1998 (as further amended,
modified, restated or supplemented from time to time, the "Credit Agreement");
and
WHEREAS, the Parent desires to issue (i) unsecured Indebtedness in an
original principal amount not to exceed $2,000,000 in the aggregate in favor of
various purchasers of the Indebtedness (collectively, the "Subordinated
Lenders") pursuant to the terms and conditions of those certain Subordinated
Notes issued by the Parent from time to time (collectively, as to all such
Subordinated Notes, the "Subordinated Notes"), which Indebtedness shall be
subordinated to the Obligations as set forth therein, and (ii) in connection
with the issuance of the Subordinated Notes, warrants to purchase up to 400,000
shares of common stock of the Parent (collectively, "the "Warrants"); and
WHEREAS, the Borrowers have requested, and the Lender as agreed, to
amend the Credit Agreement as set forth herein and on the terms and conditions
set forth herein, in order to permit, among other things, the Parent to issue
the Indebtedness in respect to the Subordinated Notes and to issue the Warrants
and the
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shares of common stock of the Parent in connection with the exercise of the
Warrants;
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.
a. Article 1 of the Credit Agreement is hereby amended by
adding the following definitions of "Sixth Amendment Date", Subordinated
Indebtedness", "Subordinated Lenders" and "Subordinated Notes" and Warrants" in
appropriate alphabetical order:
" 'SIXTH AMENDMENT DATE' shall mean July 24, 1998.
" 'SUBORDINATED INDEBTEDNESS' shall mean the Indebtedness issued under
the Subordinated Notes.
" 'SUBORDINATED LENDERS' shall mean those purchasers of the
Subordinated Notes identified on Schedule 1B to this Agreement as
supplemented by the Borrowers from time to time to reflect additional
purchasers, if any, of Subordinated Notes.
" 'SUBORDINATED NOTES' shall mean those certain Subordinated Notes
issued or to be issued by Parent in favor of the Subordinated Lenders in an
original principal amount not to exceed $2,000,000 in the aggregate, each
in substantially the form attached hereto as EXHIBIT H-1.
" 'WARRANTS' shall mean those certain Warrants, each in substantially
the form attached hereto as EXHIBIT H-2, issued or to be issued to the
Subordinated Lenders in connection with the issuance of the Subordinated
Notes, which Warrants shall be exercisable for up to an aggregate of
400,000 shares of common stock of the Parent."
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<PAGE>
b. Article 1 of the Credit Agreement is hereby further amended
by deleting the existing definition of "Restricted Payment" and by substituting
the following in lieu thereof:
" 'RESTRICTED PAYMENT' shall mean, with respect to any Person (i)
the declaration of any dividend or the incurrence of any liability to
make any other payment or distribution of cash or other property or
assets in respect of such Person's Stock, (ii) any payment on account
of the purchase, redemption or other retirement of such Person's Stock
or any other payment or distribution made in respect thereof, either
directly or indirectly, (iii) any payment, loan, contribution, or
other transfer of funds or other property to any holder of Stock of
any Borrower or any Subsidiary of any such Person except for
reasonably equivalent value or (iv) any direct or indirect payment to
any Person on account of the Subordinated Indebtedness."
2. AMENDMENT TO ARTICLE 4. Article 4 of the Credit Agreement is
hereby amended by adding the following new Section 4.29 at the end thereof:
"4.29 SUBORDINATED INDEBTEDNESS. Except as set forth on
Schedule 1B attached hereto, the Parent has not issued any
Subordinated Indebtedness. The original principal amount of all
Subordinated Indebtedness issued or to be issued by the Parent, if
any, will not exceed $2,000,000 in the aggregate."
3. AMENDMENT TO SECTION 6.8. Section 6.8 of the Credit Agreement
is hereby amended by deleting such section in its entirety and by replacing it
with the following:
"6.8 AGREEMENTS. Parent shall perform and shall cause each of
its Subsidiaries to perform within all required time periods (after
giving effect of any applicable grace periods), all of its obligations
and enforce all of its rights under each agreement, including, without
limitation, leases, the Warrants and the Subordinated Notes, to which
it is a party, where the failure to so perform and enforce would have
a Material Adverse Effect. Neither Parent nor any Subsidiary of
Parent shall terminate or modify in any manner adverse to any such
company any provision of any agreement (including,
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<PAGE>
without limitation, the Warrants and Subordinated Notes) to which it is a
party which termination or modification could have a Material Adverse
Effect. Parent shall not, without the prior written consent of Lender,
enter into any amendment of, or agree to or accept any waiver, of any of
the provisions of the Warrants or the Subordinated Notes."
4. AMENDMENT TO SECTION 6.9. Section 6.9 of the Credit Agreement is
hereby amended by adding the following sentence to the end thereof:
"Upon the issuance of any Subordinated Indebtedness subsequent to the
Sixth Amendment Date as may be permitted pursuant to Section 7.7 of
this Agreement, Borrower Representative shall also provide to Lender
executed copies of each Subordinated Note and each Warrant executed
and delivered by Parent in connection with such issuance."
5. AMENDMENT TO SECTION 7.7. Section 7.7 of the Credit Agreement
is hereby amended by deleting such section in its entirety and by replacing it
with the following:
"7.7 NEW INDEBTEDNESS. Parent shall not, and shall cause each
Subsidiary of Parent not to, create, incur, assume or permit to exist
or incur any Indebtedness except: (a) the Obligations; (b) Deferred
Taxes; (c) Capital Lease Obligations and Indebtedness secured by
purchase money Liens on Equipment permitted under clause (v) of the
definition of "Permitted Encumbrances" in a maximum aggregate amount
outstanding not to exceed $150,000 outstanding at any time; (d)
Indebtedness existing on the Closing Date and set forth in SCHEDULE
7.7 and Indebtedness permitted under Section 7.8 below; (e) unsecured
current obligations for trade debt incurred in the ordinary course of
Parent's and such Subsidiary's business, and obligations of the Parent
and its Subsidiaries for the payment of rental for any property (real,
personal or mixed, tangible or intangible) under leases, subleases or
similar arrangements (other than Capital Leases) incurred in the
ordinary course of Parent's business; and (f) from and after the Sixth
Amendment Date, unsecured Subordinated Indebtedness in an aggregate
principal amount not to exceed $2,000,000, issued by Parent to the
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Subordinated Lenders pursuant to the terms and conditions of the
Subordinated Notes."
6. AMENDMENT TO SECTION 7.13. Section 7.13 of the Credit
Agreement is hereby amended by deleting such section in its entirety and by
replacing it with the following:
"7.13 RESTRICTED PAYMENTS. Parent shall not and shall cause
each Subsidiary of Parent not to make any Restricted Payments
(including any refund or cancellation of subscriptions under the
Rights Offering which would cause the total amount received by the
Parent thereunder to be less than $3,050,000), except (a) Parent's
Subsidiaries may make Restricted Payments to Parent, (b) Parent may
pay dividends as required by the terms of its Series A preferred stock
to the holders thereof and (c) so long as no Default or Event of
Default then exists or would be caused thereby and subject to the
terms of subordination contained in the Subordinated Notes, Parent may
make payments of interest, whether accrued or scheduled, to the
Subordinated Lenders in respect of the Subordinated Indebtedness."
7. AMENDMENT TO SECTION 9.1. Section 9.1 of the Credit Agreement
is hereby amended by deleting subsection (c) thereof in its entirety and by
replacing such subsection with the following:
"(c) (i) There shall occur any default (which default is not or
waived within any applicable cure period) under the Subordinated Notes, or
any one of them or (ii) there shall occur a default by any Borrower under
any other agreement, document or instrument to which any Borrower is a
party or by which any Borrower or its property is bound, which default is
not cured before the expiration of any applicable grace or curative period
under such agreement, document or instrument or as otherwise may be granted
to such Borrower by the obligee, and such default (x) involves the failure
to make any payment (whether of principal, interest or otherwise) due
(whether by scheduled maturity, required prepayment, acceleration, demand
or otherwise) in respect of any Indebtedness of such Borrower in an
aggregate amount exceeding $100,000, except for payments lawfully withheld
by such Borrower as a setoff in connection with a good faith dispute
between such Borrower and the holder of such Indebtedness, or (y) causes
(or permits any holder of such Indebtedness or a trustee to cause) such
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<PAGE>
Indebtedness, or a portion thereof in an aggregate amount exceeding
$100,000, to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment; or"
8. AMENDMENT TO SCHEDULE 4.20. Schedule 4.20 to the Credit
Agreement is hereby modified and amended by deleting the existing schedule in
its entirety and by substituting the attached Schedule 4.20 in lieu thereof.
9. 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.
10. REPRESENTATION 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 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;
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<PAGE>
(d) The only Subordinated Indebtedness to be issued as of the
effective date hereof is as set forth on SCHEDULE 1B to the Credit
Agreement; and
(e) 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, 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.
11. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall
become effective as of the date first written above upon the receipt by the
Lender of (a) a duly executed original signature page to this Amendment from the
Borrowers and (b) a fully executed copy of each Subordinated Note and each
Warrant, and all other documents, if any, related to the issuance of the
Subordinated Indebtedness, issued and outstanding as of the date hereof.
12. 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.
13. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan
Document for all purposes.
14. 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.
15. 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.
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<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
Senior Vice President of GE Capital
Commercial Finance, Inc., being
duly authorized
8
<PAGE>
EXHIBIT "H-1"
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY OTHER APPLICABLE SECURITIES LAWS. THIS NOTE MAY NOT BE TRANSFERRED IN
THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND OTHER APPLICABLE SECURITIES LAWS
OR AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL TO THE COMPANY TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED.
THE PAYMENT OBLIGATIONS EVIDENCED BY THIS NOTE ARE SUBORDINATE TO THE CLAIMS OF
GENERAL ELECTRICAL CAPITAL CORPORATION AS MORE COMPLETELY SET FORTH HEREIN.
SENIOR SUBORDINATED NOTE
LOT$OFF Corporation (the "Company") promises to pay to or
registered assigns ("Holder"), the principal sum of Dollars
on August 15, 2000 as evidenced by this Senior Subordinated Note (the "Note").
1. INTEREST. The Company promises to pay interest on the principal
amount at a rate per annum equal to 9.25%. Interest will accrue from the date
on which this Note is issued and will be payable semi-annually commencing on
February 15, 1999 and at maturity. Interest will be computed on the basis of a
365-day year.
2. REDEMPTION. This Note is not redeemable at the option of either the
Company or the Holder.
3. SUBORDINATION. (a) The Holder hereby subordinates any and all claims
now or hereafter owing to it by the Company under this Note or otherwise to any
and all Senior Debt (including, without limitation, interest, fees, costs or
other payments on the Senior Debt paid or accrued at the commencement of a
bankruptcy or similar insolvency proceeding and whether or not such claims are
deemed allowable or recoverable under any such bankruptcy or similar insolvency
proceeding) and agrees that all Senior Debt due General Electric Capital
Corporation ("GECC") shall be paid in full in cash or otherwise satisfied to the
satisfaction of GECC and it's commitments to advance funds to the Company shall
be terminated before any payment may be made on amounts under this Note with
respect to principal, but not with respect to interest so long as no default or
event of default exists and is continuing under the GECC Agreements (as that
term is defined below), at which time interest and other payments may not be
paid under the Note.
(b) As used with respect to this Note, the term "Senior Debt" includes the
principal and other amounts outstanding from time to time owing by the Company
and certain of its
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<PAGE>
affiliates and subsidiaries to GECC as referenced by (i) that certain
$15,000,000 Revolving Credit Agreement dated as of June 16, 1997 by and among
the Company, 50-Off Texas Stores, L.P., 50-Off Multi-State Operations, Inc. and
50-Off Operating Company, as Borrowers, and GECC, as Lender, and (ii) that
certain Agreement of Limited Partnership of W3L.P. among Giant Sequoia
Corporation, as general partner, Mountain Laurel Corporation, as limited partner
and GECC, as preferred limited partner (collectively as to (i) and (ii), the
"GECC Agreements"), plus interest, fees, costs, expenses and other sums
chargeable to the Company by GECC pursuant to the GECC Agreements (including
interest, fees, costs, charges and other expenses which may accrue or may not be
paid with respect to any bankruptcy or similar insolvency proceedings which may
be filed by or against the Company irrespective of whether such interest, fees,
costs and expenses are deemed allowed or recoverable in any such proceeding),
together with any renewals, extensions, restructurings, modification, amendment,
refinancing or supplements thereto, and any other obligations owing by the
Company or its affiliates and subsidiaries to GECC under the GECC Agreements or
otherwise. The Senior Debt due GECC is secured debt. "Senior Debt" also
includes any other secured debt of the Company presently outstanding or
hereafter incurred and all renewals, extensions, refundings, restructurings,
amendments and modifications thereof.
(c) In case any funds shall be paid or delivered to the Holder in
violation of the foregoing subordination provision before the Senior Debt due
GECC shall have been paid in full in cash or otherwise satisfied to GECC s
satisfaction, such funds shall be held in trust by the Holder for and
immediately paid and delivered to GECC.
(d) The Holder agrees that the subordination of this Note to the Senior
Debt shall continue during any insolvency, receivership, bankruptcy,
dissolution, liquidation or other similar proceeding whether voluntary or
involuntary by or against the Company.
(e) Furthermore, Debt is any indebtedness, contingent or otherwise, in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of the Company or only to a portion thereof), or evidenced
by bonds, notes (including this Note), debentures or similar instruments or
letters of credit, or representing the balance deferred and unpaid of the
purchase price of any property or interest therein, except any such balance that
constitutes a trade payable, of and to the extent such indebtedness would appear
as a liability upon a balance sheet of the Company prepared on a consolidated
basis in accordance with generally accepted accounting principles.
The Company agrees, and the Holder by accepting the Note agrees, to the
subordination.
4. INDEBTEDNESS UNSECURED. All indebtedness owing pursuant to this Note
and all other indebtedness of the Company owing to the Holder shall at all times
be unsecured. The Holder agrees that if at any time it shall be in possession
of any assets or properties of the Company, the Holder shall hold such assets or
properties for the benefit of GECC with the same degree and care as the Holder
holds its own property so long as any Senior Debt due GECC remains unpaid and
until all commitments by GECC to make loans and advances to the Company are
terminated.
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<PAGE>
5. PERSONS DEEMED OWNERS. The registered Holder of this Note may be
treated as its owner for all purposes.
6. AMENDMENTS AND WAIVERS. This Note may be amended with the consent of
the Holder, and any existing default may be waived with the consent of the
Holder. Without the consent of the Holder, this Note may be amended to cure any
ambiguity, defect or inconsistency, or to make any other change that does not
adversely affect the rights of the Holder.
7. DEFAULTS AND REMEDIES. An Event of Default is: (i) default for 30
days in payment of interest or principal (at maturity) on this Note, or (ii)
accumulation by any person or group (as such term is used in Rule 13d-5 under
the Securities Act of 1934) of persons to, as a result of a tender or exchange
offer, open market purchases, merger, privately negotiated purchases or
otherwise, become, directly or indirectly, the beneficial owner (within the
meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of securities
having a majority or more of the ordinary voting power of then outstanding
securities of the Company. If an Event of Default occurs and is continuing, the
Holder may declare this Note to be due and payable immediately but in no event
before August 1, 1999. Any notice of such Event of Default shall be provided to
GECC at the address set forth on Schedule 1 to this Note. Holder may not
enforce this Note except as provided herein. The Company agrees to pay the
Holder's reasonable costs of collection including court costs and attorney's
fees.
8. NO RECOURSE AGAINST OTHERS. No director, officer, employee,
stockholder, agent or representative of the Company or GECC shall have any
liability for any obligation of the Company under this Note or for any claim
based on, in respect of or by reason of such obligations or their creation. The
Holder by accepting this Note waives and releases all such liability. Such
waiver and release are part of the consideration for the issue of this Note.
Dated: LOT$OFF Corporation
BY:
----------------------------------------------
CHARLES J. FUHRMANN II, President
11
<PAGE>
ASSIGNMENT FORM
To Assign this Note, fill in the form below.
I or we assign and transfer this Note to:
Assignee's social security or tax I.D. number:
Print or type assignee's name, address and zip code:
and irrevocably appoint
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
Date: Your signature*:
------------------------------------
*Sign exactly as your name appears on this Note.
12
<PAGE>
EXHIBIT "H-2"
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THIS
WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY OTHER APPLICABLE SECURITIES LAWS. NONE OF SUCH SECURITIES MAY BE
TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND OTHER APPLICABLE
SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED.
LOT$OFF CORPORATION
WARRANT
DATED: July ____, 1998
Number of Common Shares:
Holder:
Address:
- ----------------------------------
THIS CERTIFIES THAT the holder of this Warrant ("Holder") is entitled to
purchase from LOT$OFF Corporation, a Delaware corporation (the "Company"), at
the average closing bid price of the Company's common stock ("Common Stock") for
the three weeks ended July 31, 1998 in no event more than $5.00 per share the
number of shares set forth above. This Warrant shall expire on the fourth
anniversary of the date of issuance.
1. Neither this Warrant nor the Common Stock issuable on exercise of
this Warrant may be transferred, sold, assigned or hypothecated, unless
registered by the Company under the Securities Act of 1933, as amended (the
"Act") and other applicable securities laws or unless the Company shall have
received a written opinion of counsel satisfactory to counsel to the Company to
the effect that registration of the Warrant or the shares of Common Stock issued
on exercise of this Warrant is not necessary in connection with such transfer,
sale, assignment or hypothecation. This Warrant and the Common Stock issued
upon exercise of this Warrant shall be appropriately legended to reflect this
restriction and stop transfer instructions shall apply. The Holder shall
through its counsel provide such information as is reasonably necessary in
connection with such opinion.
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<PAGE>
2. The Holder is entitled to certain registration rights as set forth
under a Letter Agreement dated the date hereof.
3. Any permitted assignment of this Warrant shall be effected by the
Holder by (i) executing an appropriate form of assignment, (ii) surrendering the
Warrant for cancellation at the office of the Company, accompanied by the
opinion of counsel referred to above, and (iii) delivery to the Company of
certain statements and representations by the transferee (in a form acceptable
to the Company and its counsel) including, without limitation, a representation
to the effect that such Warrant is being acquired by the Holder for investment
only and not with a view to its distribution or resale; whereupon the Company
shall issue, in the name or names specified by the Holder (including the Holder,
if applicable) new Warrants representing, in the aggregate, rights to purchase
the same number of shares of Common Stock as are purchasable under the Warrant
surrendered. The transferor will pay all relevant transfer taxes. Replacement
warrants shall bear the same legend as is borne by this Warrant.
4. The term "Holder" shall be deemed to include any permitted record
transferee of this Warrant.
5. The Company covenants and agrees that all shares of Common Stock which
may be issued upon exercise hereof will, upon payment of the exercise price and
issuance, be duly and validly issued, fully paid and non-assessable. The
Company further covenants and agrees that, during the periods within which this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Common Stock for issuance upon
exercise of this Warrant and all other Warrants issued in replacement hereof.
6. This Warrant shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company.
7. In the event that as a result of a recapitalization, stock split,
stock dividend or like transaction, the outstanding shares of Common Stock of
the Company are at any time increased or decreased or changed into or exchanged
for a different number or kind of share or other security of the Company, then
appropriate adjustments in the number and kind of such securities then subject
to this Warrant shall be made effective as of the date of such occurrence. Such
adjustment shall be made successively whenever any event listed above shall
occur, and the Company will notify the Holder of the Warrant of each such
adjustment. Any fraction of a share resulting from any adjustment shall be
eliminated, and the price per share of the remaining shares subject to this
Warrant adjusted accordingly.
8. This Warrant may be exercised at any time prior to its expiration by
(i) surrender of this Warrant (with appropriate purchase form properly executed)
at the principal executive office of the Company (or such other office of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the exercise price (in cash or like principal amount of Senior Subordinated
Notes of the Company) for the number of shares of Common Stock specified in the
above-mentioned purchase form together with applicable stock transfer taxes, if
any; and (iii) the
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<PAGE>
delivery to the Company of certain statements and representations by the Holder
(in a form acceptable to the Company and its counsel) including, without
limitation, a representation to the effect that such shares of Common Stock are
being acquired by the Holder for investment only and not with a view to their
distribution or resale.
The certificates for the Common Stock so purchased shall be delivered
to the Holder within a reasonable time, not exceeding ten (10) business days
after all requisite documentation has been provided, after this Warrant shall
have been so exercised and shall bear a restrictive legend consistent with
applicable securities laws.
9. This Warrant shall be governed by and construed in accordance with the
laws of the State of Delaware. The Delaware courts shall have exclusive
jurisdiction over this instrument and the enforcement thereof. Service of
process shall be effective if by certified mail, return receipt requested. All
notices shall be in writing and shall be deemed given upon receipt by the party
to whom addressed.
IN WITNESS WHEREOF, LOT$OFF Corporation has caused this Warrant to be
signed by its duly authorized officer and to be dated as of the date set forth
above.
LOT$OFF Corporation
By:
---------------------------------------------
CHARLES J. FUHRMANN II, President
In the presence of:
- --------------------------------------------------
15
<PAGE>
SCHEDULE 1B
<TABLE>
<CAPTION>
- --------------------------------------------------------
SUB DEBT HOLDER AMOUNT
- --------------------------------------------------------
<S> <C>
Company #1 $250,000
Individual #1 225,000
Trust #1 200,000
Individual #2 150,000
Company #2 100,000
Company #3 50,000
Individual #3 100,000
Company #4 250,000
Individual #4 10,000
Trust #2 10,000
Trust #3 30,000
Individual #5 50,000
Trust #4 20,000
- --------------------------------------------------------
Total $1,445,000
- --------------------------------------------------------
</TABLE>
16
<PAGE>
SCHEDULE 4.20
There are no issued and outstanding shares of voting Stock of Parent held by any
holder who or which holds at least five percent (5%) of such issued and
outstanding shares on the date hereof other than the Depository Trust Company.
Outstanding rights, options, warrants, or agreements pursuant to which Parent
may be required to issue or sell Stock:
1. Options to purchase up to 800,000 shares of Common Stock granted or to be
granted under the Stock Option Plan of LOT$OFF Corporation
2. Warrants to acquire up to 400,000 shares of Common Stock issued or to be
issued in connection with the Subordinated Indebtedness
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LOT$OFF
CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE TWENTY-SIX WEEKS ENDED JULY
31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 526
<SECURITIES> 0
<RECEIVABLES> 993
<ALLOWANCES> 0
<INVENTORY> 14,771
<CURRENT-ASSETS> 16,599
<PP&E> 7,365
<DEPRECIATION> 4,202
<TOTAL-ASSETS> 20,514
<CURRENT-LIABILITIES> 14,466
<BONDS> 4,067
0
0
<COMMON> 42
<OTHER-SE> 1,939
<TOTAL-LIABILITY-AND-EQUITY> 20,514
<SALES> 23,366
<TOTAL-REVENUES> 23,366
<CGS> 16,489
<TOTAL-COSTS> 16,489
<OTHER-EXPENSES> 12,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 456
<INCOME-PRETAX> (2,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,239)
<EPS-PRIMARY> .54
<EPS-DILUTED> .54
</TABLE>
