<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 October 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13076
LOT$OFF CORPORATION
DELAWARE 74-2640559
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Austin Highway, #116, San Antonio, Texas 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:
--- ---
--------------------
4,203,610 shares of the Registrant's common stock were outstanding at
December 2, 1998 which includes 689,086 shares held in escrow and awaiting
distribution to holders of allowed general unsecured claims.
--------------------
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FORM 10-Q INDEX
<TABLE>
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PAGE
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PART I
ITEM 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets: October 30, 1998
(unaudited); January 30, 1998; and October 31, 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations: thirteen and
thirty-nine weeks ended October 30, 1998 (unaudited); and
thirteen and thirty-nine weeks ended October 31, 1997
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows: thirty-nine
weeks ended October 30, 1998 (unaudited); and thirty-nine
weeks ended October 31, 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 . . . . . . . . . . . . . . . . . . . . 15
PART II
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 20
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 21
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
October 30, 1998 January 30, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 556,582 $ 473,533 $ 511,137
Accounts receivable 174,012 113,463 725,436
Merchandise inventories 16,889,446 15,309,715 15,727,987
Prepayments and other
current assets 254,175 265,814 747,756
----------- ----------- -----------
TOTAL CURRENT ASSETS 17,874,215 16,162,525 17,712,316
----------- ----------- -----------
PROPERTY AND
EQUIPMENT-NET 3,235,544 3,632,965 3,831,268
OTHER ASSETS 719,370 548,464 405,275
----------- ----------- -----------
TOTAL ASSETS $21,829,129 $20,343,954 $21,948,859
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
October 30, 1998 January 30, 1998 October 31, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit facility $ 8,782,014 $ 6,330,598 $ 8,849,527
Accounts payable-trade 6,064,272 3,132,965 4,142,159
Accounts payable-other 2,149,337 3,333,093 1,868,505
Accrued expenses and
other current liabilities 1,636,175 1,597,859 2,136,796
Bank checks outstanding 953,755 1,048,855 1,075,778
Current portion of long-term debt 215,257 131,553 42,804
------------ ------------- ------------
TOTAL CURRENT LIABILITIES 19,800,810 15,574,923 18,115,569
------------ ------------- ------------
LONG-TERM DEBT, less
current portion 4,090,106 1,263,263 1,401,339
STOCKHOLDERS' (DEFICIT)
EQUITY:
Series A preferred stock - - 4,280,400
Series B preferred stock - 3,991,050 3,991,050
Common stock 42,045 25,325 8,561
Additional paid-in capital 65,139,405 60,447,467 56,147,275
Accumulated deficit (67,243,237) (60,958,074) (61,995,335)
------------ ------------- ------------
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (2,061,787) 3,505,768 2,431,951
------------ ------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY $ 21,829,129 $ 20,343,954 $ 21,948,859
------------ ------------- ------------
------------ ------------- ------------
</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 Thirty-nine Weeks Ended
-------------------------------- ------------------------------
Oct. 30, 1998 Oct. 31, 1997 Oct. 30, 1998 Oct. 31, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $10,419,964 $ 9,365,822 $33,785,801 $31,665,991
COST OF SALES 7,268,611 6,376,204 23,757,617 21,583,734
----------- ----------- ----------- -----------
GROSS PROFIT 3,151,353 2,989,618 10,028,184 10,082,257
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Selling, advertising, general
and administrative 6,150,880 5,745,409 17,723,120 16,531,218
Depreciation and amortization 202,977 193,311 605,541 547,881
Pre-opening expenses 377,707 31,811 447,830 31,811
Store closing costs 121,629 - 844,885 -
Reorganization items - - 100,000 500,000
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 6,853,193 5,970,531 19,721,376 17,610,910
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) (3,701,840) (2,980,913) (9,693,192) (7,528,653)
OTHER EXPENSE (INCOME):
Non-operating (income) expense (1,501) - (4,209,555) -
Interest (income) expense, net 345,444 154,417 801,526 423,858
------------- ------------- ------------- -------------
TOTAL OTHER (INCOME) EXPENSE 343,943 154,417 (3,408,029) 423,858
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES (4,045,783) (3,135,330) (6,285,163) (7,952,511)
(BENEFIT FROM) INCOME TAXES - - - -
------------- ------------- ------------- -------------
NET INCOME (LOSS) (4,045,783) (3,135,330) (6,285,163) (7,952,511)
PREFERRED DIVIDENDS - (58,856) - (89,171)
------------- ------------- ------------- -------------
EARNINGS APPLICABLE TO
COMMON STOCK $(4,045,783) $(3,194,186) $(6,285,163) $(8,041,682)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
INCOME (LOSS) PER COMMON SHARE:
Basic $ (0.96) $ (3.73) $ (1.51) $ (1.78)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE SHARES
Basic 4,202,951 856,080 4,176,092 4,513,023
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</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>
Thirty-nine Weeks Ended
------------------------------------------
October 30, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(6,285,163) $(7,952,511)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 605,541 547,881
Asset impairment charges 119,912 -
Reorganization items 100,000 500,000
Non-cash interest expense on long-term debt 150,909 -
Changes in assets and liabilities:
Accounts receivable (60,549) (7,584)
Merchandise inventories (1,579,731) (2,753,029)
Prepaid and other current assets 11,639 (370,256)
Other assets 16,944 (46,932)
Accounts payable-trade 2,931,307 2,983,190
Accounts payable-other (1,183,756) (579,496)
Accrued expenses and other current liabilities (61,684) 13,286
----------- -----------
Net cash provided by (used in) operating activities (5,234,631) (7,665,451)
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (328,032) (374,363)
----------- -----------
Net cash provided by (used in) investing activities (328,032) (374,363)
----------- -----------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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<PAGE>
LOT$OFF CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
---------------------------------------
October 30, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit facility 46,966,394 44,324,149
Payments on credit facility (44,514,978) (40,871,203)
Bank checks outstanding (95,100) 508,068
Payments on long-term debt (104,298) (267,287)
Proceeds from long-term debt and warrants 3,269,368 -
Net proceeds from sale of Common and Preferred
Stock - 4,094,783
Net proceeds from exercise of stock options 126,671 -
Other increases (decreases) to paid-in capital (2,345) -
Cash in escrow - 330,000
Dividend payment - (58,856)
------------ ------------
Net cash provided by (used in) financing activities 5,645,712 8,059,654
------------ ------------
Increase in cash and cash equivalents 83,049 19,840
Cash and cash equivalents at beginning of period 473,533 491,297
------------ ------------
Cash and cash equivalents at end of period $ 556,582 $ 511,137
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest: $ 572,409 $ 442,626
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL
ACTIVITIES:
Conversion of liabilities subject to compromise to:
- Long-term debt $ - $ 1,444,762
- Accounts payable-other $ - $ 626,503
- Series B preferred stock $ - $ 3,991,050
- Additional paid in capital $ - $ 24,188,229
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.
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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 October 30, 1998 and
October 31, 1997, the condensed consolidated statements of operations
and cash flows for the thirty-nine weeks ended October 30, 1998 and
October 31, 1997 and the condensed consolidated statements of cash
flows for the thirteen and thirty-nine weeks ended October 30, 1998
and October 31, 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 thirty-nine week period ended October 30, 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 a private note
financing (see Note 4), have strengthened its financial position, 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 ("Chase"), net proceeds from the private note
financing, anticipated proceeds from outstanding litigation, its
operating cash flow and its cash on hand will be adequate to finance
its operations. No assurance can be given, however, that such sources
of capital will be sufficient (additional external financing and/or
the restructuring of existing obligations may be necessary and would
be necessary if anticipated proceeds from outstanding litigation are
not timely received) 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 litigation brought by the
Company could add significantly to the Company's liquidity and capital
resources. See Notes 4 and 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 $3.2 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 $3.2 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
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<PAGE>
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 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.
As of December 2, 1998, the Court has fixed the amount of general
unsecured claims totaling approximately $19.7 million. Additional
claims totaling $6.6 million are unresolved. The Company's best
estimate of the maximum amount of unsecured claims which will
ultimately be allowed by the Court is $24.1 million, $3,991,050 of
which were satisfied by the issuance of 798,210 shares of Series B
Preferred Stock (see below) 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, 763,723, 20,001, 766 and 122,844 (907,334 shares in aggregate)
were delivered to a total of 853 holders of allowed general unsecured
claims in September 1998, October 1998, November 1998 and December
1998, respectively, and 689,086 were in an escrow account at
Continental Stock Transfer & Trust Company as of December 2, 1998 for
the benefit of holders of allowed general unsecured claims pending
delivery upon the 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 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 5.1%) 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 October 30, 1998, the Company had
approximately $9,601,000 available for borrowings under the credit
facility (after reserves of $778,000) of which $8,869,000 was
committed, leaving a net availability of $732,000, and was not in
default under the credit agreement.
LONG-TERM DEBT
Long-term debt at October 30, 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>
OCTOBER 30, 1998 JANUARY 30, 1998
---------------- ----------------
<S> <C> <C>
Promissory notes collateralized by
furniture, fixtures and equipment. . . . . . . . $ 806,961 $ 849,559
Notes to ad valorem taxing
authorities. . . . . . . . . . . . . . . . . . . 371,354 414,698
Notes to taxing authorities, other
than ad valorem taxing authorities . . . . . . . 112,203 130,559
Guarantee to GECC. . . . . . . . . . . . . . . . 1,924,598 -
Senior subordinated notes. . . . . . . . . . . . 1,090,247 -
Less: current portion . . . . . . . . . . . . . (215,257) (131,553)
---------- ----------
$4,090,106 $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 as a result of this transaction, 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 October 30, 1998, the
Company reflects a $1,924,598 (discounted at 10%) liability in the
condensed consolidated balance sheet for the minimum guarantee to
GECC.
-12-
<PAGE>
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 Common
Stock at $4.83 per share. The proceeds were used to facilitate and
accelerate the Company's opening of 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. 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 (Court of Appeals Docket #98-50288).
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
-13-
<PAGE>
reach a resolution at such conference, and, while discussions have
continued, there is no sign of resolution by settlement. On
August 7, 1998, Chase filed the appellant's brief with the Fifth
Circuit Court of Appeals; on October 9, 1998, the Company filed the
appellee's brief; and on November 12, 1998, Chase filed the reply
brief.
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 on November 20, 1998. Such judgment represents
$10,000,000 in actual damages and $20,000,000 in punitive damages.
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 substantial judgment
obtained against defendant Chase 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, especially Mr. Koutsoubos, 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 39 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 30, 1998 OCTOBER 31, 1997 OCTOBER 30, 1998 OCTOBER 31, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $(4,045,783) $(3,135,332) $(6,285,163) $(7,952,511)
Weighted average
number of shares 4,202,951 4,202,951 4,176,092 4,176,092
Earnings per share $(0.96) $(0.75) $(1.51) $(1.90)
</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 Thirty-nine Weeks Ended
--------------------------- -------------------------
October 30, October 31, October 30, October 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 69.8 % 68.1 % 70.3 % 68.2 %
Selling, advertising,
general and administrative 59.0 % 61.3 % 52.5 % 52.2 %
Depreciation and
amortization 1.9 % 2.1 % 1.8 % 1.7 %
Pre-opening expenses 3.6 % 0.3 % 1.3 % 0.1 %
Store closing costs 1.2 % 0.0 % 2.5 % 0.0 %
Reorganization items 0.0 % 0.0 % 0.3 % 1.6 %
------ ------ ------ ------
Operating income (loss) (35.5)% (31.8)% (28.7)% (23.8)%
Other expense (income),
net 3.3 % 1.6 % (10.1)% 1.3 %
------ ------ ------ ------
Total expenses 138.8 % 133.5 % 118.6 % 125.1 %
Income (loss) before
income taxes (38.8)% (33.5)% (18.6)% (25.1)%
(Benefit from) income
taxes 0.0 % 0.0 % 0.0 % 0.0 %
Net income (loss) (38.8)% (33.5)% (18.6)% (25.1)%
------ ------ ------ ------
------ ------ ------ ------
<CAPTION>
Percentage Change
------------------------------------------------------------
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, 1998 compared to October 30, 1998 compared to
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 31, 1997 October 31, 1997
---------------------------- ----------------------------
<S> <C> <C>
Net sales 11.3% 6.7 %
Cost of sales 14.0% 10.1 %
Selling, advertising, general
and administrative 7.1% 7.2 %
Pre-opening expenses 1,087.3% 1,307.8 %
Store closing costs NA NA
Depreciation and amortization 5.0% 10.5 %
Reorganization items NA (80.0)%
Operating income (loss) 24.2% 28.8 %
Other expense (income), net 122.7% NC
Total expenses 15.7% 1.1 %
Income (loss) before income taxes 29.0% (21.0)%
(Benefit from) income taxes 0.0% 0.0 %
Net income (loss) 29.0% (21.0)%
</TABLE>
-15-
<PAGE>
THIRTEEN WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTEEN WEEKS ENDED
OCTOBER 31, 1997:
The net sales increase of 11.3% for the thirteen weeks ended October 30, 1998
compared to the thirteen weeks ended October 31, 1997 is attributable to an
11.0% increase in the weighted average number of stores in operation (from 41.6
stores to 46.2 stores) and an 8.4% increase in comparable store merchandise
sales partially offset by lower non-merchandise revenues.
Cost of sales as a percentage of net sales increased from 68.1% for the thirteen
weeks ended October 31, 1997 to 69.8% for the thirteen weeks ended October 31,
1998, due primarily to lower non-merchandise sales as compared to the comparable
period in fiscal 1998.
Selling, advertising, general and administrative expenses decreased from 61.3%
of net sales for the thirteen weeks ended October 31, 1997 to 59.0% of net sales
for the thirteen weeks ended October 30, 1998 due primarily to higher sales and
partially offset by increased advertising expenses. The 7.1% increase in the
amount of selling, advertising, general and administrative expense compared to
the thirteen weeks ended October 31, 1997 was the result of the 11.0% increase
in the weighted average number of stores in operation.
Depreciation and amortization increased by 5.0% in the thirteen weeks ended
October 30, 1998 compared to the comparable period of the prior year, due
primarily to the 11.0% increase in the weighted average number of stores in
operation partially offset by re-deploying fixtures from stores closed in prior
periods.
Other expense, net, increased to $343,943 in the thirteen weeks ended October
30,1998 compared to $154,417 in the comparable period of the prior year, due
primarily to increased interest expense attributable to non-cash interest
charges associated with the $1,445,000 private placement and the Company's
$3,000,000 guarantee to GECC. See Note 4 of Notes to Condensed Consolidated
Financial Statements.
The increase in the Company's loss before income taxes for the thirteen weeks
ended October 30, 1998 compared to the thirteen weeks ended October 31, 1997 is
primarily due to higher selling, advertising, general and administrative
(primarily advertising) and interest expenses.
Income tax benefits related to the losses for the thirteen weeks ended October
30, 1998 were not recognized because the utilization of such benefits is not
assured. Such benefits, if any, are available for recognition in future years.
See "Income Tax," below.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1997:
The net sales increase of 6.7% for the thirty-nine weeks ended October 30, 1998
compared to the thirty-nine weeks ended October 31, 1997 is attributable to a
7.6% increase in the weighted average number of stores in operation (from 41.4
stores to 44.6 stores) and a 5.4% increase in comparable store merchandise sales
partially offset by a decline in non-merchandise revenues.
Cost of sales as a percentage of net sales increased from 68.2% for the
thirty-nine weeks ended October 31, 1997 to 70.3% for the thirty-nine weeks
ended October 30, 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.
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), the
cost of sales as a percentage of net sales would have been 68.3%.
Selling, advertising, general and administrative expense increased from 52.2% of
net sales for the thirty-nine weeks ended October 31, 1997 to 52.5% of net sales
for the thirty-nine weeks ended October 30, 1998 due primarily to a substantial
increase in advertising expenses from approximately $1,908,000 (approximately
6.0% of sales) for the thirty-nine weeks ended October 31, 1997 to $3,058,000
(approximately 9.1% of sales) for the thirty-nine weeks ended October 30, 1998.
The 7.2% increase in the amount of selling, advertising, general and
administrative expense compared to the thirty-nine weeks ended October 31, 1997
was the result of the 7.6% increase in the weighted average number of stores in
operation and the substantial increase in advertising expenses.
-16-
<PAGE>
Depreciation and amortization expense increased by 10.5% in the thirty-nine
weeks ended October 30, 1998 compared to the comparable period of fiscal 1998,
due primarily to capital expenditures associated with the increased number of
stores in operation.
Other (income) expense improved $3,832,000 from an expense of $424,000 in the
thirty-nine weeks ended October 31, 1997 to income of approximately $3,408,000
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 non-cash interest charges
associated with a private placement and the Company's $3,000,000 guarantee to
GECC in the fiscal 1999 period (see Note 4 of Notes to Condensed Consolidated
Financial Statements) and by 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 thirty-nine weeks ended
October 30, 1998 compared to the loss for the thirty-nine weeks ended October
31, 1997 is due to the corporate reorganization 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 is not assured.
Such benefits, if any, are available for recognition in future years. See
"Income Tax," below.
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.
-17-
<PAGE>
STORE DEVELOPMENT
The Company will concentrate near term principally on developing existing
stores to full maturity. It has been management's intention to refine the
Company's regional presence to an increased emphasis on Texas through the
openings of stores in Texas and closings of certain stores through negotiated
lease cancellations or lease expirations. The new stores are smaller than
the older stores which average approximately 26,000 square feet.
<TABLE>
<CAPTION>
New Stores Closed/Closing Stores
- -------------------------------------------------- --------------------------------------------------------------
Location Size (Sq. Ft.) Date Location Size (Sq. Ft.) Date
- ---------------------- -------------- -------- --------------------- -------------- ---------------------
<S> <C> <C> <C> <C> <C>
San Angelo, TX 13,800 06/06/98 Lawton, OK 24,000 04/25/98
Lubbock, TX 19,200 07/25/98 Shreveport, LA 28,505 07/23/98
Killeen, TX 6,493 08/14/98 Lubbock, TX 27,580 07/22/98
Carrollton, TX* 8,041 09/12/98 Amarillo, TX 26,000 09/23/98
Mesquite, TX* 8,506 09/12/98 Baton Rouge, LA 25,122 12/31/98 (projected)
Dallas, TX* 11,020 09/26/98 Baton Rouge, LA 25,399 12/31/98 (projected)
Bedford, TX* 12,616 09/29/98 Houston, TX 25,000 01/29/99 (projected)
San Antonio, TX 15,143 10/10/98 Albuquerque, NM 25,600 01/29/99 (projected)
Irving, TX* 11,200 10/10/98 Oklahoma City, OK 30,224 01/29/99 (projected)
-------
Dallas, TX* 12,548 10/22/98 Total: 237,430
Lewisville, TX* 15,000 10/27/98 Average: 26,381
-------
Total: 133,567
Average: 12,142
*Dallas/Ft. Worth Metroplex
</TABLE>
<TABLE>
<CAPTION>
A c t u a l P r o j e c t e d
------------------------------------------ -------------------------------
01/30/98 Opened Closed 10/30/98 Opening Closing 01/29/99
-------- ------ ------ -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas 31 11 2 40 0 1 39
Oklahoma 4 0 1 3 0 1 2
New Mexico 3 0 0 3 0 1 2
Louisiana 5 0 1 4 0 2 2
Tennessee 1 0 0 1 0 0 1
-- -- -- -- -- -- --
44 11 4 51 0 5 46
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company began fiscal 1998 with cash of $473,533. During the thirty-nine
weeks ended October 30, 1998, the Company generated $5,645,712 from financing
activities ($126,671 from the exercise of stock options under the Company's
stock option plan, $1,824,369 from the obligation to GECC related to the
corporate reorganization discussed in Note 4 of Notes to Condensed
Consolidated Financial Statements, $1,445,000 from the private placement of
notes and warrants also discussed in Note 4 and $2,451,416 from an increase
in the Company's outstanding balance under its credit agreement with GECC,
net of a $95,100 decrease in bank checks outstanding and $104,298 in payments
on long term debt), used $5,234,631 in operating activities, including
$1,292,715 in pre-opening expenses and store closing costs, used $328,032 for
capital expenditures and ended the period with cash on hand of $556,582.
-18-
<PAGE>
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 $15,000,000. The credit facility bears interest at a floating rate
equal to the published rate for thirty-day commercial paper issued by major
corporations (5.1% at December 2, 1998) plus 3% per annum and provides for an
unused facility fee of 0.5% per annum. Borrowings under the facility are
available in aggregate amounts up to 65% of LOT$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 December 11, 1998, LOT$OFF had approximately $10,174,000 available for
borrowings under the credit facility (after reserves of $874,000) of which
$8,927,000 was committed, leaving a net availability of $1,247,000.
Management believes that borrowings available under its revolving credit
facility, available trade credit, anticipated proceeds from outstanding
litigation, its operating cash flow and its cash on hand will be adequate to
finance its operations 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 outstanding litigation, timely received, and
additional external financing and/or the restructuring of existing
obligations may be necessary. The receipt of proceeds from Chase from the
significant litigation brought by the Company (see Note 5 of Notes to
Condensed Consolidated Financial Statements and "Significant Litigation,"
below) could add significantly to the Company's liquidity and capital
resources; such proceeds, if any, are not expected in the fiscal year ending
January 29, 1999. Should such proceeds not be forthcoming or timely
received, additional external financing and/or the restructuring of existing
obligations would be necessary to finance the Company's operations through
fiscal 2000. Also, no assurance can be given 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.
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.
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.
-19-
<PAGE>
YEAR 2000 COMPLIANCE
The Company has been 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 has communicated with its suppliers of products and services in order
to assess the extent of those companies' Year 2000 compliance. To date, such
suppliers have assured the Company that they will be in 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-20-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
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$OFF CORPORATION
By: /s/ CHARLES J. FUHRMANN II
-------------------------------------------------------
Charles J. Fuhrmann II, Chairman, President and
Chief Executive Officer (Principal Executive Officer)
By: /s/ JEFF SEIDEL
-------------------------------------------------------
Jeff Seidel, Vice President-Finance and Chief Financial
Officer (Principal Financial and Accounting Officer)
-21-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Exhibit 27 - Financial Data Schedule . . . . . . . . . . . . . . . . . . 22
</TABLE>
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LOT$OFF
STORES CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE THIRTY-NINE WEEKS
ENDED OCTOBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-30-1998
<PERIOD-START> JAN-30-1998
<PERIOD-END> OCT-30-1998
<CASH> 557
<SECURITIES> 0
<RECEIVABLES> 174
<ALLOWANCES> 0
<INVENTORY> 16,889
<CURRENT-ASSETS> 17,874
<PP&E> 7,604
<DEPRECIATION> 4,368
<TOTAL-ASSETS> 21,289
<CURRENT-LIABILITIES> 19,801
<BONDS> 4,090
0
0
<COMMON> 42
<OTHER-SE> (2,104)
<TOTAL-LIABILITY-AND-EQUITY> 21,289
<SALES> 33,786
<TOTAL-REVENUES> 33,786
<CGS> 23,758
<TOTAL-COSTS> 23,758
<OTHER-EXPENSES> 19,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 802
<INCOME-PRETAX> (6,285)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,285)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
</TABLE>
