<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 May 1, 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:
---- -----
-------------------
4,159,210 shares of the Registrant's Common Stock were outstanding at May 28,
1998, which includes 1,596,420 shares held in escrow and awaiting distribution
to holders of allowed general unsecured claims. See Item 2. Changes in
Securities.
<PAGE>
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
ITEM 1. Financial Statements (unaudited) . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets, May 1, 1998,
January 30, 1998 and May 2, 1997 . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations, thirteen weeks
ended May 1, 1998 and thirteen weeks ended May 2, 1997 . . . . . 5
Condensed Consolidated Statements of Cash Flows, thirteen weeks
ended May 1, 1998 and thirteen weeks ended May 2, 1997. . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . 8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . .15
PART II
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .18
ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . .18
ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . .19
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . .19
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . .19
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . .19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . .20
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
May 1, 1998 January 30,1998 May 2, 1997
----------- --------------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 574,238 $ 473,533 $ 590,730
Accounts receivable 93,532 113,463 206,887
Merchandise inventories 15,763,386 15,309,715 13,912,910
Prepaid and other current assets 280,221 265,814 402,056
------------ ------------ ------------
TOTAL CURRENT ASSETS 16,711,377 16,162,525 15,112,583
------------ ------------ ------------
PROPERTY AND
EQUIPMENT-NET 3,441,151 3,632,965 3,940,548
OTHER ASSETS 551,500 548,464 456,762
------------ ------------ ------------
TOTAL ASSETS $20,704,028 $20,343,954 $19,509,893
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
May 1, 1998 January 30, 1998 May 2, 1997
----------- ---------------- -----------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $ 5,333,535 $ 6,330,598 $ 7,660,908
Accounts payable-trade 3,215,610 3,132,965 1,550,344
Accounts payable-other 1,537,872 3,333,093 2,102,733
Accrued expenses and
other current liabilities 1,724,401 1,597,859 1,717,298
Bank checks outstanding 1,107,343 1,048,855 479,497
Current portion of long-term debt 190,120 131,553 -
----------- ----------- ----------
TOTAL CURRENT LIABILITIES 13,108,881 15,574,923 13,510,780
LONG-TERM DEBT AND OTHER
OBLIGATIONS, less current portion 3,021,135 1,263,263 -
LIABILITIES SUBJECT TO
COMPROMISE - - 30,193,052
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series B Preferred Stock - 3,991,050 -
Common Stock 41,578 25,325 122,009
Additional paid-in capital 64,470,611 60,447,467 36,022,264
Subscription receivable - - (3,991,050)
Accumulated deficit (59,938,177) (60,958,074) (56,347,162)
----------- ----------- ----------
TOTAL STOCKHOLDERS' EQUITY 4,575,012 3,505,768 (24,193,939)
----------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $20,704,028 $20,343,954 $19,509,893
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
------------------- -------------------
May 1, 1998 May 2, 1997
------------------- -------------------
<S> <C> <C>
NET SALES $12,234,903 $11,919,152
COST OF SALES 8,768,465 7,857,420
---------- ----------
GROSS PROFIT 3,466,438 4,061,732
---------- ----------
OPERATING EXPENSES:
Selling, advertising, general and
administrative 5,834,557 5,805,429
Depreciation and amortization 201,282 177,285
Reorganization items - 300,000
---------- ----------
TOTAL OPERATING EXPENSES 6,035,839 6,282,714
---------- ----------
OPERATING INCOME (LOSS) (2,569,401) (2,220,982)
OTHER INCOME (EXPENSE):
Non-operating income 3,815,737 -
Interest income (expense), net (226,439) (142,214)
---------- ----------
TOTAL OTHER INCOME (EXPENSE) 3,589,298 (142,214)
---------- ----------
INCOME (LOSS) BEFORE INCOME 1,019,897 (2,363,196)
TAXES
PROVISION FOR (BENEFIT FROM)
INCOME TAXES - -
---------- ----------
NET INCOME (LOSS) $ 1,019,897 $ (2,363,196)
---------- ----------
---------- ----------
INCOME (LOSS) PER COMMON
SHARE:
Basic $ .31 $ (.19)
---------- ----------
---------- ----------
Diluted $ .22 $ (.19)
---------- ----------
---------- ----------
WEIGHTED AVERAGE SHARES:
Basic 3,310,393 12,200,915
---------- ----------
---------- ----------
Diluted 4,634,030 12,200,915
---------- ----------
---------- ----------
</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>
Thirteen Weeks Ended
----------------------------------------------
May 1, 1998 May 2, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $1,019,897 $(2,363,196)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 201,282 177,285
Reorganization items - 300,000
Changes in assets and liabilities:
Accounts receivable 19,931 510,965
Merchandise inventories (453,671) (937,952)
Prepaid and other current assets (14,407) (8,530)
Other assets (3,036) (98,419)
Accounts payable-trade 82,645 333,883
Accounts payable-other (1,795,221) 281,234
Accrued expenses and other
current liabilities 126,542 (206,212)
--------- ---------
Net cash provided by (used in) operating
activities (816,038) (2,010,942)
--------- ---------
--------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures, net (9,468) (129,073)
--------- ---------
Net cash provided by (used in) investing activities (9,468) (129,073)
--------- ---------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
----------------------------------------------
May 1, 1998 May 2, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from (payments on) credit facility (997,063) 2,264,328
Bank checks outstanding 58,488 (88,213)
Net proceeds from (payments on) long-term debt 1,816,439 (266,667)
Cash in escrow - 330,000
Proceeds from the exercise of stock options 48,347 -
--------- ---------
Net cash provided by (used in) financing
activities 926,211 2,239,448
--------- ---------
Increase (decrease) in cash and cash equivalents 100,705 99,433
Cash and cash equivalents at
beginning of period 473,533 491,297
--------- ---------
Cash and cash equivalents at
end of period $ 574,238 $ 590,730
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 266,000 $ 166,298
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL
ACTIVITIES:
Conversion of Series B Preferred Stock to:
Common Stock $ 15,964 -
Additional paid in capital $ 3,975,086 -
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated balance sheet at January 30, 1998 has been
condensed from the audited consolidated balance sheet at January 30,
1998.
The condensed consolidated balance sheets at May 1, 1998 and May 2,
1997 and the condensed consolidated statements of operations and cash
flows for the thirteen weeks ended May 1, 1998 and the thirteen ended
May 2, 1997 have been prepared by the Company without audit. In the
opinion of management, all adjustments necessary to present fairly the
condensed consolidated financial position, results of operations and
cash flows have been made. The results of operations for the thirteen
week period ended May 1, 1998 are not necessarily indicative of the
operating results for a full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in
the Registrant's annual report on Form 10-K for the year ended
January 30, 1998.
Management has been redirecting the Company's retail activities from
50-OFF's off-price retailing concept to LOT$OFF's extreme value,
close-out retailing concept. Coincident and consistent with this
change has been a change in the mix of products, historically a
majority in family apparel, to a majority in non-apparel merchandise,
principally through the addition of new product categories and the
elimination of apparel categories subject to substantial markdowns and
inventory shrink. The Company continues to maintain a healthy showing
of basic family apparel products in its stores. The actual
merchandise mix fluctuates by category, by season and by store based
on customer needs and buying trends, demographics and the availability
of products at close-out prices. This merchandising concept is
designed to appeal to value-conscious shoppers and other bargain
hunters, and management is hopeful its continued implementation will
lead to higher initial mark-ups, less promotional pricing, fewer
markdowns, low inventory shrinkage, increased store traffic and
improved operating results. The Company's business plan is focused on
achieving higher gross margins, higher store contribution and
controlled corporate overhead, all designed to promote overall
profitability, and on being a major factor in extreme value retailing
in Texas. The key elements of this strategy included the geographic
consolidation of the chain, the liquidation and closing of
under-performing stores or stores located outside of the reduced
market area with appropriate reductions in field and corporate
overhead and staffing, the conversion of the continuing 50-OFF stores
to LOT$OFF stores (only 14 of the 41 continuing stores had been
converted as of the filing of the voluntary bankruptcy petitions on
October 9, 1996; all stores had been converted by January 30, 1998)
and a reduced overhead structure. The management team is now
concentrating on optimizing the contribution from store operations
while maintaining only the absolute minimum amount of corporate
overhead necessary to support store operations, on collecting on
judgments from significant litigation (see Note 5) and on maximizing
shareholder value.
The Company's ability to successfully reorganize and continue as a
going concern will be affected by a number of factors, including, but
not limited to, the need to remain in compliance with the terms,
covenants and conditions of it revolving credit facility, the degree
of success in continuing to increase sales, 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 the total stores in operation and the reduction in the
geographic area it serves has facilitated its efforts to improve the
Company's operating performance and that the recapitalization
implemented upon the consummation of its Plan, coupled with the
receipt of net lawsuit proceeds and the receipt of contingent claim
proceeds from GECC (see Note 3), have strengthened its financial
position and alleviated concerns of credit and merchandise suppliers,
no assurance can be given
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<PAGE>
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.
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 June
12, 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 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), 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 six (net) new stores in
Texas, through fiscal 1999. No assurance can be given, however, that
such sources of capital will be sufficient or that the Company will be
successful in its continuing efforts to attain 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
("MetLife") at a face amount of $850,000; and the Plan provided for
the payment of such amount over approximately seven years. MetLife
agreed to such treatment with the balance of its claim (approximately
$3.3 million) becoming an allowed general unsecured claim. 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 $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
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<PAGE>
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
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 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 $100.00 per Unit. The
record date for determining which holders of 50-OFF common stock
("Old Common Stock") were entitled to vote on the Plan and receive
such rights was March 21, 1997. Persons who acquired Old Common
Stock after such record date were not entitled to vote on the Plan
or subscribe for Units pursuant to the Rights Offering. The Rights
Offering expired on May 22, 1997. At the confirmation hearing on
June 3, 1997, the Company announced it had received more than
enough subscriptions for Units for the required minimum in the
Rights Offering to be met. Subscriptions received in the Rights
Offering were held in escrow with Bank One, Texas N. A. pending the
Effective Date of the Plan.
Contemporaneously with its filing of the Plan on February 6, 1997, the
Company filed the Disclosure Statement With Respect to the Debtors'
Joint Plan of Reorganization ("the Disclosure Statement") setting
forth more detailed information regarding the Company and the Plan.
Under applicable Court rules and procedures, a hearing was held to
review and approve the Disclosure Statement, which was approved as
containing adequate information in accordance with section 1125 of the
Bankruptcy Code on March 20, 1997. Upon approval of the Disclosure
Statement by the Court, the Plan and Disclosure Statement were
furnished to all creditors of the bankruptcy estates and all holders
of Old Common Stock as of March 21, 1997 and was also filed with the
SEC. Votes in support of the Plan were solicited, and, at the
confirmation hearing on June 3, 1997, the Company announced that the
Plan had been approved by both creditors and stockholders.
On the Effective Date, certain key elements of the Plan were
implemented, including: the Company's corporate name was changed from
50-OFF to LOT$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: Liabilities in existence at October 9, 1996 were reflected as
liabilities subject to compromise in the May 2, 1997 consolidated
balance sheet. The principal categories of claims included in
liabilities subject to compromise at May 2, 1997 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, the $30,193,052 of liabilities subject to compromise
as included in the consolidated balance sheet as of May 2, 1997 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 further 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. Such shares of Common Stock
are in an escrow account at Continental Stock Transfer & Trust Company
for the benefit of holders of allowed general unsecured claims pending
delivery upon the filing and/or resolution of claims objections.
Future obligations, if any, to the allowed general unsecured creditors
(up to the full face amount of their allowed claims, depending on Net
Lawsuits' Proceeds as defined in the Plan) may be satisfied by the
issuance of Common Stock and/or cash (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 and June 12, 1998) with GECC
providing the Company with a line of credit through June 16, 2000 of
up to $15,000,000, including letters of credit. Borrowings under the
line are limited to a borrowing base equal to a percentage of eligible
inventory at cost: August 15 through December 15, 65%; and December
16 through August 14, 60%. Interest under the line is charged on
funds borrowed at the annualized yield of 30-day commercial paper
(currently 5.55%) plus 3%. The line of credit is collateralized by
inventory, accounts receivable and other assets. The credit
agreement, as amended, contains various restrictive covenants,
including restrictions on the payment of dividends on Common Stock,
and various financial covenants, including minimum availability,
minimum working capital and minimum EBITDA. On December 22, 1997, the
Company entered into an amendment to the credit agreement allowing for
additional availability of $1.0 million from December 22 through
December 31, 1997 and $2.0 million from January 1 through February 15,
1998. On February 15, 1998, the Company entered into another
amendment to the credit agreement allowing for additional availability
of $1,250,000 from February 15 through March 1, 1998. On April 17,
1998, the Company entered into a further amendment to the credit
agreement in conjunction with the acquisition by GECC of a contingent
claim on a $10,000,000 portion of the potential net proceeds from the
$148,575,000 judgment against The Chase Manhattan Bank ("Chase") for
$5,800,000, or 58 cents on the dollar. See Long-term Debt below. The
effect of this amendment was the waiver of existing covenant
violations and related defaults under the credit agreement through May
31, 1998. On June 12, 1998, the Company entered into a further
amendment to the credit agreement, adjusting the minimum availability,
minimum working capital and minimum EBITDA financial covenants and
eliminating the minimum gross margin, maximum capital expenditures and
minimum inventory financial covenants. On May 1, 1998, the Company
had approximately $7,729,000 available for borrowings under the credit
facility (after reserves of $879,000) of which $5,334,000 was
committed, leaving a net availability of $2,395,000, and was not in
default under the credit agreement.
LONG-TERM DEBT
Long-term debt for the quarter ending May 1, 1998 consists of four
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 and were classified as liabilities subject
to compromise (see Note 3) for the thirteen weeks ending May 2, 1997.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MAY 1, 1998 JANUARY 30, 1998
------------------ ----------------
<S> <C> <C>
Promissory notes collateralized by
furniture, fixtures and equipment . . . . $ 848,941 $ 849,559
Notes to ad valorem taxing
authorities . . . . . . . . . . . . . . . 400,389 414,698
Notes to taxing authorities, other
than ad valorem taxing authorities. . . . 130,559 130,559
Guarantee to GECC . . . . . . . . . . . . $1,831,366 -
Less: current portion. . . . . . . . . . (190,120) (131,553)
--------- ---------
$3,021,135 $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
-12-
<PAGE>
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 $9-10,000,000 (but in no event less than a
guaranteed $3,000,000), according to a scheduled payout with respect
to its contingent claim. The $3,000,000 minimum is
cross-collateralized to the Company's indebtedness to GECC (see Credit
Facility, above) and is payable upon the sooner of the resolution of
the Chase litigation, April 17, 2003 or certain other events. While
the Company has been advised by its counsel that it is more likely
than not that the Chase litigation will be resolved prior to April 17,
2003 for an amount sufficient to relieve the Company of any liability
under the $3,000,000 guarantee, the Company reflects a $1,831,366
(discounted at 10%) liability in the consolidated balance sheet for
the minimum guarantee to GECC.
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 breach of contracts, securities fraud,
conspiracy and conversion. The conversion claim related to actions of
the defendants in transferring, selling and trading the shares despite
the fact that the defendants had never paid for such shares. 50-OFF
sought recovery of actual and punitive damages and pre- and
post-judgment interest.
On October 14, 1997, the trial of this case began before the Honorable
H.F. Garcia. Defendants, Paribas, Chase and Dennis Morris, appeared
and announced ready for trial. On November 14, 1997, after four weeks
of evidence, the Company entered into a Settlement Agreement and Full
and Final General Release with Paribas. As part of the settlement,
Paribas agreed to pay the Company $2,400,000 (of which the Company
received $1,800,000 after attorneys' 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 has given notice that it will appeal the
judgment entered by the court
-13-
<PAGE>
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. While
the parties were unable to reach a resolution at such conference,
discussions have continued.
On April 6, 1998, the court entered default judgments against Betafid
S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited,
Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on
the Company's claims for violations of Section 10b-5 of the
Securities Exchange Act and common law fraud. Such judgments total
$166,275,000, plus pre-judgment interest on $12,975,000 at 10% per
annum from November 18, 1994 until April 6, 1998 and post-judgment
interest on the entire amount at 5.31% from April 6, 1998.
The Company intends to vigorously pursue the favorable judgments
obtained against defendants in the above matter. The Company, based
upon advice from counsel, believes that it will obtain a favorable
result in the appeal of the judgment against defendant Chase
referenced in the above proceeding. 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
MAY 1, 1998 MAY 2, 1997
-------------- --------------
<S> <C> <C>
Net Income (Loss) Applicable to Common Stock $1,019,897 $(2,363,196)
Weighted Average Number of Shares 4,134,917 4,128,860
Earnings Per Share $ 0.25 $ (0.57)
</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 Net Sales
--------------------------------------
Thirteen Weeks Ended
--------------------------------------
May 1, 1998 May 2, 1997
----------------- -----------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 71.7 65.9
Selling, advertising, general and administrative 47.7 48.7
Depreciation and amortization 1.6 1.5
Reorganization items 0.0 2.5
Operating income (loss) (21.0) (18.6)
Other income (expense), net 29.3 (1.2)
Income (loss) before income taxes 8.3 (19.8)
Provision for (benefit from) income taxes 0.0 0.0
Net income (loss) 8.3% (19.8)%
</TABLE>
<TABLE>
<CAPTION>
Percentage Change
-------------------------------
13 Weeks Ended
May 1, 1998 compared to
13 Weeks Ended May 2, 1997
-------------------------------
<S> <C>
Net sales 2.6%
Cost of sales 11.6%
Selling, advertising, general and administrative 0.5%
Depreciation and amortization 13.5%
Reorganization items (100.0)%
Operating loss 15.7%
Other income (expense), net not a meaningful figure
Income (loss) before income taxes not a meaningful figure
Provision for (benefit from) income taxes 0.0%
Net income (loss) not a meaningful figure
Weighted average number of stores 5.5%
</TABLE>
-15-
<PAGE>
THIRTEEN WEEKS ENDED MAY 1, 1998 COMPARED TO THIRTEEN WEEKS ENDED MAY 2, 1997:
The net sales increase of 2.6% for the thirteen weeks ended May 1, 1998 compared
to the thirteen weeks ended May 2, 1997 is attributable primarily to a 5.5%
increase in the weighted average number of stores in operation (from 41.7
stores to 44.0 stores) and a 4% 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 revenue, including revenue from leased shoe
departments.
Cost of sales as a percentage of net sales increased from 65.9% for the thirteen
weeks ended May 2, 1997 to 71.7% for the thirteen weeks ended May 1, 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 merchandising philosophy. Excluding the $342,091 of revenue realized
on the sale of the aged merchandise and the cost of sales of $761,281 (including
$423,400 of markdowns), the cost of sales as a percentage of net sales would
have been 66.6% for the recent period.
Selling, advertising, general and administrative expense decreased from 48.7% of
net sales for the thirteen weeks ended May 2, 1997 to 47.7% of net sales for the
thirteen weeks ended May 1, 1998 due primarily to higher sales and improved
operating efficiencies. The 0.5% increase in the amount of selling,
advertising, general and administrative expense compared to the thirteen weeks
ended May 2, 1997 was the result of the 5.5% increase in the weighted average
number of stores in operation.
Depreciation and amortization expense increased by 13.5% in the thirteen weeks
ended May 1, 1998 compared to the comparable period of fiscal 1998, due
primarily to the increased number of stores in operation and capital
expenditures associated with the conversions of existing stores to the LOT$OFF
format.
Other income (expense) improved $3,731,512, from an expense of $142,214 in the
thirteen weeks ended May 2, 1997 to income of $3,589,298 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 and partially offset by
higher interest expense caused by a higher average outstanding loan balance for
the quarter ended May 1, 1998 and the cessation of interest accrual on
liabilities subject to compromise in the fiscal 1998 period.
The Company's income before income taxes for the thirteen weeks ended May 1,
1998 compared to the loss for the thirteen weeks ended May 2, 1997 is primarily
due to the corporate reorganization described above and in Note 4 to Notes to
Condensed Consolidated Financial Statements.
Income tax expense related to the income for the thirteen weeks ended May 1,
1998 was not recognized because of the Company's substantial tax loss
carryforward to shelter the income. 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.
Income tax benefit related to the loss for the fiscal 1998 period was not
recognized because the utilization of such benefit was not assured.
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
-16-
<PAGE>
currently expects to be operating 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
Company's Lawton, Oklahoma store closed on May 5, 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 new 13,800 square foot store in San Angelo, Texas the week of June 8,
1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company began fiscal 1998 with cash of $473,533. During the thirteen weeks
ended May 1, 1998, the Company generated $926,211 from financing activities
($48,347 from the exercise of stock options under the Company's stock option
plan, $1,831,366 from the obligation to GECC related to the corporate
reorganization discussed in Note 4 of Notes to Condensed Consolidated Financial
Statements and $58,488 from an increase in bank checks outstanding, net of a
$997,063 paydown of the Company's outstanding balance under its credit agreement
with GECC), used $816,038 in operating activities, used $9,468 for capital
expenditures and ended the period with cash on hand of $574,238.
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 $15,000,000. The credit facility bears interest at a floating rate equal
to the published rate for thirty-day commercial paper issued by major
corporations (5.53% at May 1, 1998) plus 3% per annum and provides for an unused
facility fee of 0.5% per annum. Borrowings under the facility are available in
aggregate amounts up to 65% of LOT$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 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 below and Notes 1 and 4 of Notes to Condensed Consolidated
Financial Statements. As of June 9, 1998, LOT$OFF had approximately
$7,476,000 available for borrowings under the credit facility (after reserves of
$885,000) of which $6,190,000 was committed, leaving a net availability of
$1,286,000.
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 $5.8 million (see Notes 4 and 5 of
Notes to Condensed Consolidated Financial Statements), anticipated proceeds from
outstanding litigation, its operating cash flow and its cash on hand will be
adequate to finance its operations, including the opening of six (net) new
stores in Texas, through fiscal 1999. No assurance can be given, however, that
such sources of capital will be sufficient or that the Company will be
successful in its continuing efforts to attain profitability. For this reason,
any investment in Common Stock should be considered speculative. The receipt of
additional proceeds from the significant litigation brought by the Company could
add significantly to the Company's liquidity and capital resources. See Notes 1
and 5 of Notes to Condensed Consolidated Financial Statements.
SIGNIFICANT LITIGATION
The Company has received a jury verdict and substantial judgments in its favor
from a lawsuit related to certain parties' breaches of contractual obligations
to purchase 1,500,000 shares of Old Common Stock and actions in misappropriating
and removing these shares from an escrow account prior to payment for such
shares. The Company intends to vigorously pursue all reasonable available
avenues to effect the receipt of payment for actual and punitive damages. The
matter is being handled by counsel on a contingency fee basis. The Company,
based upon advice of counsel, believes that it will obtain a favorable result in
this lawsuit. See Note 5 of Notes to Condensed Consolidated Financial
Statements for further discussion of this matter.
SEASONALITY AND QUARTERLY FLUCTUATIONS
As with most retailers, highest net sales and operating income are experienced
during the fourth quarter, which includes the Christmas/holiday selling season.
Otherwise, LOT$OFF's business is heaviest on weekends (Friday through Sunday)
and at
-17-
<PAGE>
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.
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, including
the level of advertising and pre-opening expenses associated with such openings,
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.
FORWARD-LOOKING INFORMATION
This Form 10-Q, including Management Discussion 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 identified set forth below and
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 herein 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 and ability fo finance its
operations, including the opening of six (net) new stores, are competitive
practices in the close-out merchandising industry generally and particularly
in the Company's targeted market and the ability of the Company to fund its
continuing operations in the event of poor operating performance or adverse
industry or economic conditions.
PART II
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of Note 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
On March 19, 1998, in response to the Company's motion to modify the Plan by
consolidating certain steps to be taken pursuant to the Plan and with the
support of the Class 7 agent and its counsel, representing Class 7 creditors
(the allowed general unsecured creditors) under the Plan, the Court entered an
order to consolidate the treatment of Class 7 creditors by allowing the issuance
of two shares of Common Stock in lieu of any single share of Series B Preferred
Stock, Series A Conversion Rights or Series A Preferred Stock, as the case may
be, which would otherwise have been issued pursuant to the Plan. The immediate
effect of the order was to cause the conversion of the previously issued, but
not delivered, 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 of any
obligation of the Company to issue Series A Conversion Rights or Series A
Preferred Stock to allowed general unsecured creditors under the Plan. Such
shares of Common Stock are in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections. Future
obligations, if any, to the allowed general unsecured creditors (up to the full
face amount of their allowed claims, depending on Net Lawsuits' Proceeds as
defined in the Plan) may be satisfied by the
-18-
<PAGE>
issuance of Common Stock and/or cash (provided that at least the Excess Net
Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be paid in
cash).
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The Company's Annual Meeting of Stockholders will be held July 14, 1998 in San
Antonio, Texas. The record date for the Annual Meeting was May 28, 1998. At
May 28, 1998, there were 4,159,210 shares of Common Stock outstanding, 1,596,420
shares of which are held in an escrow account at Continental Stock Transfer &
Trust Company for the benefit of holders of allowed general unsecured claims
pending delivery upon the filing and/or resolution of claims objections under
the Company's confirmed Plan of Reorganization, as Amended and Modified. Such
escrowed shares are not entitled to vote at the Annual Meeting.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 10 - Fifth Amendment to the General Electric Capital
Corporation Revolving Credit Agreement
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 18, 1998 reporting the following:
A decision and order was entered by Judge Leif M. Clark in the
Company's bankruptcy proceeding in the United States District Court
for the Western District of Texas, San Antonio Division effectively
denying creditors in the bankruptcy proceeding leave to file late
proofs of claim or, alternatively, excuse from filing proofs of claim
by finding that the confirmation of the Company's plan of
reorganization, as amended and modified, operates as RES JUDICATA to
bar the allowance of any late claims that have been or might be filed
in the Company's bankruptcy case.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
LOT$OFF CORPORATION
By: /s/ CHARLES J. FUHRMANN II
------------------------------------------------
Charles J. Fuhrmann II, Chairman, President, and
Chief Executive Officer (Principal Executive
Officer)
By: /s/ JEFF SEIDEL
------------------------------------------------
Jeff Seidel, Vice President, Chief Financial
Officer (Principal Financial and Accounting
Officer)
-19-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Exhibit 10 21
Exhibit 27 27
</TABLE>
-20-
<PAGE>
EXHIBIT 10
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
This Fifth Amendment to Revolving Credit Agreement (this "Amendment"),
made as of the 12th of June, 1998, among LOT$OFF CORPORATION, 50-OFF TEXAS
STORES, L.P., 50-OFF OPERATING COMPANY, AND 50-OFF MULTISTATE OPERATIONS, INC.,
as Borrowers (collectively, the "Borrowers"), and GENERAL ELECTRIC CAPITAL
CORPORATION, as Lender (the "Lender"),
W I T N E S S E T H:
WHEREAS, the Borrowers and the Lender are parties to that certain
Revolving Credit Agreement dated as of June 16, 1997, as amended by that certain
First Amendment to Revolving Credit Agreement dated as of August 28, 1997, 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 and by that certain Fourth Amendment to Revolving Credit
Agreement dated as of April 17, 1998 (as further amended, modified, restated or
supplemented from time to time, the "Credit Agreement"); and
WHEREAS, the Borrowers have requested that certain terms of the Credit
Agreement be amended, and the Lender has agreed to the requested amendments on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
that all capitalized terms used but not otherwise defined herein shall have the
meanings ascribed thereto in the Credit Agreement, and further agree as follows:
1. AMENDMENT TO ARTICLE 1. Article 1 of the Credit Agreement
is hereby amended by adding the following definition of "Fifth Amendment Date"
in appropriate alphabetical order:
"'FIFTH AMENDMENT DATE' shall mean June 12, 1998."
2. Amendment to Section 5.1. Section 5.1 of the Credit Agreement
is hereby amended by deleting subsection thereof in its entirety and by
replacing such subsection with the following:
"(c) Within thirty (30) days prior to the close of each Fiscal Year,
the monthly projections of Parent's (on a consolidated basis with its
Subsidiaries) balance sheet, income statement, cash flow stateemtn, capital
expenditures and depreciation for each Fiscal Period of Parent and its
Subsidiaries for the current Fiscal Year, together with a certification of
the Controller, Chief Accounting Officer or Chief Financial Officer of
Parent stating that such projectiosn have been approved by Parent's board
of directors; provided, however, that Borrower Representative shall
deliver such projectiosn with respect to Fiscal Year 2000 within sixty
(60) days prior to the close of Fiscal Year 1999."
3. AMENDMENT TO SECTION 6.19. Section 6.19 of the Credit
Agreement is hereby amended by deleting Section 6.19 thereof in its entirety and
by replacing such section with the following:
<PAGE>
"6.19 MINIMUM AVAILABILITY. Borrowers shall maintain at all times
after the Fifth Amendment Date, and demonstrate to Lender upon Lender's
request that Borrowers have, Availability of not less than $500,000."
4. AMENDMENTS TO ARTICLE 7. Article 7 of the Credit Agreement is
hereby amended by deleting Sections 7.17, 7.18, 7.19, 7.20, 7.21 and 7.27
thereof in their entirety and replacing such sections, respectively, with
the following:
"7.17 CONSOLIDATED EBITDA.
(A) Borrowers will not permit cumulative Consolidated EBITDA
calculated on a Fiscal Year-to-date basis for Fiscal Year 1999, for any
period ending on the last day of any Fiscal Period set forth below to be
less than the amount set forth opposite such Fiscal Period:
<TABLE>
<CAPTION>
Fiscal Period/year Amount
------------------ ------
<S> <C>
May 1998 ($3,200,000)
June 1998 ($3,800,000)
July 1998 ($4,400,000)
August 1998 ($4,800,000)
September 1998 ($5,400,000)
October 1998 ($5,800,000)
November 1998 ($6,000,000)
December 1998 ($5,100,000)
January 1999 ($5,900,000)
</TABLE>
7.18 [INTENTIONALLY OMITTED].
7.19 [INTENTIONALLY OMITTED].
2
<PAGE>
7.20 [INTENTIONALLY OMITTED].
7.21 MINIMUM CONSOLIDATED WORKING CAPITAL RATIO.
Borrowers will not permit the Consolidated working Capital Ratio on
the last day of any Fiscal Period, (i) commencing with Fiscal Period May
1998 through Fiscal Period September 1998, to be less than 1.50 to 1.00,
(ii) commencing with Fiscal Period October 1998 through Fiscal Period
December 1998, to be less than 1.25 to 1.00 and (iii) commencing with
Fiscal Period January 1999 and each Fiscal Period ended thereafter, to be
less than 1.50 to 1.00.
7.27 [INTENTIONALLY OMITTED] Covenant Revisions. On or before
the end of Fiscal Year 1999. Borrowers and Lender shall agree to amend
Section 7.17 of this Agreement to establish appropriate financial covenant
levels (including but not limited to, setting a minimum consolidated EBITDA
threshold for each Fiscal Period for Fiscal Year 2000, which in Section 7.17
of this Agreement), which levels shall be based upon the projections
delivered to Lender pursuant to Section 5.1(c) hereof with respect to Fiscal
Year 2000."
5. WAIVERS. The Lender hereby waives (i) each Event of Default
listed on Schedule 1 attached hereto as of the Fiscal Period Mah 1, 1998, and
(ii) all of its rights and remedies under the Credit Agreement which amy arise
as a result of such Events of Default; provided, that the waivers expressly set
forth herein shall not hinder, restrict or otherwise modify the rights and
remedies of the Lender following the occurrence of any other Default or Event of
Default under the Credit Agreement. Except for the waiver set forth in the
immediately preceding sentence, the text of the Credit Agreement and the other
Loan Documents shall remain in full force and effect, and the Lender hereby
reserves the right to require strict compliance in the future with all terms and
conditions of the Credit Agreement and other Loan Documents.
6. NO OTHER AMENDMENT. Except for the amendments expressly
set forth above, the text of the Credit Agreement and all other Loan
Documents shall remain unchanged and in full force and effect. The Borrowers
acknowledge and expressly agree that the Lender reserves the right to, and
does in fact, require strict compliance with all terms and provisions of the
Credit Agreement and the other Loan Documents.
7. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby
represents and warrants in favor of the Lender as follows:
(a) Such Borrower has the corporate power and authority (i) to
enter into this Amendment and (ii) to do all acts and things as are
required or contemplated hereunder to be done, observed and performed
by it;
(b) This Amendment has been duly authorized, validly executed and
delivered by one or more authorized signatories of such Borrower, and
constitutes the legal, valid and binding obligation of such Borrower,
enforceable against it in accordance with its terms;
(c) The execution and delivery of this Amendment and performance
by such Borrower under the Credit Agreement, as amended hereby, do not
and will not require the consent or approval of any regulatory authority
or governmental authority or agency having jurisdiction over such Borrower
which has not already been obtained, nor
3
<PAGE>
contravene or conflict with the charter documents of such Borrower, or the
provision of any statute, judgment, order, indenture, instrument,
agreement, or undertaking, to which such Borrower is party or by which any
of its properties are or may become bound;
(d) As of the date hereof, and after giving effect to this
Amendment (i) no Default or Event of Default exists under the Credit
Agreement or is caused by this Amendment, 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.
8. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall
become effective on the date that the Lender shall have received a duly
executed original signature page to this Amendment from the Borrowers.
9. 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.
10. LOAN DOCUMENT. This Amendment shall be deemed to be a
Loan Document for all purposes.
11. EXPENSES. The Borrowers agree to pay all reasonable
expenses to the Lender incurred in connection with this Amendment, including,
without limitation, all fees and expenses of counsel to the Lender.
12. COUNTERPARTS. This Amendment may be executed by one or
more of the parties hereto on any number of separate counterparts, each of
which shall be deemed an original and all of which, taken together, shall be
deemed to constitute one and the same instrument. Delivery of an executed
counterpart of this Amendment by facsimile transmission shall be as effective
as delivery of a manually executed counterpart hereof.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
4 <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
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
<PAGE>
LENDER: GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/ Timothy C. Huban
-------------------------------------------
Its: SENIOR VICE PRESIDENT OF GE CAPITAL
COMMERCIAL FINANCE, INC., BEING DULY
AUTHORIZED
------------------------------------------
FIFTH AMENDMENT TO REVOLVING CREDIT AGREEMENT
<PAGE>
SCHEDULE 1
FOR THE FISCAL MONTH ENDED MAY 1, 1998
SECITON 6.19 AFFIRMATIVE COVENANTS-MINIMUM AVAILABILITY.
LOT$OFF Corporation's Availability has been less than $1,500,000 beginning on
and since June 9, 1998.
SECITON 7.19 NEGATIVE COVENANTS-MINIMUM GROSS MARGIN.
LOT$OFF Corporation's generated a Gross Margin of 28.57% for the trailing 6
months through May 1 versus a covenant minimum of 32.00%.
<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 THIRTEEN WEEKS ENDED
MAY 1, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-01-1998
<PERIOD-END> MAY-01-1998
<CASH> 574
<SECURITIES> 0
<RECEIVABLES> 94
<ALLOWANCES> 0
<INVENTORY> 15,763
<CURRENT-ASSETS> 16,711
<PP&E> 7,625
<DEPRECIATION> 3,441
<TOTAL-ASSETS> 20,704
<CURRENT-LIABILITIES> 13,109
<BONDS> 3,021
0
0
<COMMON> 42
<OTHER-SE> 4,533
<TOTAL-LIABILITY-AND-EQUITY> 20,704
<SALES> 12,235
<TOTAL-REVENUES> 12,235
<CGS> 8,768
<TOTAL-COSTS> 8,768
<OTHER-EXPENSES> 7,522
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> 1,020
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,020
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,020
<EPS-PRIMARY> .31
<EPS-DILUTED> .22
</TABLE>
