-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgOaTe0eTgI+HnX8XE1ND67fNxsHA9HSLv6ioVsqZdyOYdJZxjCqlmQ59FFPxUVr hxy/+WiJZG6JNTj1+MofCg== 0000930661-97-001507.txt : 19970612 0000930661-97-001507.hdr.sgml : 19970612 ACCESSION NUMBER: 0000930661-97-001507 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19970611 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 50 OFF STORES INC CENTRAL INDEX KEY: 0000735584 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 742640559 STATE OF INCORPORATION: DE FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-25061 FILM NUMBER: 97622557 BUSINESS ADDRESS: STREET 1: 8750 TESORO DRIVE CITY: SAN ANTONIO STATE: TX ZIP: 78217-0555 BUSINESS PHONE: 2108059300 MAIL ADDRESS: STREET 1: 8750 TESORO DR PO BOX 17555 STREET 2: 8750 TESORO DR PO BOX 17555 CITY: ANTONIO STATE: TX ZIP: 78217 FORMER COMPANY: FORMER CONFORMED NAME: SHOPPERS WORLD STORES INC DATE OF NAME CHANGE: 19871214 S-1/A 1 AMENDMENT NO. 1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1997 REGISTRATION NO. 333-25061 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- 50-OFF STORES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 5651 74-2640559 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION ORGANIZATION) NUMBER) ---------------- 8750 TESORO DRIVE SAN ANTONIO, TEXAS 78217 (210) 805-9300 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- CHARLES J. FUHRMANN II, PRESIDENT AND CHIEF EXECUTIVE OFFICER 8750 TESORO DRIVE SAN ANTONIO, TEXAS 78217 (210) 805-9300 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE AMOUNT TO BE AGGREGATE PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(3) FEE - -------------------------------------------------------------------------------------- Units................... 122,009 $100.00 $12,200,900 $3,697.24 Common Stock, $.01 par value................... 7,320,540 ---- ---- (4) Series A Preferred Stock, $.01 par value... 2,440,180 ---- ---- (4) Rights to Purchase Units................... 12,200,915 ---- ---- (4)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Rights represent rights to subscribe for Units. Each Unit represents 20 shares of Common Stock and 20 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into two shares of Common Stock for no additional consideration. No more than 122,009 Units will be sold. (2) The Unit price determination was based upon negotiations with the General Committee of Unsecured Creditors, recent and projected operating results and pro forma book value. (3) Estimated solely for the purpose of calculating the registration fee and assumes all Units are subscribed. (4) No registration fee payable due to registration fee paid for Units. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 50-OFF STORES, INC. CROSS REFERENCE SHEET
CAPTION OR LOCATION IN ITEM NUMBER AND CAPTION IN FORM S-1 PROSPECTUS ----------------------------------- ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus................. Cover Page of Registration Statement; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.................................. Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges...................... Introduction; Summary Information; Certain Risk Factors; Selected Consolidated Financial Data 4. Use of Proceeds................................ The Offering 5. Determination of Offering Price................ Outside Front Cover Page of Prospectus; The Offering 6. Dilution....................................... * 7. Selling Security Holders....................... * 8. Plan of Distribution........................... Outside Front Cover Page of Prospectus; The Offering 9. Description of Securities to be Registered..... Outside Front Cover Page of Prospectus; Dividend Policy; Description of Securities 10. Interests of Named Experts and Counsel......... Legal Opinion; Experts 11. Information with Respect to the Registrant..... Outside Front Cover Page of Prospectus; Introduction; Summary Information; The Company; Business; Management; Business Plan; Certain Risk Factors; Material Litigation; The Offering; Description of Securities; Plan of Reorganization; Consolidated Financial Statements 12. Disclosure of Commission Position on Indemnification For Securities Act Liabilities. *
- -------- *Not applicable. PROSPECTUS 50-OFF STORES, INC. 12,200,915 RIGHTS TO PURCHASE UNITS MAXIMUM 122,009 UNITS MINIMUM 30,500 UNITS 7,320,540 SHARES OF COMMON STOCK AND 2,440,180 SHARES OF SERIES A PREFERRED STOCK This Prospectus relates to (i) 12,200,915 Rights (the "Rights") to subscribe for and purchase up to a maximum of 122,009 Units and not less than a minimum of 30,500 Units (the "Units"), (ii) the 2,440,180 shares of Common Stock and 2,440,180 shares of Series A Preferred Stock represented by the maximum number of Units issuable by the Company, with each Unit representing 20 shares of Common Stock and 20 shares of Series A Preferred Stock, and (iii) the 4,880,360 shares of Common Stock issuable upon conversion of the 2,440,180 shares of Series A Preferred Stock (the "Offering"). The Company issued to each stockholder of record of Common Stock at the close of business on March 21, 1997 ("Record Date") one Right for each share of Common Stock held by such stockholder on the Record Date. As of March 21, 1997, there were 12,200,915 shares of Common Stock outstanding. Each Right entitled the holder to subscribe for one Unit for $100.00 (the "Subscription Price") prior to 2:15 p.m. CST on May 22, 1997, at which time the Rights Offering, as extended, expired. At expiration of the Rights Offering, 44,736 Units were subscribed. See "The Offering." Any Units unsubscribed for at 2:15 p.m. CST on May 22, 1997 may be offered to the public by the Company until expiration of the Offering. See "Introduction" and "The Offering" for a discussion of the escrow arrangement with respect to funds received upon subscription for Units. See "Description of Securities" for a description of the preferences, limitations and relative rights of the Series A Preferred Stock. The Common Stock is traded in the over-the-counter market under the symbol "FOFFQ." On June 6, 1997, the closing bid and asked prices of the Common Stock, as reported by the National Association of Securities Dealers ("NASD") Electronic Bulletin Board were $0.015 and $0.03 respectively. See "Price Range of Old Common Stock." When and if the requisite criteria are met, application will be made for the Common Stock and Series A Preferred Stock to be quoted on the NASDAQ National Market. The Rights and Units are nontransferable and will not be listed for trading on the NASD Electronic Bulletin Board, the NASDAQ National Market, or on any exchange. SEE "CERTAIN RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE UNITS OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
SUBSCRIPTION PRICE/PRICE TO PROCEEDS TO PUBLIC COMPANY* - -------------------------------------------------------------------------------- Per Unit.......................................... $ 100.00 $ 100.00 - -------------------------------------------------------------------------------- Total Maximum......................................... $12,200,900.00 $12,200,900.00 Minimum......................................... $ 3,050,000.00 $ 3,050,000.00
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- *Before deducting estimated expenses of $205,697 payable by the Company. The date of this Prospectus is June 11, 1997. IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. INTRODUCTION PRELIMINARY STATEMENT On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc., a Delaware corporation (the "Company" or "50-Off"), 50-OFF Multistate Operations, Inc., a Nevada corporation, 50-OFF Texas Stores, L.P., a Texas limited partnership, and 50-OFF Operating Company, a Nevada corporation (hereinafter collectively, the "Debtors" or the "Company" where the context requires) filed their voluntary petitions 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 cases have been pending since that time before the Honorable Leif M. Clark, United States Bankruptcy Judge. Since the Petition Date, the Company has operated its business as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code. A copy of the Debtors' Joint Plan of Reorganization, as Amended, dated March 27, 1997 (the "Plan") was filed as an Exhibit to the Registration Statement, of which this Prospectus is a part. For purposes hereof, any term with respect to the Plan and used in this document (regardless of capitalization), and not otherwise separately defined herein, shall have the defined meaning ascribed to it in the Glossary attached as an Appendix to this Prospectus, the Plan or in section 101 of the Bankruptcy Code. Included in the Plan is the offering of up to 122,009 Units comprised of Series A Preferred Stock and Common Stock (the "Units") contemplated hereby (the "Offering"); and included as part of the Offering is the right of holders of Public Equity Interests to purchase Units (the "Rights Offering"). Public Equity Interests refer to the common stock of 50-OFF Stores, Inc., sometimes referred to herein as "Old Common Stock," which will be canceled upon the Effective Date of the Plan, along with all currently existing options and warrants to buy such stock. The record date for determining which such holders were entitled to vote on the Plan and the record date for determining which such holders were deemed to have received, pursuant to the Plan, such Rights was March 21, 1997. Persons who acquired Public Equity Interests after such record date were not entitled to vote on the Plan and had no protected opportunity to subscribe to and purchase Units. On March 20, 1997, the Court approved the Disclosure Statement with respect to the Plan as containing adequate information in accordance with section 1125 of the Bankruptcy Code. Such Statement was mailed to all creditors of the bankruptcy estates and all holders of Public Equity Interests as of March 21, 1997 and has been filed as an Exhibit to the Registration Statement of which this Prospectus is a part. Stockholders of record on March 21, 1997 were entitled to exercise their Rights to subscribe for Units pursuant to the Rights Offering described herein. See "The Offering." To subscribe for Units, stockholders were asked to complete and return an Expression of Interest in Purchasing Rights Offering Units distributed with the Disclosure Statement. To exercise Rights to purchase Units, stockholders were then asked to complete a Subscription Exercise Form for Rights Offering and return such form together with the full purchase price for the Units in accordance with accompanying instructions. All funds received pursuant to the Rights Offering are currently being held and all funds to be received pursuant to subscriptions of others, if any, will be held in escrow by Bank One, Texas, NA (the "Subscription and Escrow Agent") pending the effective date of the Plan. On May 22, 1997, the Rights Offering, as extended, expired. As of such date, subscriptions for 44,736 Units ($4,473,600) had been received. The Company does not anticipate continuing the Offering to the public after June 13, 1997 but reserves the right to do so in its sole discretion. Any funds received by the Company pursuant to sales of Units to the public after June 16, 1997 will not be subject to any escrow arrangement inasmuch as the Company will be entitled to the proceeds of any such Unit sales upon the sale thereof. At the Company's Confirmation Hearing on June 3, 1997 in the courtroom of the Honorable Leif M. Clark, United States Bankruptcy Judge for the Western District of Texas, San Antonio Division, the Company's Plan was confirmed. It is anticipated that the Company's Plan will become effective on or about June 16, 1997 (the "Effective Date"). On the Effective Date, the name of the Company will be changed to LOT$OFF Corporation. The Company's principal executive offices are located at 8750 Tesoro Drive, San Antonio, Texas 78217; (210) 805-9300. CERTAIN RISK FACTORS The Plan and the securities to be issued pursuant to the Plan and this Prospectus are subject to a number of material risks, including those enumerated below. Holders of Public Equity Interests and other prospective purchasers of Units offered hereby should consider this information in conjunction with making their subscription and investment decisions. LACK OF RECENT HISTORICAL PROFITABILITY The Company has not operated profitably for the most recent four fiscal years (see Selected Financial Data). There can be no assurances that the Company can reverse this trend. LACK OF SIGNIFICANT OPERATING HISTORY WITH LOT$OFF CONCEPT The Company opened its first LOT$OFF stores in July 1996. Accordingly, the Company's operating history with such concept is brief and was impacted by the Company's inability to maintain inventories at planned levels and the Debtors' chapter 11 filings. While the concept has been successfully implemented by others, such as Consolidated Stores Corporation, MacFrugal's Bargains & Close- outs, Inc. and Mazel Stores, Inc., there can be no assurance that growth in the Company's sales and net income will occur, or if it occurs, will be maintained. LIQUIDITY The Company has certain financial covenants in its loan agreement with GECC which, if violated, could severely impact the Company's liquidity. Covenants of such type will likely continue to exist after the Effective Date. Under such loan agreement, GECC may increase reserves in its discretion to cover risks or events it perceives may affect its security under the loan or the business or prospects of the Company. Such increased reserves could significantly restrict the Company's access to funds under the credit facility. Short-term trade credit represents a significant source of financing for merchandise inventories. Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases and is either financed by the vendors or third-party factors. Business conditions and the Company's financial performance could result in additional vendors' concerns regarding the Company's creditworthiness, which could adversely affect the Company's ability to receive trade credit support sufficient to acquire adequate levels of inventory in the future. COMPETITION The Company faces intense competition for customers, for access to quality merchandise and for suitable store locations from regional and national close- out, off-price and discount retail chains, traditional department stores and specialty retailers. Most of the Company's competitors have greater financial and marketing resources than the Company. In addition, in the recent past the Company has experienced more direct price competition from certain department store chains for limited time periods as a result of promotional pricing activity. The Company may face similar periods of intense competition in the future, which could have an adverse effect on its financial results. GEOGRAPHIC CONCENTRATION OF OPERATIONS The Company's stores are located in the South and Southwest, and a substantial number are located in Texas. Consequently, the Company's results of operations and financial condition are dependent upon general trends in the economy of these markets. In the event of adverse economic conditions in these markets, retail spending may decline, resulting in a decrease in the Company's retail sales. 2 MEXICAN ECONOMIC CONDITIONS Although the Company has in recent years significantly reduced its dependence upon border store operations by the reduction of its border presence (to eight stores as of fiscal 1997) and expansion into other markets, the Company's activities were historically dependent to a significant degree upon its stores located in Texas cities along the Mexican border. During fiscal 1996, approximately 12% of the Company's net sales were attributable to the Company's then 13 border stores. Mexican peso devaluations and duty-free import restrictions, and the enforcement thereof, have from time to time significantly reduced purchases by Mexican nationals, who constitute a significant portion of the Company's customers in certain of its border locations, and have resulted in decreases in sales during such periods. The Mexican Government devalued the peso and subsequently released it for free exchange just prior to Christmas 1994, and the Company has experienced a significant drop in sales from border markets ever since. The continuing economic weakness along the border and further erosion of the peso continued to negatively affect sales and operating results in the Company's 13 border stores throughout fiscal 1996; the Company's border stores experienced an approximately $10.2 million (32.0%) drop in sales to $21.8 million for fiscal 1996 compared to $32.0 million for fiscal 1995. With the continued erosion of the value of the peso well into fiscal 1997 and with the current peso value still below its comparable level of year ago, sales in the Company's continuing border stores have continued to suffer. The eight continuing border stores experienced a 34.2% drop in sales in fiscal 1997 (to approximately $10.1 million) as compared to their fiscal 1996 results (approximately $15.4 million); some of the drop, of course, should be attributed to the Company's inability to maintain inventories at appropriate levels due to its liquidity problems. While the Company cannot predict the ultimate effect on future results, continuing weakness in the border economy and negative comparable peso values would have a continuing negative effect on sales and other operating results. DEPENDENCE ON KEY INDIVIDUALS The Company is dependent on its ability to retain the services of its senior executives. The loss of one or more of these individuals could have a material adverse effect on the Company. The Company is also dependent upon its ability to retain the services of its buyers. CERTAIN RISKS OF NON-CONSUMMATION The consummation of the Plan is subject to certain conditions, such as the ability to consummate the post-confirmation credit facility, which are described in the Plan and Disclosure Statement and summarized herein. See "Plan of Reorganization." If the Plan were not consummated, it is unclear whether a reorganization comparable to the reorganization contemplated by the Plan could be implemented in a timely manner and, if so, what distributions holders of Claims and Interests ultimately would receive with respect to their Claims and Interests. Moreover, if an alternative reorganization could not be implemented in a timely manner, it is possible that the Debtors would have to liquidate their assets, in which case it is likely the holders of Claims and Interests would receive less than they would have received pursuant to the Plan. POSSIBLE VOLATILITY OF STOCK, LIQUIDITY AND BLUE SKY CONSIDERATIONS The Rights and Units are not transferable and will not trade. There is no assurance that an active market will exist for the other securities offered hereby. As a result, an investment in the securities may be illiquid, which could have a material adverse effect on the market value of the securities. The market price for such securities may be highly volatile depending on various factors, including, but not limited to, lack of liquidity, the state of the national economy, stock market conditions, industry research reports, actions by governmental agencies, litigation involving 50-OFF, earnings and other announcements by the Company or its competitors and general conditions in the retail industry. The Company's position is that the Rights Offering and the offer and sale of securities in connection with such Rights Offering, for both federal and state law purposes, were and are 3 exempt pursuant to section 1145 of the Bankruptcy Code, and this position was confirmed by order of the Bankruptcy Court. As part of a compromise with the Securities and Exchange Commission, which had challenged the Company's position with respect to section 1145 at the Company's hearing on its Disclosure Statement, the Company agreed, without waiving its position with respect to section 1145, to file a registration statement, of which this Prospectus is a part. Voluntarily, without waiving its position with respect to section 1145, the Company is also taking all reasonable action to ensure that the securities offered hereby are registered or otherwise exempt from registration under all applicable blue sky laws; however; there can be no assurance that such securities may be offered or sold in all states. SEASONALITY AND QUARTERLY FLUCTUATIONS Historically, 50-OFF's highest net sales and operating income have been experienced during the fourth quarter, which includes the holiday selling season. Any adverse trend in net sales for such period could have a material adverse effect upon the Company's overall profitability and adversely affect its 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 conversions from 50-OFF to LOT$OFF stores, including the level of advertising and pre-opening expenses associated with such conversions, as well as other factors. GOING CONCERN The Company's need to attain profitable operations raises substantial doubt about its ability to continue as a going concern. FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE This Prospectus contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "believe," "expect," "anticipate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions including those identified herein. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition to the risk factors set forth herein, among the key factors that may have a direct bearing on the Company's results are competitive practices in the close-out merchandising industry generally and particularly in the Company's targeted market and the ability of the Company to fund its continuing operations in the event of adverse industry or economic conditions. 4 THE COMPANY FORMATION OF THE COMPANY 50-OFF was incorporated in Delaware in 1992 and is the successor to Shoppers World Stores, Inc., which was incorporated in Texas in 1983. Shoppers World Stores, Inc. was the successor to a New York corporation formed in 1975 to purchase nine junior discount department stores located along the Texas side of the Mexican border from Daylin, Inc. which had purchased them in conjunction with its acquisition of King Clothing Company. 50-OFF went public on July 16, 1984. PUBLIC TRADING OF COMMON STOCK 50-OFF's Old Common Stock began trading publicly on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") in July of 1984 and was subsequently added to the NASDAQ National Market in September of 1989. The NASDAQ-NM symbol was "FOFF" until October 15, 1996, when a fifth character "Q" was appended to denote a company operating under bankruptcy proceedings. Furthermore, the NASDAQ Listing Qualifications Panel determined to delete 50- OFF's Old Common Stock from The NASDAQ National Market effective December 31, 1996 due to such stock's failure to meet the bid price and bankruptcy requirements as set forth in NASD Marketplace Rules 4450(a)(5) and 4450(e). The following table sets forth for the periods indicated the range of high and low closing sale prices for the common stock as reported on the NASDAQ National Market to December 31, 1996.
HIGH LOW ----- ----- Fiscal Year Ended February 2, 1996: Quarter ended May 5, 1995..................................... $3.00 $1.25 Quarter ended August 4, 1995.................................. 2.50 1.75 Quarter ended November 3, 1995................................ 2.25 1.19 Quarter ended February 2, 1996................................ 1.94 0.50 Fiscal Year Ended January 31, 1997: Quarter ended May 3, 1996..................................... 1.69 0.94 Quarter ended August 2, 1996.................................. 1.50 0.75 Quarter ended November 1, 1996................................ 0.94 0.06 Period ended December 30, 1996................................ 0.44 0.16
The high and low closing sales prices for the period from December 31, 1996 through June 6, 1997 were $0.19 and $0.01, respectively; and the closing prices in the over-the-counter market on March 21, 1997 and June 6, 1997 were $0.08 and $0.03 per share, respectively. 50-OFF has never paid cash dividends on shares of Old Common Stock. Management presently intends to retain cash for the operation and expansion of 50-OFF's business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The Company is prohibited from paying cash dividends under its credit facility. ALL OLD COMMON STOCK, ALONG WITH CURRENTLY EXISTING OPTIONS AND WARRANTS TO PURCHASE SUCH OLD COMMON STOCK WILL BE CANCELED UPON THE EFFECTIVE DATE OF THE PLAN. As of March 21, 1997, the number of record holders of 50-OFF's 12,200,915 shares of common stock then outstanding was 700. OVERVIEW OF RECENT YEARS' OPERATIONS The Company's operating results in recent years have been disappointing, reflecting weaknesses in retailing generally and in apparel retailing specifically. The casualization of apparel hurt many apparel retailers; and regional, off-price retailers faced increased competition for the "value- conscious" consumers' purchases. In addition, 50-OFF was especially hard hit by the last devaluation and continued deterioration of the Mexican peso 5 and the continuing economic turmoil along the Texas-Mexico border where the Company operated thirteen 50-OFF stores (currently eight stores and an annex), historically its best performing locations, and experienced a severe liquidity crisis due, in part, to the breach of certain foreign purchasers in an international offering by 50-OFF in late fiscal 1995 of their contractual obligations to purchase in aggregate 1,500,000 shares of Old Common Stock at $3.65 per share ($5,475,000 in aggregate). HISTORICAL AND RECENT DEVELOPMENTS The Company has experienced net losses for the last four fiscal years. The Company had a net loss of $8,024,000 in fiscal 1995, including store closing costs of approximately $5,019,000. Fiscal 1995 results were for a fifty-three week period and reflected the operations of 111.8 weighted average stores. The Company's financial performance in fiscal 1996 continued to be disappointing, especially in the second half. Net sales for the fifty-two weeks ended February 2, 1996 decreased 13.2% to $175,023,000, and the Company had a net loss of $6,778,000. The Company operated a weighted average of 104.0 stores in fiscal 1996. Sales on a comparable store basis were down 8.7% (3.4%, excluding the border stores). During fiscal 1996, certain factors negatively affected operating results and corporate liquidity: . the breach of certain foreign purchasers in an international offering by the Company in late fiscal 1995 of their contractual obligations to purchase in aggregate 1,500,000 shares of Old Common Stock at $3.65 per share ($5,475,000 in aggregate) led to a continuing increase in borrowings by the Company under its credit facility (and a decrease in availability under the facility) and contributed to an increase in the interest rate on borrowings under the facility; therefore, the Company experienced an approximately $873,000 increase in its net interest expense for fiscal 1996 compared to fiscal 1995. . such breach, and the resulting lack of the planned equity infusion and decrease in availability under the credit facility, negatively impacted the Company's perceived creditworthiness with sources of trade credit, which led, in some cases, to shorter payment terms and/or less credit support from such sources. . concerns of sources of trade credit with the financial stability of the retail industry, generally, and with the continuing negative impact of the economic turmoil in Mexico on retailers with border exposure similarly affected payment terms and credit support from such sources. . the economic weakness along the Texas/Mexico border continued to negatively affect sales and operating results; the Company's border stores experienced an approximately $10.2 million (32.0%) drop in sales to $21.8 million for fiscal 1996 compared to $32.0 million for fiscal 1995. . the physical inventory taken at fiscal year end resulted in an unanticipated high inventory shrinkage and a $963,000 fourth quarter, charge to operating results for the additional shrinkage for total fiscal 1996 shrinkage as a percentage of merchandise sales of 4.4%. . disappointing sales during the "Back-to-School" and Christmas/holiday selling seasons contributed to lower than expected sales. During fiscal 1996, the Company took the following affirmative steps in its continuing efforts to achieve a more disciplined cost structure, to lessen vulnerability to external factors and to attain profitability: . filed lawsuits against the defaulting foreign purchasers and others involved in the international offering by the Company in an effort to obtain appropriate remedies, including the Company's actual and punitive damages. . completed its store consolidation program by closing 14 stores (anticipated fiscal 1996 store closing costs totaling approximately $4,107,000 were charged to operating results for fiscal 1995; as a result of the favorable experience in negotiating certain lease termination costs, the Company reversed a portion of this charge, approximately $409,000, in the fourth quarter of fiscal 1996 and approximately $1,131,000 in the third quarter of fiscal 1997). . opened five stores. 6 . negotiated monthly rent reductions in a significant number of its 100 continuing stores with the cooperation of its landlords. . engaged a new, San Antonio-based marketing and advertising agency. . made changes in merchandising management to contribute to the flexibility the Company sought in its product offering mix. . made plans to expand its offering of shelf-stable food product through its neighborhood stores (to lessen seasonality and to increase store traffic), a logical extension of its merchandising commitment to offer its customers the products they need, conveniently and at the best prices. As stated above, during fiscal 1996, certain factors negatively affected the Company's liquidity, including significant operating losses. In late February 1996, the Company began to address its liquidity problem and anticipated violations of financial covenants in its credit agreements by restructuring certain debt obligations, including its unsecured trade obligations owed to vendors and its long term notes with an affiliate of an insurance company. With the support of its vendors, the Company implemented a payment plan with respect to its $8,447,000 of unsecured trade payables as of February 26, 1996. Under the plan, such payables were to be paid in full within a two year period without interest. Approximately $4,681,000 of such payables remained outstanding at January 31, 1997 and is included in liabilities subject to compromise. In April 1996, the Company restructured its $4,000,000 and $2,775,000 long term borrowings with MetLife Capital Corporation into one promissory note for approximately $4,645,000. The restructuring of the notes, including an extension of the maturity, reduced monthly debt service requirements. The promissory note provided for monthly installments (including principal and interest) of $94,638 until March 2001. Interest is charged at a rate of 8.50%. The note is collateralized by the Company's furniture and fixtures. Approximately $4,191,000 of such note remained outstanding at January 31, 1997 and is included in liabilities subject to compromise. Significant operating losses continued through the Company's first fiscal quarter of 1997. For the thirteen week period ended May 3, 1996, the Company had net sales of $32.4 million, down 27.6% from the comparable prior year period's $44.8 million, and the Company's loss before income taxes rose to $4.9 million (including an approximate $2.1 million write-down of inventories in stores scheduled for conversion to LOT$OFF stores late in the second fiscal quarter) from $1.0 million from the comparable prior year period. The Company operated a weighted average of 100.5 stores in the fiscal 1997 period as compared to 109.6 stores in the comparable prior year period. The Company began fiscal 1997 with cash of $341,334. During the thirteen weeks ended May 3, 1996, the Company decreased borrowings by a net of $1,319,567, generated $1,701,480 from operating activities, used $282,912 for capital expenditures (refurbishing existing stores and opening one store) and ended the period with cash on hand of $440,335. Faced with such continuing, deteriorating results and the apparent consumer rejection of the 50-OFF retailing concept in almost all its markets, the Board of Directors supported a change of leadership in mid-May. On May 7, 1996, the Company's Board of Directors accepted the resignation of Charles Siegel from his positions as President and Chief Executive Officer of the Company, as well as his position on the Board. Mr. Siegel, who resigned to pursue other endeavors, was a co-founder of the Company. Upon accepting Mr. Siegel's resignation, the Board acted to appoint Charles J. Fuhrmann II to the positions of President, Chief Executive Officer and Chief Financial Officer. Mr. Fuhrmann, a Director of the Company since October 1994, had served in various consulting capacities for 50-OFF, including Acting Chief Administrative and Financial Officer until his new appointment. Mr. Fuhrmann, a private investor and strategic and financial consultant, was formerly Managing Director-Investment Banking with Merrill Lynch & Co. in New York. Other management changes included the promotion of James Scogin to Vice President--Controller, Chief Accounting Officer and Assistant Secretary. On May 13, 1996, the Company entered into a revolving credit facility with Foothill Capital Corporation and GBFC, Inc. providing the Company with a line of credit through May 1998 of up to $22,500,000, including letters of credit. In conjunction with the establishment of this facility, the Company issued the lenders a three year warrant to purchase 400,000 shares of its common stock at $2.50 per share. Borrowings under the line were limited to a borrowing base equal to the lessor of (i) eligible inventory at cost: December 16 to February 28, 7 55.75%, March 1 to September 15, 60.75% and September 16 to December 15, 63.75% or (ii) eligible inventory at retail: December 16 to February 28, 33.45%, March 1 to September 15, 37.25% and September 16 to December 15, 39.0%. Interest under the line was charged on funds borrowed at the First National Bank of Boston's base rate plus 1.75%, and there were monthly administrative fees and an annual facility fee of $12,000 and 1.5% ($337,500), respectively. The line of credit was collateralized by inventory, accounts receivable and other assets. The agreement contained various restrictive covenants. The agreement also contained minimum gross margin, minimum EBITDA, minimum and maximum inventory levels, minimum working capital and minimum trade support financial covenants. This facility replaced a credit facility with another financial institution providing the Company a line of credit through January 12, 1998, as amended, of up to $20,000,000. Borrowings under this prior facility were limited to a borrowing base equal to the lesser of (i) 45% of eligible inventory or (ii) 80% of liquidation value of inventory, both minus a permanent block of $1,500,000. Interest under the old line was charged on funds borrowed at the lender's prime rate plus 1.75%. The prior agreement contained various restrictive covenants and was collateralized by inventory, certain accounts receivable and other assets. The Company expected the increased liquidity under the new facility to provide important cash resources to 50-OFF and, with the other restructurings discussed above, increased creditworthiness. As of May 13, 1996, the Company had approximately $4,061,000 available for use under this line of credit. For the twenty-six week period ended August 2, 1996, the Company had net sales of $64.1 million, down 26.3% from the comparable prior year period's $87.0 million, and the Company's loss before income taxes rose to $9.9 million (including a $3.6 million write-down of inventories in stores scheduled for liquidation, but excluding any then undetermined charges for future store closings and staff reductions) from the comparable prior year period $1.9 million. The Company operated a weighted average of 100.4 stores in the fiscal 1997 period as compared to 106.6 stores in the comparable prior year period. The Company began fiscal 1997 with cash of $341,334. During the twenty-six weeks ended August 2, 1996, the Company increased borrowings by a net of $5,231,763, used $4,546,816 for operating activities, used $433,350 for capital expenditures (refurbishing existing stores, opening one store and converting 50-OFF stores to LOT$OFF stores) and ended the period with cash on hand of $592,931. On August 8, 1996, the Company was notified by the lender that it was in violation of the minimum gross margin (disputed) and the minimum working capital financial covenants of its credit agreement and that such breaches constituted events of default under the loan documents. The lenders subsequently established additional availability reserves which reduced availability, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing, which, individually and together, substantially impacted the Company's financial liquidity and, therefore, its ability to acquire and maintain much needed inventory for its stores. The Company was unable to secure the resources required to cure the defaults under the loan documents and to implement its business plan and effect the changes believed necessary to improve operations and reverse the Company's disappointing operating results without the protections afforded under the Bankruptcy Code. As stated above, the Company and its significant subsidiaries filed petitions for relief under chapter 11 of such Code in the Court on October 9, 1996. As of November 1, 1996, the Company had approximately $7,335,000 outstanding under the credit facility and, with the support and by order of the Court, was using cash collateral for working capital needs. This facility was paid off in November 1996 with proceeds from the Company's line of credit with GECC. In September 1996, the Board of Directors approved a plan which provided for the continued conversion of existing 50-OFF stores to LOT$OFF stores, a geographic consolidation of the chain (exiting Alabama, Arkansas, Florida, Georgia, North Carolina, South Carolina and most of Tennessee) and the liquidation or closing of at least 37 under-performing stores or stores located outside of the reduced market area (since mid-May 1996, the Company has closed 60 stores) with appropriate reductions in field and corporate overhead and staffing. BUSINESS DURING THE CHAPTER 11 CASES On October 8, 1996, the Board of Directors approved the Company's and its significant subsidiaries' filings of petitions for relief under the Bankruptcy Code, and, as stated above, on October 9, 1996, such petitions were filed in the Court. The Company had been pursuing an infusion of capital, an external affiliation with a supplier 8 of product and credit and additional concessions from lenders and landlords to secure the resources necessary to implement its business plan and to effect the changes believed necessary by management to achieve profitability. Although management believed it had developed an appropriate plan for the Company, the Company was unable to secure the necessary concessions and resources to improve operations and to reverse operating trends and its disappointing operating results and was forced to seek the protections afforded under the Bankruptcy Code. On November 18, 1996, the Company, with the approval of the Court, entered into a credit agreement with GECC providing the Company with a line of credit through November 1997 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 on 30-day commercial paper (currently 5.62%) plus 3%. The line of credit is secured by inventory, accounts receivable and other assets. The credit agreement contains various restrictive covenants. The agreement also contains minimum gross margin, minimum EBITDA, minimum inventory, minimum sales, minimum trade support and maximum capital expenditure financial covenants. At January 31, 1997, the Company had approximately $5,396,580 outstanding under the credit facility and had approximately $1,238,000 available for use. For the fifty-two week period ended January 31, 1997, the Company had net sales of $106.2 million, down 39.3% from the comparable prior year period's $175.0 million, and the Company's loss before income taxes rose to $43.5 million (including write-downs of inventories of approximately $5.4 million and write-offs of leasehold improvements in stores closed or scheduled for liquidation and closing and reorganization expenses, including landlord lease rejection claims, totaling approximately $23.9 million) from $6.8 million. For the prior fiscal year, the Company operated a weighted average of 82.8 stores in the period ended January 31, 1997 as compared to 104.0 stores in the comparable prior year period. The Company began fiscal 1997 with cash of $341,334. During the fifty-two weeks ended January 31, 1997, the Company decreased borrowings by a net of $6,567,499, generated $7,742,003 from operating activities, including store liquidations, used $694,541 for capital expenditures (refurbishing existing stores, opening one store and converting 50-OFF stores to LOT$OFF stores) and ended the period with cash on hand of $821,297. On February 25, 1997 and April 2, 1997, GECC provided the Debtors written notice of certain defaults under its existing DIP financing facility. GECC asserted two events of default: (1) the failure of the Debtors to receive net proceeds of $1 million from the sale of its headquarters building; (2) the failure to satisfy certain financial covenants regarding minimum (a) EBITDA (covenant $400,000 actual ($484,000)), (b) Net Sales (covenant $15,000,000, actual $12,609,000) and (c) Inventory Balances (covenant $16,000,000, actual $13,504,000). The Debtors received $997,847.50 of net proceeds from the sale of the headquarters. The amount that the Debtors fell short upon such covenant was less than $2,500 and, accordingly, immaterial; and GECC has waived such default. The Debtors' defaults with regard to financial covenants were a result of closing the DIP loan approximately ten days after the anticipated date of closing (due to circumstances beyond the control of the Debtors or GECC). Such delay in closing caused the Debtors' holiday inventory not to be stocked at expected levels, which caused the inventory covenant to fail. Such failure, in turn, caused a ripple effect and subsequent failure in the Debtors' meeting the net sales and EBITDA tests; a corollary result was less borrowing and increased availability. GECC is forebearing from exercising any remedies in connection with such financial defaults. On March 17, 1997, GECC provided a formal commitment letter to serve as the Debtors' Senior Secured Exit Financing lender on terms similar to the existing DIP financing facility. Consummation of such exit financing would moot existing defaults in the DIP financing facility. The Company's sales have remained disappointing, due principally to inventory imbalances among the 41 continuing stores and the lack of resources to effectively promote customer traffic to the stores. Preliminary results for the thirteen weeks ended May 2, 1997 are net sales of $11.9 million and a net loss, including reorganization items, of $2.2 million from a weighted average 41.7 stores. Results for the prior year's comparable period were net sales of $32.4 million and a net loss of $4.9 million from a weighted average 100.5 stores. 9 While in chapter 11, the Company has operated its business as a debtor in possession while formulating and promoting its Plan of Reorganization originally filed February 6, 1997 with the Court: . liquidating and closing 60 stores. . reducing its geographic presence (exiting Alabama, Arkansas, Florida, Georgia, North Carolina, South Carolina and most of Tennessee). . closing one of two freight consolidation and distribution centers and moving the remaining center to San Antonio. . downsizing its corporate staff and field personnel (corporate and distribution: 177 to 31; field and stores: 967 full time, 1,482 part time to 382 and 425, respectively). . selling its headquarters building and leasing appropriate, reduced space. . refinancing its principal credit facility through GECC's providing a line of credit through November 1997 of up to $15,000,000 (at May 16, 1997, the Company had approximately $6,974,000 outstanding under this facility and had approximately $611,000 available for use). . restoring credit facilities with vendors (from 100% prepaid to approximately 35% terms at fiscal year end). . redirecting its retail activities from an off-price ("50-Off") to a close-out ("LOT$OFF") retailing concept. . restructuring its merchandising department, including a new Vice- President--Merchandise and a new Vice President--Marketing. . changing its inventory mix from 25.9% (May 1996) to 45.8% (May 1997) hardlines through category additions. . developing marketing and advertising strategies and programs to revive and increase store traffic. . generally positioning itself for improved operating results (higher initial mark-ups, less promotional pricing, fewer markdowns and less inventory shrinkage). Management has been redirecting 50-OFF's retail activities from 50-OFF's off-price retailing concept to LOT$OFF's close-out retailing concept. Coincident and consistent with this change has been a change in the mix of products, historically a majority in family apparel, to a majority in non- apparel merchandise, principally through the addition of new product categories to the Company's historical non-apparel offerings which include cosmetics, housewares and giftware, home furnishings, shelf-stable food products, toys, luggage, footwear, stationery and health and beauty aids. New categories include sporting goods, automotive, greeting cards, jewelry, books, party goods, seasonal, pet supplies and hardware, among others. The Company will continue to maintain a healthy showing of basic family apparel products in the LOT$OFF stores. The actual merchandise mix will fluctuate 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, less inventory shrinkage, increased store traffic and improved operating results. YEAR-END PHYSICAL INVENTORY On January 30, 1997, the Company announced the results of its year-end physical inventory at its 43 off-price/close-out retail stores and its clearance and distribution centers. Among the factors contributing to the Company's poor operating performance the last few years had been the Company's disappointing year-end physical inventories. Management was pleased to announce that such was not the case with the most recent inventories. While the inventory shrinkage determined in the 1996 fiscal and 1995 physical inventories ran 4.17% and 3.82% of sales, respectively, the fiscal 1997 inventory reflected a 1.84% shrinkage, right in line with the 10 retail industry average as reported by the University of Florida in its "National Retail Security Survey" and below the reported 2.14% average for discount stores. Dollar shrinkage dropped for the 43 stores operating at fiscal year end to $1,069,202 from $3,508,114 and $3,408,714 in fiscal 1996 and 1995, respectively. "Shrinkage" is the book loss on inventory due to the physical loss of inventory attributed to (industry averages): employee theft (38.4%), shoplifting (35.8%), administrative error (19.4%) and vendor fraud (6.4%). Shrinkage reduction has been a major concern of 50-OFF's management, and the recent results are cause for confidence in programs initiated this year to reverse historical trends. SELECTED FINANCIAL DATA The following selected financial data (dollars in thousands, except per share data) should be read in conjunction with and are qualified in their entirety by the Consolidated Financial Statements and the notes thereto which are included elsewhere in this Prospectus.
FISCAL YEARS ENDED ------------------------------------------------ JAN. 29, JAN. 28, FEB. 3, FEB. 2, JAN. 31, 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net sales.................... $181,035 $199,589 $201,543 $175,023 $106,194 Cost of sales(1)............. 120,184 137,784 135,560 118,629 78,560 -------- -------- -------- -------- -------- Gross profit................. 60,851 61,805 65,983 56,394 27,634 Selling, advertising, general and administrative expenses(2)................. 46,029 65,477 63,827 57,377 42,295 Depreciation and amortization................ 2,376 3,523 3,779 3,951 3,223 Reorganization items(4)...... -- -- -- -- 23,975 Total operating expense(1)(2)............... 53,748 69,722 72,624 60,918 69,493 Interest (Income) expense, net......................... (174) 528 1,382 2,255 1,597 Income (Loss) cumulative effect of a change in accounting principle and income taxes(1)(2).......... 7,277 (8,445) (8,024) (6,778) (43,457) (Provision for) benefit from income tax(3)............... (2,462) 2,933 -- -- (153) Income (Loss) cumulative effect of a change in accounting principle(1)(2)(3).......... $ 4,815 $ (5,512) $ (8,024) $ (6,778) $(43,610) Cumulative effect of a change in accounting principle, net of income tax benefit(2).... -- (3,404) -- -- -- Net income (loss)(1)(2)(3)... $ 4,815 $( 8,916) $ (8,024) $ (6,778) $(43,610) Fully diluted income (loss) per common share............ $ 0.45 $ ( 0.86) $ (0.76) $ (0.56) $ (3.57)
- -------- (1) Total operating expense amounts indicated for January 29, 1993, January 28, 1994, February 3, 1995, February 2, 1996 and January 31, 1997 include closed store costs (excluding inventory liquidation write-downs of approximately $ 0, $ 0, $1,129,000, $ 0 and $5,415,000, respectively, charged to cost of sales) of approximately $ 0, $723,000, $5,019,000, ($409,145) and $0, respectively. (2) Effective with the beginning of fiscal 1994, the Company changed its method of accounting for pre-opening store costs to expense such costs as incurred rather than capitalizing such costs and amortizing them over a period of 12 months from the store opening date. Selling, advertising, general and administrative expense amounts indicated for January 28, 1994, February 3, 1995, February 2, 1996 and January 31, 1997 include pre- opening expenses of $3,932,554, $250,864, $309,035 and $66,997, respectively. (3) In fiscal 1995, 1996 and 1997, no income tax benefit was recorded in accordance with Statement of Financial Accounting Standards (SFAS) 109 "Accounting for Income Taxes." In fiscal 1997 an income tax provision was recorded to book additional valuation allowance. (4) Reorganization items include severance payroll ($191,000), professional fees ($997,000), loss on disposal of stores ($23,143,000) and gain on sale of building of ($356,000). 11
FISCAL YEARS ENDED ------------------------------------------------ JAN. JAN. 29, 28, FEB. 3, FEB. 2, JAN. 31, 1993 1994 1995 1996 1997 ------- ------- ------- ------- -------- PRO FORMA AMOUNTS:(1) Net Income.................. 3,275 -- -- -- -- Primary and fully diluted income per share............ .30 -- -- -- -- OTHER DATA: Stores open at beginning of period...................... 66 98 111 109 100 New stores.................. 32 22 5 5 1 Stores closed............... 0 9 7 14 57 Stores open at end of period...................... 98 111 109 100 44 Softline sales as a percentage of merchandise sales(2).................... 82.7% 80.3% 77.4 % 75.8% 69.1% Hardline sales as a percentage of merchandise sales(2).................... 17.3% 19.7% 22.6 % 24.2% 30.9% Comparable store sales increase (decrease) from prior period(3)............ (1.2)% (9.5)% 2.6% (8.7)% (30.9)% Softline merchandise gross margin(4)................... 32.3% 29.2% 31.5% 30.9 % 32.2% Hardline merchandise gross margin(4)................... 35.0% 34.3% 35.8% 34.7 % 34.6% Total gross margin(2)(4).... 33.6% 31.0% 32.7% 32.2 % 33.0% Markdowns as a percentage of merchandise sales(2)(4)..... 5.9% 9.0% 7.1% 7.1 % 7.3% Shrinkage a percentage of merchandise sales(4)........ 3.0% 4.1% 3.9% 4.2 % 1.8% BALANCE SHEET DATA(5): Working capital............. $21,471 $12,909 $ 8,503 $11,089 $ 4,073 Total assets................ 72,123 67,601 62,676 55,449 19,255 Long-term obligations, excluding current maturities.................. 1,364 6,403 14,012 15,198 -- Liabilities subject to compromise.................. -- -- -- -- 30,251 Stockholders' (deficit) equity...................... $44,389 $35,683 $28,557 $21,779 $(21,831)
- -------- (1) The "Pro Forma Amounts" shown above assume the accounting method for pre- opening store costs is applied retroactively. (2) Merchandise sales are net sales less other revenues, principally layaway fees (no longer applicable, discontinued as of fiscal 1997) and rental income from leased shoe departments. (3) Comparable store data are calculated based on stores which have been open over 24 months. (4) Total gross margin represents gross profit calculated as a percentage of net sales and has been adjusted to exclude the sale of inventories at 56 closed stores in fiscal 1997. A similar adjustment has been made to markdowns as a percentage of merchandise sales. (5) See "The Offering--Pro Forma Balance Sheet and Capitalization," below. Pro forma per share and income statement presentation will not change as a result of the Debtors' Plan of Reorganization and Rights Offering. No cash dividends with respect to the Company's Old Common Stock were paid during any of the fiscal periods referred to in the foregoing table. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following tables set forth (i) certain items in the consolidated statements of operations expressed as a percentage of net sales for the periods indicated and (ii) the percentage change in certain items in the consolidated statements of operations and in the weighted average number of stores from the prior period.
PERCENTAGE OF NET SALES --------------------------------------- FISCAL YEAR ENDED --------------------------------------- JAN. 31, 1997 FEB. 2, 1996 FEB. 3, 1995 ------------- ------------ ------------ Costs and Expenses: Cost of sales........................ 74.0% 67.8% 67.3% Selling, advertising, general and administrative...................... 39.8 32.6 31.5 Pre-opening store costs.............. -- .2 .1 Depreciation and amortization........ 3.0 2.2 1.9 Closed store cost.................... -- (.2) 2.5 Reorganization items................. (22.6) -- -- Interest (income) expense............ 1.5 1.3 .7 ----- ----- ----- Total expenses......................... 140.9 103.9 104.0 ----- ----- ----- Loss before income taxes............... (40.9) (3.9) (4.0) Provision for income taxes............. (.1) -- -- ----- ----- ----- Net.................................... (41.0)% (3.9)% (4.0)% ===== ===== =====
PERCENTAGE CHANGE ----------------------------------- FISCAL YEAR ENDED FISCAL YEAR ENDED JANUARY 31, 1997 FEBRUARY 2, 1996 COMPARED TO COMPARED TO FISCAL YEAR ENDED FISCAL YEAR ENDED FEBRUARY 2, 1996 FEBRUARY 3, 1995 ----------------- ----------------- Net sales.................................. (39.3)% (13.2)% Cost of sales.............................. (33.8) (12.5) Operating Expenses......................... Selling, advertising, general and administrative.......................... (26.3) (10.1) Depreciation and amortization............ (18.4) 4.5 Closed store costs....................... N/A (108.2) Reorganization items..................... N/A N/A Interest income/expense.................. (29.2) 63.1 Total operating expenses................... 14.1 (16.1) Loss before income taxes................... 541.1 (15.5) Net loss................................... 543.4 (15.5) Weighted average number of stores.......... (20.4)% (7.0)%
13 FISCAL YEAR ENDED JANUARY 31, 1997 COMPARED TO FISCAL YEAR ENDED FEBRUARY 2, 1996 The net sales decrease of 39.3% for fiscal 1997 compared to fiscal 1996 is attributable to a 20.4% decrease in the weighted average number of stores in operation (from 104.0 stores to 82.8) and a 30.9% decrease in comparable store sales. These decreases were partially offset by increased net sales pertaining to liquidations of inventories at the 50-OFF stores converted to LOT$OFF stores during the fiscal 1997 period (such stores were closed, however, on average, 13 days during the period for remodeling and re-merchandising), the sale to a third party of inventories at 37 stores closed during the period and the beginning of store liquidations at other stores closed. Cost of sales as a percentage of net sales increased from 67.8% for fiscal 1996 to 74% for fiscal 1997 due primarily to approximately $5,415,000 in write-downs of inventories at stores liquidated (including the inventories sold to a third party at 37 stores closed during the period) and to the store liquidations which began in September. Excluding the write-downs of inventory and the sale to a third party of inventories at 37 closed stores, cost of sales as a percentage of net sales would have been 68.9% for fiscal 1997. Selling, advertising, general and administrative expenses increased from 32.6% of net sales for fiscal 1996 to 39.8% of net sales for fiscal 1997. The percentage increase was due to lower sales, offset in part by the cost reductions implemented by management late in the period. Depreciation and amortization decreased by 18.4% in fiscal 1997 compared to the prior fiscal year, due to the decreased number of stores in operation. Other expense, net, decreased to approximately $1,597,000 in fiscal 1997 compared to approximately $2,255,000 in the prior fiscal year, due primarily to decreased interest expense attributable to decreased borrowings under the Company's line of credit and the Company's discontinuing to accrue interest on certain of its obligations. The increase in the Company's loss before income taxes for fiscal 1997 compared to fiscal 1996 is primarily due to the Company's reorganization expenses associated with the bankruptcy filing, lower sales and the write- downs, sales and liquidations of inventories discussed above. Income tax benefit related to the losses for fiscal 1997 and 1996 were not recognized because the utilization of such benefit is not assured. Such benefit, if any remaining after the Company's reorganization, is available for recognition in future years. FISCAL YEAR ENDED FEBRUARY 2, 1996 (52 WEEKS) COMPARED TO FISCAL YEAR ENDED FEBRUARY 3, 1995 (53 WEEKS) The net sales decrease of 13.2% for fiscal 1996 compared to fiscal 1995 resulted primarily from (i) the decrease of 7.0% in the weighted average number of stores in operation during fiscal 1996 as compared to fiscal 1995 and (ii) the devaluation of the Mexican peso and the continued economic weakness along the Texas/Mexico border which negatively affected the Company's Texas/Mexico border stores. Such stores experienced an approximate $10,200,000 reduction in sales, which accounted for 38% of the fiscal 1996 net sales decrease (comparable store sales excluding the border stores decreased 3.4%) Cost of sales as a percentage of net sales increased to 67.8% for fiscal 1996 compared to 67.3% for fiscal 1995 primarily due to an increase in inventory shrinkage to 4.4% of net sales as compared to 3.9% for fiscal 1995. Selling, advertising, general and administrative expenses increased from 31.5% of net sales for fiscal 1995 to 32.6% of net sales for fiscal 1996. The 10.2% decrease in the amount of selling, advertising, general and administrative expenses compared to fiscal 1995 was the result of the 7.0% decrease in the weighted average number of stores open and certain cost reductions, including negotiated monthly rent reductions and personnel. 14 Depreciation and amortization increased by 4.5% in fiscal 1996 compared to fiscal 1995, due primarily to approximately $3,700,000 of capital expenditures in fiscal 1996. Other expense, net, increased to approximately $2,255,000 for fiscal 1996 compared to approximately $1,382,000 for fiscal 1995, due primarily to increased interest expense attributable to a higher interest rate and increased borrowings under the Company's revolving credit line. Loss before income taxes and closed store costs (a credit of approximately $409,000 in fiscal 1996 and expense of approximately $5,019,000 in fiscal 1995) for fiscal 1996 increased as compared to fiscal 1995 due primarily to a decrease in net sales and an increase in other expense, net, offset in part by a decrease in selling, advertising, general and administrative expense. Income tax benefits related to the losses for fiscal 1996 and 1995 were not recognized because the utilization of such benefits are not assured. Such benefits are available for recognition in future years. LIQUIDITY AND CAPITAL RESOURCES The Company began fiscal 1997 with cash of $341,334. During the fiscal year ended January 31, 1997, the Company decreased borrowings by a net of $6,897,499, generated $6,399,355 from operating activities, used $694,541 for capital expenditures in refurbishing existing stores, opening one store and converting 50-OFF stores to LOT$OFF stores, received net proceeds (before payment of the related mortgage lien) of $1,342,648 from the sale of the building and ended the period with cash on hand of $491,297. On May 13, 1996, the Company entered into a $22.5 million revolving credit facility with Foothill Capital Corporation and GBFC, Inc. which provided for a 60.75% advance rate on eligible inventory (63.75%, September 16--December 15; 55.75%, December 16--February 28) with interest set at prime plus 1.75% through May 31, 1998. The line of credit was secured by inventory, accounts receivable and other assets. The agreement contained various restrictive covenants, including restrictions on the payment of cash dividends. The agreement also contained minimum gross margin, minimum EBITDA, minimum and maximum inventory levels, minimum working capital and minimum trade support financial covenants. On August 8, 1996, the Company was notified that it was in violation of the minimum gross margin (disputed) and the minimum working capital financial covenants and that such breaches constituted events of default under the loan documents. The lenders subsequently established additional availability reserves, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing, which individually and together, substantially impacted the Company's financial liquidity and therefore, its ability to acquire and maintain much needed inventory for its stores. The Company was unable to secure the resources required to cure the defaults under the loan documents and to implement its business plan and effect the changes believed necessary to improve operations and reverse the Company's disappointing operating results without the protections afforded under chapter 11. The Company and its significant subsidiaries filed petitions for relief under chapter 11 in the Bankruptcy Court on October 9, 1996. This facility was paid off in November 1996. On November 18, 1996, the Company, with the approval of the Bankruptcy Court, entered into a credit agreement with GECC providing the Company with a line of credit through November 1997 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 5.62%) plus 3%. The line of credit is collateralized by inventory, accounts receivable and other assets. The credit agreement contains various restrictive covenants. The agreement also contains minimum gross margin, minimum EBITDA, minimum inventory, minimum sales, minimum trade support and maximum capital expenditure financial covenants. The Company has violated certain of these covenants, which GECC is forbearing. As of January 31, 1997, the Company had approximately $5,396,580 outstanding under the credit facility. At May 16, 1997, the Company had approximately $6,974,000 outstanding under the credit facility and had approximately $611,000 available for use. 15 The Company believes its operating cash flow, its anticipated Senior Secured Exit Financing, its restructuring of certain other obligations under the Plan, its cash on hand and the anticipated required minimum subscription in the Rights Offering contemplated hereby will be adequate to finance its operations and costs to convert the remaining 50-OFF Stores to LOT$OFF Stores through the remainder of fiscal 1998, although there can be no assurance that such sources of capital will be sufficient, assuming that such sources of capital are received, obtained and realized. BUSINESS OUTLOOK The Company opened LOT$OFF stores at 50-OFF's existing locations in Oklahoma (4), the Dallas Metroplex (4) and San Antonio (6), on July 26, August 1 and September 27, 1996, respectively. Early operating results for the 14 converted LOT$OFF stores were encouraging, in spite of difficulties in maintaining inventories due to serious cash shortages, and significantly surpassed the results of the remaining 50-OFF stores. During its operation in bankruptcy, the Company has generally allocated its available resources evenly among all continuing store locations. The Company is continuing to operate 41 50-OFF and LOT$OFF stores in New Mexico (3), Texas (28), Oklahoma (4), Louisiana (5) and Memphis, Tennessee (1). The Company plans to proceed with the conversion of those 50-OFF stores it elects to continue to operate to LOT$OFF stores. On March 20, 1997, the Company opened LOT$OFF stores at its existing locations in Amarillo, Austin, Corpus Christi, Lubbock, Midland and Waco, Texas. The Company's four existing locations in Houston, Texas were converted during the week of April 14, 1997. Through the Plan, the Company is restructuring its obligations and capitalization in order to strengthen its financial position so management can more fully implement its business plan and improve the Company's operating performance. As discussed herein, management has developed and is implementing a business strategy which seeks to achieve higher gross margins and a return to profitability; the key elements of this strategy, which included the geographic consolidation of the chain and the liquidation and closing of under-performing stores or stores located outside of a reduced market area with appropriate reductions in field and corporate overhead and staffing, are converting the continuing 50-OFF stores to LOT$OFF stores, more close-out buying, higher initial mark-ups, less promotional pricing, new "hardlines" categories, elimination of certain "softline" categories subject to high markdowns and inventory shrinkage, extensive programs to control shrinkage generally and a reduced expense structure. 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 final results of the Offering, the need to sucessfully complete negotiation of a post-confirmation credit facility and ultimately comply with its terms, covenants and the conditions, the degree of success in reversing the Company's recent business trends (increasing sales and operating profit) and the ability to alleviate trade credit concerns and restore merchandise flow to adequate levels. While management believes that the recent closings of stores and the implementation of expense cuts commensurate with the downsizing of the total stores in operation (from 101 to 41 stores) facilitates its efforts to improve the Company's operating performance and that the recapitalization to be implemented upon the confirmation of its Plan of Reorganization should strengthen its financial position and alleviate concerns of credit and merchandise suppliers, no assurance can be given that the Company will be successful in its continuing efforts to reverse recent business trends which have continued through May 1997 and return to profitability. The receipt of Net Lawsuit Proceeds from significant litigation brought by the Company would further strengthen the Company's financial position. See "Material Litigation." If the Company's plans to improve operations post-confirmation are not successful, management will consider, among other alternatives, strategic and/or financial alliances with third parties (including wholesalers or manufacturers) and the merger, sale or liquidation of all or a part of the Company. 16 BUSINESS MERCHANDISING 50-OFF stores primarily offer moderately priced, regionally and nationally advertised merchandise, including apparel as well as non-apparel goods. To respond to a sluggish economy for apparel sales, as consumers concentrated more on home decor and improvement purchases, the Company increasingly emphasized the merchandising of non-apparel products, which generally have higher maintained gross margins. As discussed above, with the introduction of the LOT$OFF concept, management is redirecting 50-OFF's retail activities from off-price to close-out retailing. Coincident and consistent with this change is a change in the mix of products, historically a majority in family apparel, to a majority in non-apparel offerings which include cosmetics, housewares and giftware, home furnishings, shelf-stable food products, toys, luggage, footwear, stationery and health and beauty aids. New categories include sporting goods, automotive, greeting cards, jewelry, books, party goods, seasonal, pet supplies and hardware, among others. The Company will continue to maintain a healthy showing of basic family apparel products in LOT$OFF stores. The actual merchandise will fluctuate by category, by season and by store based on consumer needs and buying trends, demographics and the availability of products at close-out prices. This merchandising concept is designed to appeal to value-conscious shoppers and other "bargain hunters," and management is hopeful its implementation will lead to higher initial markups, less promotional pricing, fewer markdowns, less inventory shrinkage, increased store traffic and improved operating results. Merchandise in 50-OFF stores, previously ticketed at twice the sales price, is now ticketed "Priced Right at" the price to be paid by customers for their convenience, to avoid confusion at the cash registers and to minimize shrinkage. These prices are based upon a combination of factors which include: the prices paid for such merchandise; the wholesale prices paid by others and traditional markups; manufacturers' suggested retail prices; locally and nationally advertised prices; and comparison shopping by the Company's buyers, distributors and district and store managers. In each store, apparel is neatly displayed on modern fixtures. Private, mirrored dressing rooms are provided. Other merchandise, including certain prepackaged apparel items, is conveniently displayed on gondolas or tables within easy reach of customers. New store layouts include a central core for seasonal product presentations, featured items and special promotions. While principally a self-service store operation, the Company strives to make personnel promptly available to customers desiring assistance. Purchases are made at cash registers located at the front of each store, near the entrance and exit doors. ADVERTISING AND MARKETING The Company works closely with its advertising and marketing agency in implementing a program focusing on direct mail and other print advertising. Electronic media will be used for special events only. The Company has developed new pricing statements which accentuate the low price image implied by the Company's 50-OFF and LOT$OFF names but strategically avoid any confusion or resistance evoked by the natural questions, "50 percent off what?" The new pricing statements, "Priced Right. In Your Neighborhood" and "Quality Merchandise. Close-out Prices," capitalize on the low price image while highlighting the quality merchandise benefit and convenience. These pricing statements are now being communicated to customers through in-store signs and print media. PURCHASING The Company's buyers purchase goods at substantially lower than regular wholesale prices from manufacturers and other vendors. The following factors contribute to the Company's ability to obtain quality merchandise at reduced wholesale prices: . manufacturers' overproduction. . cancellations of orders by other retailers. 17 . merchandise which does not meet other retailers' delivery deadlines for various reasons, including import delays. . merchandise not shipped to other retailers that have credit problems. . ability of the Company to buy goods at a time closer to a target season, or, in some cases, out of season, which is generally not the normal buying pattern of most other retail stores. . excess merchandise accumulated by vendors. . packaging changes by manufacturers. . increased availability of imports from the Far East in the form of close-outs and in-stock overruns. . utilization of left-over piece goods available after production for traditional department stores. . discontinued goods. . ability to commit for categories of merchandise produced specifically for the Company. . ability of the Company to prepay or accept abbreviated credit terms. The Company has historically purchased merchandise from more than 1,300 manufacturers and other vendors. No single manufacturer or other vendor supplied a significant percentage of the Company's merchandise during the last fiscal period, or, in the opinion of the Company, was material to its operations. In the future, however, the Company may seek strategic alliance(s) with certain manufacturers and/or other vendors. See "Business--Plan" below. Financial creditability and good relationships with manufacturers and other vendors, generally, will be critical to the Company's future operations. INVENTORY MONITORING The Company's computerized management information system, featuring double- bar-code-scanning, point-of-sale cash registers in all of its stores and a computerized perpetual inventory system, permits corporate management to review each store's inventory on a daily basis. This system enables the Company to closely monitor its inventory needs and coordinate its purchase orders. DISTRIBUTION SYSTEM Substantially all of the Company's merchandise is shipped directly from manufacturers or vendors to store locations through a third-party freight consolidation point in San Antonio, Texas (the prior two such points in Dallas, Texas and Atlanta, Georgia were terminated with the recent reduction of stores in operation and the Company's geographic consolidation). This distribution system generally allows merchandise delivery to the Company's stores as quickly as ten days after placing an order and, in addition, gives the Company the flexibility to purchase merchandise for all or a small number of its stores. STORE OPERATIONS Substantially all merchandise decisions with respect to product mix, prices, markdowns and advertising are made by management at the Company's store support center in San Antonio, Texas. The Company has district managers who visit each of the Company's stores on a regular basis to review the implementation of Company policy, monitor operations and review inventories and the presentation of merchandise. Accounting and general financial functions for the Company's stores are also conducted at the store support center. Each store has a manager and one or more assistant managers responsible for store sales and profitability, supervision and overall operations. Store managers receive a fixed salary and are eligible for bonuses primarily based on their control of inventory and on their achieving a targeted increase in sales over budgeted amounts. 18 REAL ESTATE AND OTHER PROPERTY The Company's 41 currently existing and continuing stores (including one annex) are all leased and range in size from 13,000 to 50,000 square feet, with most containing at least 20,000 square feet of selling space. The majority of the Company's stores are located in strip shopping centers or malls. The Company's policy is to locate stores in areas where demographics indicate that its targeted customers have easy access to the location and where the targeted customer base is large enough to support a store. During fiscal 1997, the Company incurred and expensed an aggregate of approximately $7,353,000 in fixed rent and a nominal amount of additional percentage rent. Minimum rental commitments (excluding renewal options) under the 41 store plan (including the one annex to remain open) were approximately $4,595,000 ($.34 per square foot per month, before any negotiated rent reductions) for the fiscal year ended January 31, 1997. Minimum rental commitments (excluding renewal options) under leases having a term of more than one year at January 31, 1997 are approximately $3,888,000 for the fiscal year ending January 30, 1998. In addition to its rejection of unproductive leases through the bankruptcy process, the Company plans to downsize some continuing stores and to attempt to renegotiate rental rates on remaining leases. The following is a list of the 41 stores the Company is currently operating and expects to operate in fiscal 1998 by state and city (total: 1,107,825 square feet; 951,220 square feet selling space). LOUISIANA OKLAHOMA TEXAS TEXAS (5) (4) (28) (CONTINUED) Baton Rouge (2) Lawton* Amarillo* Laredo Bossier City Oklahoma City (3)* Austin* Lubbock* New Orleans Brownsville McAllen Shreveport TENNESSEE Corpus Christi* Midland* (1) Memphis Dallas-Fort Worth (4)* Pharr NEW MEXICO El Paso (2) Roma (and annex) (3) Albuquerque (3) Harlingen San Antonio (6)* Houston (4)* Waco*
- -------- * LOT$OFF Stores In most of the Company's stores, a small portion of selling space is subleased to an unaffiliated party operating shoe departments. Such subleases generally provide for a percentage rent payable to the Company equal to 12% of the net sales of such departments. In certain of the San Antonio, Texas stores, a small portion of selling space is subleased to an unaffiliated party operating jewelry departments at approximately $100 per square foot plus percentage rent (6-7% of sales) over established break points. The rental income from the subleases is included in the Company's reported net sales figures. Typical store leases have primary terms of five to ten years with at least one five-year renewal option. Some leases have provisions that allow the Company, and in a few cases the landlord, to terminate the lease during the primary term based on the Company's store not reaching predetermined sales levels. Most of the Company's leases provide that the landlord will pay for the major portion of leasehold improvements or allow the Company to recover its expenditures for such improvements in the form of reduced rent. The Company owns its equipment, furniture and fixtures which are well- maintained and suitable for its present store requirements. The Company sold its store support center in San Antonio, Texas for gross proceeds of $1,440,000 on January 14, 1997 and leased back the reduced portion of the building currently occupied by the downsized corporate staff for approximately $18,000 per month on a full service lease. The Company has registered (or has applications pending for, where indicated with an *) its principal logos, which include the phrases "The 50-OFF," "50- OFF, Why Pay More", "50-OFF Stores, where you save as 19 much as you spend," "LOTSOFF*," "LOT$OFF*" and "50-OFF" as service marks in the principal register with the U.S. Patent and Trademark Office. The "50-OFF" mark is also registered in Mexico. EMPLOYEES The Company has recently completed a major downsizing and at the end of fiscal 1997 was staffed to fit the new 41 store core business group. At May 5, 1996, the Company had 1,134 full time employees (101 corporate management, administrative and clerical personnel, 10 buyers, 56 distribution and transportation personnel and 967 store management and store personnel) and 1,482 part-time store employees. After the substantial cutbacks in personnel and the restructuring of responsibilities to reflect both the reduction in stores and the increased emphasis on cost and expense containment, the Company currently has approximately 413 full time employees (24 corporate management, administrative and clerical personnel, 4 buyers, 3 distribution and transportation personnel and 382 store management and store personnel) and 425 part-time store employees. Additional part-time employees are usually hired during the busier Easter/spring, "Back-to-School" and Christmas/holiday selling seasons. None of the Company's employees are represented by a union, and employee relations are considered satisfactory. MANAGEMENT OFFICERS The executive and other significant officers of the Company are shown below with a summary of their backgrounds: . Charles J. Fuhrmann II (52): President, Chief Executive Officer, Chief Financial Officer and Director. Has served as President, Chief Executive Officer and Chief Financial Officer since May 1996 and as a Director of the Company since October 1994. Since May 1991, has been a private investor and independent, strategic and financial consultant to private and public companies, including the Company since October 1994. From 1978 through May 1991, was Managing Director, Investment Banking and Vice President of Merrill Lynch & Co., Inc., New York City, New York. . Doug Sims (48): Vice-President--Operations. Has served as Vice- President -Loss Prevention and Internal Audit since March 1994 and served as Director of Loss Prevention since June 1990. Self-employed in polygraph/investigations for numerous retail corporations from July 1980 to June 1990. Filed for a divorce related personal bankruptcy under chapter 13 in 1995. . Loretta Marino-Ortiz (31): Vice-President--Merchandise. Has served as Vice-President-- Merchandise since May 1997. Served as General Merchandise Manager for Remington Retail Division from January 1993 and, from 1980 to 1993, served principally as Buyer for Job Lot Pushcart. Has over 16 years of retail experience, primarily in close- out buying and general merchandising capacities. . Thomas H. Lazenby II (37): Vice-President--Marketing. Has served as Vice-President--Marketing since May 1997. Served as Vice-President-- Operations for UETA Inc./Duty Free International from September 1995 and Regional Vice-President from February 1995 and, from 1987 to 1995, served principally as Store Manager for Dillard's Department Stores. Has over 14 years of retail experience. . James G. Scogin (35): Vice-President--Chief Accounting Officer, Controller and Assistant Secretary. Has served as Vice-President-- Chief Accounting Officer, Controller and Assistant Secretary since May 1996, served as Controller-Chief Accounting Officer since February 1995 and served as Controller since June 1992. A Certified Public Accountant, was employed by Deloitte & Touche LLP from August 1985 to June 1992. 20 . Roy E. Springer (48): Vice-President--Human Resources. Has served as Vice-President--Human Resources since July 1993 and Director of Human Resources since 1989. Served as District Store Manager of the Company from 1988 until 1989. Held various multi-unit management positions for other retail organizations for 10 years prior to joining the Company. DIRECTORS The Board of Directors of the Company, currently two members including Mr. Fuhrmann, will be expanded on the Effective Date to add more retail and general business expertise. See "Directors of the Reorganized Company," below. The current Director in addition to Mr. Fuhrmann is Cecil Schenker (54), who has served as a Director since July 1991 and previously from October 1983 until July 1986. Mr. Schenker is a corporate securities attorney and the managing partner of the San Antonio, Texas office of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. of which he has been a partner, through his professional corporation, for more than 10 years. Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly performed legal services for the Company. Mr. Schenker also serves as a Director of Taco Cabana, Inc. (a Mexican patio cafe chain). FURTHER DISCLOSURES REGARDING OFFICERS AND DIRECTORS No person is known to own 5% or more of the Old Common Stock of 50-OFF. The current officers and Directors of 50-OFF, who received Rights and were entitled to subscribe for Units, currently own or have the following amounts of Old Common Stock and stock options, all of which will be canceled under the Plan:
OLD OLD COMMON UNITS COMMON STOCK STOCK OPTIONS SUBSCRIBED* ------------ ------------- ----------- Charles J. Fuhrmann II............... 5,000 510,000 50 Doug Sims............................ 325 35,956 10 James G. Scogin...................... 250 20,820 3 Roy E. Springer...................... 1,000 32,364 10
* Represents number of Units subscribed in the Rights Offering. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Charles J. Fuhrmann II, a Director of the Company, performed certain financial and strategic advisory services for the Company and was compensated $31,250 during fiscal 1997 and $127,500 during fiscal 1996 for such services. On May 7, 1996, Mr. Fuhrmann was appointed President, Chief Executive and Financial Officer of the Company. During fiscal periods prior to August 1988, and again since February 1991, the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly performed legal services as counsel to the Company. Cecil Schenker, a Director of the Company and a member of the Company's Compensation Committee, is the sole shareholder of Cecil Schenker, P.C., a partner with Akin, Gump, Strauss, Hauer & Feld, L.L.P. The investment firm of James M. Raines & Company, the owner of which was a Director of the Company until May 28, 1997, performed consulting services for a fee in connection with the Company's Regulation S offering conducted during the fiscal year ended February 3, 1995. Effective May 7, 1996 and July 8, 1996, Charles M. Siegel and Richard Sherman, respectively, resigned as Directors of the Company. Effective May 28, 1997, Joseph Lehrman and James M. Raines resigned as Directors of the Company. 21 SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning the compensation earned during the Company's last three fiscal years by the Company's Chief Executive Officer, the only executive officer earning compensation in excess of $100,000 in fiscal 1997, and the Company's former Chief Executive Officer who resigned in May 1996 (the "named executive officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION ---------------- ----------------------------------- AWARDS PAYOUTS --------------------------- ------- RESTRICTED STOCK SECURITIES LTIP ALL OTHER NAME AND PRINCIPAL FISCAL SALARY BONUS AWARD(S) UNDERLYING PAYOUTS COMPENSATION POSITION YEAR ($) ($) ($) OPTIONS(#) ($) ($) (1) ------------------ ------ ------- ----- ---------------- ---------- ------- ------------ Charles J. Fuhrmann II 1997 156,460(2) -- -- 400,000 -- -- President, CEO and CFO 1996 -- -- -- -- -- -- 1995 -- -- -- -- -- -- Charles M. Siegel 1997 82,118(2) -- -- 50,000 -- -- Chairman, President and 1996 203,846 -- -- 50,000 -- -- CEO 1995 250,000 -- -- -- -- 308
- -------- (1) Represents company matching contributions under the Company's Profit Sharing Plan and Trust. (2) Represents partial year compensation. Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus reported for any named executive officer. In May 1996, Charles M. Siegel resigned from his positions as President, Chief Executive Officer and a Director of the Company. The Company had an amended employment agreement (the "Agreement") with Charles Siegel, which expired on June 15, 1996. Upon Mr. Siegel's resignation from his positions as President and Chief Executive Officer, the Agreement was terminated and a severance agreement was entered into with Mr. Siegel who received $50,000 severance immediately and severance pay of $250,000 payable in equal monthly payments over a two year period; $229,000 of such severance pay is included in liabilities subject to compromise. In May 1996, Charles J. Fuhrmann II became President, Chief Executive and Financial Officer of the Company. The Company does not have an employment agreement with Mr. Fuhrmann, but Mr. Fuhrmann receives a base salary of $200,000 and was granted on May 20, 1996, 400,000 options exercisable at $1.00 per share, of which 100,000 options were exercisable immediately, with the remaining 300,000 options exercisable in whole or in part, upon the Company's achieving certain minimum net income requirements or achieving certain valuations upon any change of control of the Company. All such options will be canceled on the Effective Date of the Plan. COMPENSATION OF DIRECTORS Each outside Director received $750 per Board meeting attended (and $500 per telephone meeting in excess of two hours duration). In addition, each outside director received $750 per meeting for services as members of, or $1,000 per meeting for chairing, the Audit and Compensation Committees. Outside members of the Executive Committee received $1,000 per meeting attended, the Chairman $1,500, (and $500 per telephone meeting in excess of two hours duration). Each outside Director also received stock option grants. See "Stock Option Plan," below. STOCK OPTION PLAN UPON THE EFFECTIVE DATE OF THE COMPANY'S PLAN, THE COMPANY'S STOCK OPTION PLAN DESCRIBED BELOW WILL BE DEEMED TERMINATED AND ALL OUTSTANDING OPTIONS WILL BE DEEMED CANCELED AND OF NO FURTHER FORCE, EFFECT OR VALUE. SEE "MANAGEMENT--EMPLOYEE AND DIRECTOR OPTIONS" FOR INFORMATION REGARDING A NEW OPTION PLAN. Under the Company's current Stock Option Plan (the "Option Plan"), stock options to purchase up to 3,000,000 shares of Old Common Stock may be granted to full-time employees, outside Directors, advisors and outside consultants of the Company. The Company's Compensation Committee set the specific terms and conditions of options granted under the Option Plan and administered the Option Plan. 22 Employees of the Company were eligible to receive either incentive stock options or non-qualified stock options or a combination of both, as the Compensation Committee determined. Non-employee participants could be granted only non-qualified stock options. In accordance with the terms of the Option Plan, outside directors received initial grants upon election or appointment and additional grants upon reelection following five years of service. Such options became exercisable in five equal annual installments commencing with the first anniversary following the date of grant. The exercise price was equal to 100% of the fair market value of a share of Old Common Stock on the date of grant. As of January 31, 1997 stock options covering an aggregate of 1,417,436 shares of Old Common Stock were outstanding with a weighted average exercise price of $3.27 per share and 1,043,564 additional shares were available for issuance upon exercise of options which may be granted in the future. As of May 30, 1997, stock options covering an aggregate of 812,254 shares of Old Common Stock were outstanding with a weighted average exercise price of $1.99 per share and 1,648,746 additional shares were available for issuance upon exercise of options which may be granted in the future. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning options granted to the named executive officers during the Company's fiscal year ended January 31, 1997:
OPTION GRANTS IN FISCAL 1997 ---------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM (2) OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------ NAME (#) FISCAL 1997 (2) ($/SH) DATE 5% 10% ---- ---------- --------------- -------- ---------- - --------------- Charles J. Fuhrmann II.. 400,000 48% $1.00 5-15-06 $ 252,000 $ 636,000 Charles M. Siegel....... 50,000 6% $1.38 4-12-01 $ 14,000 $ 42,000
- -------- (1) In fiscal 1997, options for an aggregate 662,084 were granted to executive officers as a group; and options for an aggregate 171,668 shares were granted to employees and outside consultants, other than executive officers, as a group. (2) The dollar amounts under these columns use the 5% and 10% rates of appreciation prescribed by the SEC. The 5% rate of appreciation would result in per share prices of $1.63 and $1.76, respectively. The 10% rate of appreciation would result in per share prices of $2.22 and $2.59, respectively. This presentation is not intended to forecast possible future appreciation of the Company's Old Common Stock. FISCAL YEAR END OPTION VALUES The following table sets forth certain information concerning the value of unexercised options held by the named executive officers at January 31, 1997 (no options were exercised by such officers during the fiscal year ended on such date):
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN- UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT FY-END (#) OPTIONS AT FY-END ($) (1) ------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Charles J. Fuhrmann II...... 165,000 345,000 $0.00 $0.00 Charles M. Siegel........... 100,000 0 $0.00 $0.00
- -------- (1) Values stated are based on the closing price of the Company's Old Common Stock as reported in the over-the-counter market on January 31, 1997 (under $0.10) and equal the aggregate amount by which the market value of the option shares exceeds the exercise price of such options at the end of the fiscal year (nil). SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, the beneficial ownership (as defined by the rules of the Securities of Exchange Commission) of the Old Common Stock as of May 30, 1997 by each person known by the Company to be a beneficial owner of more than 5%, all Directors, the named executive officers, and all Directors and executive officers as a group. 23
NUMBER OF SHARES BENEFICIALLY PERCENT OF NAME OWNED CLASS (1) ---- ------------ ---------- Charles J. Fuhrmann II................................. 170,000(2) 1.4% Charles M. Siegel...................................... 100,000(2) * Cecil Schenker......................................... 0 * All executive officers and Directors as a group (8 persons)............................................... 356,645 2.8%
- -------- * Less than 1% (1) This calculation is the quotient of: (a) the number of shares of Old Common Stock currently beneficially owned by the named individual or group, plus the number of shares of Old Common Stock, if any, for which options held by such person or group are currently exercisable or become exercisable within 60 days of May 30, 1997; divided by (b) the total number of shares of Old Common Stock outstanding and the number of shares of Old Common Stock, if any, for which options held by such person or group are currently exercisable or become exercisable within 60 days of May 30, 1997. (2) Includes 165,000 shares in the case of Mr. Fuhrmann and 100,000 shares in the case of Mr. Siegel, which are issuable pursuant to presently exercisable options (or those exercisable within 60 days of May 30, 1997). Excludes 340,000 shares, in the case of Mr. Fuhrmann, which are issuable pursuant to options which are not currently exercisable or exercisable within 60 days of May 30, 1997. PROFIT SHARING PLAN AND TRUST The Company's Profit Sharing Plan and Trust (the "Profit Sharing Plan") was adopted effective April 1, 1990, and is intended to constitute a qualified cash or deferred profit sharing plan within the meaning of Section 401(a) and 401(k) of the Internal Revenue Code of 1986. The Profit Sharing Plan is subject to the Employee Retirement Income Security Act of 1974. All employees of the Company who have attained the age of 21, and, with respect to employees hired on or after April 1, 1990, who have also completed at least 1,000 hours of service in a 12-month period (a "year of service"), are eligible to participate. Each eligible employee is allowed to contribute up to 15% of his earnings as shown on the employee's W-2 form. Through February 1995, the Company matched 25% of the participating employees' contributions up to a maximum of 6% of the employees' earnings, and will determine any future matching after the financial results are known each year. All participating employees' contributions to the Profit Sharing Plan are at all times fully vested and nonforfeitable. Contributions made by the Company and credited to employees' accounts are vested 20% after two years of service, 40% after three years of service, 60% after four years of service, 80% after five years of service and 100% after six years of service, but all such Company contributions are fully vested and nonforfeitable upon (i) the employee's reaching the normal retirement age of 65, or (ii) the employee's death or disability prior to age 65, or (iii) termination of the Profit Sharing Plan. All forfeitures of non-vested Company contributions are reallocated to non-forfeiting participants' accounts. Participating employees may choose among alternative investment vehicles (Company Stock is not an option). Distributions may be made prior to normal retirement age upon showing of hardship. The annual benefits payable upon retirement at normal retirement age cannot be estimated due to the number of variables which operate under the Profit Sharing Plan. The Company made aggregate contributions of $33,575 to the Profit Sharing Plan during fiscal 1995. The Company did not make any contributions during fiscal 1996 or fiscal 1997. OFFICERS OF THE REORGANIZED COMPANY The current officers of 50-OFF will remain the officers of Reorganized 50- OFF. Such officers' salaries will be set by the Board of Directors of Reorganized 50-OFF. 24 DIRECTORS OF THE REORGANIZED COMPANY The initial Board of Directors of Reorganized 50-OFF will consist of five Directors, selected prior to the commencement of the Confirmation Hearing by the existing Chief Executive Officer of 50-OFF and upon consultation with the existing Board and the General Unsecured Creditors Committee (the "Committee"). The Chief Executive Officer of Reorganized 50-OFF will serve as an initial Director. Such initial Board of Directors will be appointed pursuant to the Confirmation Order and Section 303 of the Delaware General Corporation Law as if unanimously approved by the Board of Directors and stockholders, and the Board of Directors will be authorized to take such actions as may be necessary to fully consummate the Plan. The initial Board will commence serving on the Effective Date of the Plan. The names and brief biographical information for each of the anticipated Reorganized 50-OFF's post-Effective Date Directors are as follows: . Sheryle J. Bolton -- Will serve as initial Director of Reorganized 50-OFF. Has been Chief Executive Officer of Scientific Learning Corporation (CD/ROM and Net-based training programs for people with language impairments) since November 1996. Served as President, Chief Operating Officer and a Director of Physicians' Online, Inc. (proprietary online service for professionals) from January 1994 to July 1996. Associated with Rockefeller & Co., Inc. (global investment management firm) from 1990-1993 with responsibility for all institutional client services and marketing. Serves as a Director or trustee of several Scudder, Stevens & Clark, Inc. managed funds. . Charles J. Fuhrmann II -- Will serve as initial Director and Chairman of Reorganized 50-OFF. See "Officers" above. . Cecil Schenker -- Will serve as initial Director of Reorganized 50- OFF. See "Directors" above. . William B. Snow -- Will serve as initial Director of Reorganized 50- OFF. Has been Vice Chairman of Movie Gallery, Inc. (video specialty retailer) since 1994. Served as Executive Vice President and Director of Consolidated Stores Corporation (closeout specialty retailer) from 1985 until his retirement in 1994. Serves as Director of Homeland Stores, Inc. and DePaul University. . M. David White -- Will serve as initial Director of Reorganized 50- OFF. Has been Vice-President--Finance of Boston Chicken, Inc. (multi- unit specialty food retailer) since December 1994. Served as Director, Investment Banking and Vice-President of Merrill Lynch & Co., Inc., Houston, Texas from 1986 through December 1994. The Directors will serve at the pleasure of the stockholders, and new Directors may be elected at the first annual meeting of stockholders to occur after the Effective Date of the Plan. The subsequent tenure and manner of selection of Directors will be as provided in the charter and bylaws of Reorganized 50-OFF. To provide continuity of management for some period after confirmation of the Plan, the initial Board of Directors for Reorganized 50- OFF will call the first annual meeting of stockholders no sooner than twelve months after the Effective Date unless an earlier meeting is determined to be called by such Board. As compensation for their services, each initial Director will receive $1,000 per meeting attended (a minimum of four per year are expected) and reimbursement of expenses associated with such attendance. Telephonic meeting participation lasting over an hour will be compensated for at $500. In addition, each initial Director of Reorganized 50-OFF will be granted 5-year options to buy 5,000 shares of Common Stock, effective on the Effective Date and exercisable after 90 days after the Effective Date at $1.67 per share. See "--Employee and Directors Options," below for information regarding a new Stock Option Plan. In the future, 5-year options to buy 5,000 shares of Common Stock at then fair market will be granted to Directors upon appointment or election (or re-election) to the Board of Directors. Directors may receive additional compensation for consulting services as approved by a majority of the Board of Directors. EMPLOYEE AND DIRECTOR OPTIONS. Pursuant to the Plan, 5-year options for 400,000 of the authorized shares of Reorganized 50-OFF Common Stock will be granted to the Company's executive officers under the Reorganized 50-OFF Stock Option Plan, including 200,000 such options to be granted to Mr. Fuhrmann. Such 25 options will be granted on the Effective Date and will be exercisable after 90 days after the Effective Date at $1.67 per share. Pursuant to the Plan, options for an additional 25,000 shares will be granted to initial Directors (5,000 per initial Director), including Mr. Fuhrmann, on terms similar to those discussed above. Reorganized 50-OFF may grant options to acquire up to an additional 375,000 shares of Reorganized 50-OFF Common Stock (approximately 5% of the fully diluted shares of Reorganized 50-OFF Common Stock authorized and/or reserved for issuance on the Effective Date) to officers, including executive officers, and other key employees and Directors (limited to 5,000/year/individual Director) of Reorganized 50-OFF pursuant to the terms of the Reorganized 50- OFF Stock Option Plan, which Stock Option Plan will expire on the fifth anniversary of the Effective Date. The terms and conditions of the additional options, if any, related to such shares shall be determined by the post- confirmation Board of Directors of Reorganized 50-OFF or a committee thereof; provided, however, that any such initial determination shall be made only after at least 90 days after the Effective Date. The Reorganized 50-OFF Stock Option Plan shall become effective on the Effective Date without the necessity for further corporate action by the Board of Directors of Reorganized 50-OFF or the holders of Reorganized 50-OFF Common Stock pursuant to the Confirmation Order and Section 303 of the Delaware General Corporation Law. SELECTED PORTIONS OF THE COMPANY'S BUSINESS PLAN EXECUTIVE SUMMARY As noted, the Company is a regional, off-price/close-out retailer operating stores under the names "50-OFF" and "LOT$OFF" in five states in the southern and southwestern United States. Management has selected 42 locations (one is an annex) which will be incorporated into a new core business from which to emerge from bankruptcy; the Company is operating and expects to operate 41 stores (and the annex) through fiscal 1998 (ending January 30). Management has worked to accomplish the following: . consolidate and solidify the core business in the southern and southwestern U.S. . restructure the balance sheet and obtain permanent financing (secured lender and trade suppliers). . reorganize the corporate management team to provide value-added contribution to the overall operating results. . obtain additional capital through the Offering. . obtain Court approval of its Plan of Reorganization. Now it must implement the Court confirmed Plan. The Company's business plan is focused on redirecting its retail activities to achieve higher gross margins, higher store contribution and lower corporate overhead, all promoting overall profitability. The key elements of this strategy, which included the geographic consolidation of the chain and the liquidation or closing of under-performing stores or stores located outside of the reduced market area with appropriate reductions in field and corporate overhead and staffing, are converting the continuing 50-OFF stores to LOT$OFF stores (14 of the continuing stores had been converted as of the filing of the voluntary bankruptcy petitions on October 9, 1996), more close-out buying, higher initial markups, less promotional pricing, new "hardlines" categories, elimination of certain "softline" categories subject to high markdowns and inventory shrinkage, extensive programs to control shrinkage generally and a reduced overhead structure. While plans are in place to convert the additional locations (24 are now converted), the conversion schedule is constantly being reviewed given the bankruptcy filings and available resources. Under the leadership of CEO Charles Fuhrmann and with the support of the Board of Directors, management has developed and is implementing a business plan centered on five basic goals: . The Company must always operate with a business plan. . The Company must employ the most qualified people it can afford in all key management positions. 26 . The management team must have current and accurate operating information in order to effectively manage the growth and profitability of the Company. . The Company must consistently generate an above average profit from store operations. . The Company must maintain financial credibility with its key suppliers, lenders and stockholders. Growth will be an objective once the Company has completed the successful conversion of its 41 continuing locations to the LOT$OFF concept. The operating performance of 50-OFF deteriorated over the past several years with important common denominators indicating such slippage. Management is now targeting the core stores to return to over $90.00 per square foot in revenues and to generate a 10+ percent individual store contribution on an annual basis. This level of profitability is being currently generated by companies with similar concepts (Consolidated Stores Corporation: Odd Lots and Big Lots stores; MacFrugal's Bargains and Close-Outs, Inc.: MacFrugal's stores; and Mazel Stores, Inc.: Odd Job stores; among others) and should be attainable under an experienced, disciplined management team. The current management team is excited about the opportunities ahead for the Company and is serious about the attainment of the targeted operating results. There is a new understanding of the financial information by all key members of management; they have fully reviewed the historical operating performance and are now concentrating on optimizing the contribution from store operations while maintaining only the absolute minimum amount of corporate overhead necessary to support store operations. GENERAL BUSINESS PHILOSOPHY 50-OFF's mission is to create a shopping experience that surpasses customers' expectations as it seeks to be a leading off-price retailer of close-out merchandise to low-to-moderate income customers and other "bargain hunters" in the markets it serves. The major elements of the Company's strategy include: . Value Leadership: 50-OFF intends to offer its customers a broad selection of quality merchandise that maintains the credibility and integrity of the Company's value pricing structure while providing a pleasant and convenient shopping experience. . Distinctive Marketing: The Company plans to differentiate itself from other retail stores through its close-out purchasing and value pricing. . Purchasing at Close-out Prices: The Company will purchase a majority of its merchandise at close-out (substantially lower than regular wholesale) prices relying upon its buyers' knowledge of, and reputation among, manufacturers and other vendors and its willingness to purchase in large quantities, in special situations, in odd lots and for immediate delivery. . Merchandising: The Company will offer a mix of products that may fluctuate by category, by season and by store based on consumer needs and buying trends and availability of products at close-out prices. . Emphasis on Low Operating Costs: The Company will focus on maintaining low operating costs through a cost-effective, drop-ship distribution system, its approach to store leases (traditionally in strip centers), its particularly low store operating expenses, further reductions in corporate overhead and a corporation-wide effort to minimize inventory shrinkage. . Store Maturity: The Company will concentrate on developing existing stores to full maturity and profitability. Over time, the Company believes a store builds recognition and customer loyalty as management adjusts the store's merchandise mix in response to local consumer preferences. . Expansion: The Company's long-term development plan is to expand its regional presence in existing and new markets. For the foreseeable future, however, the Company will concentrate on 27 converting its continuing 50-OFF stores to LOT$OFF stores. Any store openings will be limited to existing market areas where the store base is underdeveloped and will be based on an evaluation of the sales and income performance of existing stores and the ability to obtain leases for desirable locations. THE "LOT$OFF" CONCEPT The LOT$OFF chain will be an off-price/close-out retail operation located in Texas, Louisiana, Tennessee, New Mexico and Oklahoma. There are 24 of the anticipated 41 continuing stores already converted to the LOT$OFF concept. Stores will average approximately 27,000 square feet (23,000 square feet of selling space) and will be located in both urban and suburban markets and in strip centers, enclosed malls and stand alone units. The mix of product will be 60 percent hardlines: housewares health and beauty aids household chemicals home decor toys electronics gifts seasonal small appliances automotive greeting cards shelf-stable food sporting goods books hardware party goods pet supplies garden supplies
The remaining 40 percent will be softlines comprised of domestics and basic apparel for men, ladies, infants, boys and girls, including accessories, underwear, socks and hosiery for all genders. CUSTOMERS The LOT$OFF targeted customers are 60 percent female and 40 percent male, 25 to 50 years old and have an average annual income of $15,000 to $45,000 per household. Their ethnic make-up is 30 percent Anglo, 30 percent Afro-American and 40 percent Hispanic. The effective means of communication is direct mail to residences with electronic media used for special events. These customers shop seeking the best value, not necessarily the lowest price, and are influenced by nationally advertised brands. LOT$OFF's business will be heaviest on weekends (Friday through Sunday) and at the beginning of each month. PURCHASING The vast majority of the hardlines portion of LOT$OFF's inventory will be purchased from a limited number of suppliers in each category, perhaps as few as one or two manufacturers and/or wholesalers, who will provide product and credit for these categories. The remaining 40 percent will be purchased by a team of four to six buyers located in San Antonio, each such buyer being responsible for purchasing $6 million to $12 million of product at retail. Their categories of responsibility include: girls' apparel infants' apparel boys' apparel ladies' apparel men's apparel domestics accessories hosiery lingerie
Softlines will be purchased from approximately 400 different vendors. Approximately 30 percent of purchases will be "in-line" product such as greeting cards (sold at a 40 percent discount from everyday pricing), imports, seasonal items and basic commodities, including hosiery and socks. The remaining 70 percent of purchases will be principally from manufacturers' overruns, cancellations by other retailers, refurbished electronics, late in the season product and packaging changes. 28 STORE MERCHANDISING Store merchandising techniques will include a center core of merchandise as one enters a store, which, when appropriate, will feature a seasonal theme: Easter Spring cleaning Mothers' Day Summer Back-to-school Fall Halloween Thanksgiving Christmas
This area will feature products from any category which relate to that season. The rest of the offerings will be presented by category, with hardlines and domestics product presented primarily on gondolas and apparel featured on four ways and round and straight racks. The floor layout will vary based on the size and shape of a store, but a consistent flow from one category to the next will be present in each store. Each store will be stocked based on the specific demographics of each location with input from store management and other store personnel. Each store will be encouraged to communicate directly with buyers and distributors as to their needs and customers' requests. GROSS MARGIN The average initial markup is planned at 45 percent of retail; markdowns are planned at 5.0 percent of sales (i.e., a targeted gross margin of 42.2 percent before freight costs and shrinkage). LOT$OFF CONVERSIONS The current schedule for the 17 remaining store conversions is July - October 1997. The incremental cost to convert a store is approximately $20,000 for signage, special advertising and minor painting, touch-up and refixturing; concept maximization would also require an increase in the average inventory per store. The stores are scheduled to go dark for no more than a few days during the conversion process. 29 MATERIAL LITIGATION REGARDING SALE OF SECURITIES As was discussed above, among the principal reasons for the Company's having to file for bankruptcy protection was a severe liquidity crisis caused in part by the breach of certain foreign purchasers of their contractual obligations to purchase in aggregate 1,500,000 shares of the Company's common stock at $3.65 per share ($5,475,000 in aggregate) in an international (Regulation S) offering by 50-OFF in late fiscal 1995. The Company has filed two Lawsuits relating to this matter. As per the Plan, the Company proposes to issue 770,170 shares (approximately $3.9 million liquidation value) of Series B Preferred Stock (with each share convertible into two shares of Common Stock) to its General Unsecured Creditors for its more than $28 million of pre- petition obligations to them. Additional shares of Series A Preferred Stock ($5.00 liquidation value per share), not covered by this Prospectus, and/or Cash would be issued or paid to such Creditors to the extent that the Net Lawsuits' Proceeds exceed the $3.9 million. The Company's obligations to issue Series A Conversion Rights, Series A Preferred Stock and/or Cash to such Creditors are secured by the Net Lawsuits' Proceeds. See "Plan of Reorganization." In November 1994, the Company received subscriptions for approximately 1,810,000 shares of its common stock in a Regulation S offering to qualified investors. The Company received net proceeds of approximately $861,000 from the purchase of 310,000 shares and has purchase agreements for 1,500,000 shares for which proceeds have not been received. On February 21, 1995, the Company filed a Lawsuit [50-Off Stores, Inc. v. Banque Paribas (Suisse), S.A., Betafid, S.A., Yanni Koutsoubos, Andalucian Villas (Forty Eight) Limited, Arnass Limited, Brocimast Enterprises Ltd., Dennis Morris, Howard White, and Morris & Associates, Case No. SA-95-CA-0159] in United States District Court in San Antonio, Texas against Banque Paribas (Suisse) S.A., Betafid S.A., three purchaser entities allegedly controlled by them and certain affiliated individuals in connection with the breach by certain of the defendants of their contractual obligations to purchase an aggregate of 1,500,000 shares of the Company's Old Common Stock at $3.65 per share. The Lawsuit also includes securities fraud, promissory estoppel, conspiracy and conversion claims. The conversion claim relates to actions of the defendants in transferring, selling and trading the shares even though the defendants have never paid for such shares. The Company seeks recovery of actual and punitive damages, an injunction against the defendants' transfer of such stock in violation of the Securities Act, pre- and post-judgment interest, attorneys' fees and such other remedies to which the Company may show itself entitled. Dennis Morris and Howard White have answered the complaint with White raising the affirmative defense of contributory negligence. White also served a third party complaint on Chase Manhattan Bank, N.A. 50-OFF has recently joined Chase and Aries Peak, Inc. as additional defendants. Defaults have been entered against Arnass, Andalucian Villas, Brocimast, Betafid and Koutsoubos for failure to appear or answer. Banque Paribas (Suisse) ("Paribas") moved to dismiss the action for lack of personal jurisdiction, failure to state a claim and for forum non conveniens. The District Court referred all pre-trial matters to U.S. Magistrate Judge John W. Primomo, who denied each of Paribas' motions to dismiss. U.S. District Judge H.F. Garcia has adopted Judge Primomo's rulings in their entirety. On March 20, 1997, Paribas answered 50-OFF's complaint asserting a number of affirmative defenses including contributory negligence. Paribas also asserted a counterclaim against 50-OFF for defamation. 50-OFF has moved to dismiss this counterclaim and to strike Paribas' affirmative defenses. Judge Primomo has recommended such dismissal and the striking of the affirmative defenses. Written discovery has been served on all defendants who have appeared, and depositions have been taken of numerous parties and non-party witnesses. Judge Primomo has required that all discovery of Paribas take place pursuant to the provisions of the Hague Evidence Convention. Paribas recently responded to 50- OFF's request for production and interrogatories. This case is currently set for trial on August 25, 1997. 30 On January 9, 1996, the Company filed a second Lawsuit [50-OFF Stores, Inc. v. Jefferies & Company, Inc. and Jefferies International, Ltd., Cause No. 96- CI-00349] in Bexar County District Court in San Antonio, Texas against the Company's placement agents in the securities offering referenced in the Lawsuit discussed above. The suit alleges that the defendants breached their contracts with the Company, breached their fiduciary duties to the Company and were reckless or grossly negligent in failing to investigate properly the qualifications of the purchasers they introduced to the Company. The Company seeks to recover actual and exemplary damages in excess of $10,000,000, pre- and post-judgment interest, costs and attorneys' fees. Both defendants have answered the petition and raised the affirmative defense of contributory negligence. Additionally, Jefferies & Company filed a third party claim against Howard White. Discovery is proceeding. Soon after the Company filed for protection under the Bankruptcy Code, Jefferies and White removed this case to the Court. The United States District Court, however, granted 50-OFF's motion to abstain from hearing the case and remanded the case back to the Bexar County District Court. This case is specially set for jury trial on October 4, 1997. The Bexar County District Court also ordered the parties to conduct mediation of the case prior to such trial date. The Company will continue to prosecute these cases vigorously. The Company, based upon advice of counsel, believes that it will obtain a favorable judgment against one or more of the defendants referenced in the preceding two Lawsuits. The Company intends to vigorously pursue all remedies to collect the sums owing to the Company as per any judgment obtained against one or more of the defendants. Akin, Gump, Strauss, Hauer & Feld, L.L.P., represents the Company in these matters on a contingency fee basis. 31 THE OFFERING THE OFFERING SUMMARY OF THE OFFERING SECURITIES OFFERED 122,009 Units. PRICE $100.00 per Unit. MINIMUM OFFERING 30,500 Units. MAXIMUM OFFERING 122,009 Units. UNITS Each Unit consists of 20 shares of 5.5% cumulative convertible Series A Preferred Stock ($5.00 per share liquidation value; convertible into two shares of Common Stock) and 20 shares of Common Stock $0.01 par value. ESCROW AGENT Bank One, Texas, NA. OLD COMMON STOCK OUTSTANDING AT MARCH 21, 1997 12,200,915 shares. COMMON STOCK TO BE OUTSTANDING AFTER THE Minimum: 610,000 shares; OFFERING* Maximum 2,440,180 shares. SERIES A PREFERRED STOCK TO BE OUTSTANDING AFTER Minimum: 610,000 shares; THE OFFERING* Maximum: 2,440,180 shares. ESTIMATED GROSS PROCEEDS* Minimum: $3,050,000; Maximum: $12,200,900.
* At May 30, 1997, 44,736 Units had been subscribed and $4,473,600 was being held in escrow pursuant to the Rights Offering. Such Units represent 894,720 shares of Common Stock and 894,720 shares of Series A Preferred Stock. USE OF PROCEEDS The proceeds from the sale of the Units are estimated to be a minimum of $3,050,000 (and a maximum of $12,200,900). At expiration of the Rights Offering, $4,473,600 in subscription proceeds had been received. On the Effective Date, proceeds from the Offering will be applied immediately to pay down the Company's asset based lending facility which, in turn, will be used, together with cash from operations and any Net Lawsuits' Proceeds, for working capital, including the financing of increased inventories for the Company's stores and to finance its exit from bankruptcy including the costs of the Offering (with the costs to exit from bankruptcy estimated to require approximately $2.0 million, $780,000 of which will be paid over approximately six months). 32 PRO FORMA BALANCE SHEET AND CAPITALIZATION The following table sets forth the balance sheet and capitalization of the Company (in thousands) as of January 31, 1997 giving effect to the Company's implementation of the Debtors' Plan of Reorganization, including the sale of 44,736 Units ($4,473,600) subscribed for in the Rights Offering.
PRO FORMA JANUARY 31, 1997 ADJUSTMENT JANUARY 31, 1997 ---------------- ---------- ---------------- Assets: Current Assets......... $ 14,908 $ 19,306 Net Property, Plant and Equipment............. 3,989 3,989 Other Assets........... 358 358 -------- ------- -------- Total Assets............. 19,255 23,653 ======== ======= ======== Liabilities and Stockholders' (Deficit) Equity: Current Liabilities.... 10,835 (5,397) 5,438 Long-term debt: Senior secured exit fi- nancing............... 0(1) 1,129 1,129 MetLife Renewal Note(2)............... 0 850 850 Other long-term debt(3)............... 0 589 589 -------- -------- Total long-term debt..... 0 2,568 Liabilities subject to compromise.............. 30,251 (30,251)(11) 0 Stockholders' (deficit) equity: Preferred Stock(4)..... Series A(5).......... 0 4,474 (10) 4,474 Series B(6).......... 0 3,991 (11) 3,991 Common Stock ($0.01 par value)(7)............. 122 (113)(10)(12) 9 Additional paid-in capital............... 36,022 20,737 (11)(12) 56,759 Subscription receivable............ (3,991) 3,991 (11) 0 Accumulated deficit(8). (53,984) (53,984) -------- -------- Total stockholders' (deficit) equity......... (21,831) 11,249 -------- ------- -------- Total liabilities and stockholders' equity..... $ 19,255 $ 23,524 ======== ======= ======== Total capitalization(9).. $ 8,420 $ 18,085 ======== ========
- -------- (1) At January 31, 1997, a similar facility is classified as current with $5,397,000 outstanding. (2) At January 31, 1997, the Company owed MetLife $4,190,881, which amount was compromised by agreement with MetLife to $850,000. (3) Represents note payable for prepetition ad valorem taxes. (4) At liquidating value of $5.00 per share; convertible into two shares of Common Stock. (5) 894,720 shares issued and outstanding (reflects 44,736 Units subscribed for in the Rights Offering); 5.5% annual cumulative dividend, payable quarterly in arrears. (6) 798,210 shares issued and outstanding. (7) 894,720 shares issued and outstanding; 3,385,860 shares reserved for potential conversion of all issued and outstanding Preferred Stock (Series A and Series B); and up to 425,000 shares reserved for potential exercise of options outstanding as of the Effective Date of the Plan. Pro forma January 31, 1997 book value per share: $3.26 ($2.57 fully diluted). Upon receipt of up to $3,991,050 of Net Lawsuits' Proceeds, the Company is not obligated to issue any additional common stock equivalents or any further liquidation preference; therefore, should there be Net Lawsuits' Proceeds of $3,991,050, pro forma book value per share would be $7.72 ($3.42 fully diluted). 33 (8) Assuming the Plan had been consummated as of January 31, 1997, the fully diluted earnings per share based on 4,280,580 equivalent shares would have been ($10.18) no adjustments have been made to historical earnings as a result of the implementation of the Plan. (9) Total capitalization consists of total long-term debt, liabilities subject to compromise and stockholders' (deficit) equity. (10) Represents the proceeds from the issuance of 894,720 shares of Common Stock (par value of $9,000) and Series A Preferred stock (reflects 44,736 Units subscribed for in the Rights Offering) net of estimated offering expenses of $205,000. Such net proceeds are applied against the Senior Secured Exit Financing. (11) Represents the reclassification of $30,251,000 of liabilities subject to compromise and the subscription receivable of $3,991,000, the rights of which accrue to the Series B Preferred Shareholders into long-term debt of $1,439,000; 894,720 shares of new common stock; 798,210 shares of Series B Preferred stock with a liquidation preference of $3,991,000 and an increase in additional paid in capital of 20,830,000. (12) Represents the reclassification of Old Common Stock into additional paid- in capital for the elimination of the Old Common Stock. SUMMARY OF THE RIGHTS OFFERING SECURITIES DISTRIBUTED 12,200,915 Rights exercisable for an aggregate maximum of 122,009 Units. RIGHTS RATIO One Right for each share of Old Common Stock owned on the Record Date. One Unit could be subscribed for each Right; subject to the maximum.
SUBSCRIPTION PRICE $100.00 per Unit. RECORD DATE March 21, 1997. EXPIRATION DATE May 22, 1997, as extended.* SUBSCRIPTION AND ESCROW AGENT Bank One, Texas, N.A.
- -------- * The extension was to accomodate receipt of additional subscriptions anticipated from existing stockholders. The Company had received subscriptions for 42,691 Units ($4,269,100) on May 20, 1997, the original expiration date of the Rights Offering. RIGHTS The Company issued to its stockholders of record on March 21, 1997, Rights to subscribe for a maximum of 122,209 Units, each comprised of 20 shares of Common Stock and 20 shares of Series A Preferred Stock, at $100 per Unit (the "Subscription Price"). One Right was issued for each share of Old Common Stock outstanding on the Record Date. Although there could be no assurance that a Subscriber would receive more than one Unit per 100 shares of Old Common Stock currently held; Rights allowed the Subscriber to subscribe to additional Units, up to one Unit per share currently held, to the extent such Units were available under the Rights Offering (see "Oversubscription Privilege," below). Rights were not evidenced by Rights Certificates, but rather were evidenced by the transfer agent's ledger as of the close of business on March 21, 1997. Stockholders could purchase Units through the exercise of the Rights or allow the Rights to expire unexercised. The Rights were not transferable. All Rights expired on May 22, 1997, the extended Rights Offering Deadline. OTHER TERMS OF THE RIGHTS OFFERING RIGHTS OFFERING RECORD DATE FOR HOLDERS OF PUBLIC EQUITY INTERESTS The Rights Offering Record Date, March 21, 1997, was the date for determining the holders of Public Equity Interests entitled to receive Rights provided under the Plan. As of the close of business on the Rights Offering Record Date for purposes of distribution, the transfer ledger in respect of the Public Equity Interests was closed. The Debtors, the Disbursing 34 Agent, broker/dealers and their agents had no obligation to recognize any transfer of Public Equity Interest occurring after the Rights Offering Record Date. The Debtors, the Disbursing Agent, broker/dealers and their agents were entitled instead to recognize and deal with only those holders of record stated on the transfer ledger maintained by the transfer agent for the Public Equity Interests as of the close of business on the Rights Offering Record Date. On the Effective Date, all outstanding Public Equity Interests will be canceled on the books of Reorganized 50-OFF as is consistent with the Plan. REORGANIZED 50-OFF RIGHTS OFFERING AND UNITS Pursuant to the Plan, 50-OFF issued to the holders of Old Common Stock as of March 21, 1997, the Rights Offering Record Date, rights to subscribe for Units as described herein (the "Rights"). One Right was issued for each share of Old Common Stock. Each Right entitled the holder of such Right to purchase a Reorganized 50-OFF Unit, which consists of 20 shares of Series A Preferred Stock and 20 shares of Reorganized 50-OFF Common Stock in exchange for $100.00 per Unit in cash, subject to certain limitations on the number of Units to be sold and the allocation of such maximum number of Units in the event of an oversubscription, and subject to the terms and conditions described herein. One Right was required to subscribe for one Reorganized 50-OFF Unit, except as provided in the Oversubscription Privilege. No Rights certificates were issued to holders of Old Common Stock. The ledger maintained by 50-OFF's transfer agent as of the close of business on the Record Date was deemed to be the ledger of the holders of such Rights. MAXIMUM/MINIMUM NUMBER OF UNITS TO BE SOLD A maximum of 122,009 Units would be sold. In the event that subscriptions for in excess of 122,009 Units were received on account of the Rights and the oversubscription privilege, the funds attributable to unfilled subscriptions (as selected pursuant to the terms hereof), without interest, would have been promptly returned to such subscribers. A minimum of 30,500 Units would be sold. Had subscriptions for fewer than 30,500 been received in the Rights Offering, all such subscriptions, without interest, would have been promptly returned to the subscribers, and the Rights would have been deemed canceled. OVERSUBSCRIPTION PRIVILEGE Any holder of a Right could have exercised an oversubscription privilege to subscribe for additional Units which were otherwise unsubscribed (the "Oversubscription Privilege"). Such Oversubscription Privilege must have been exercised prior to the extended Rights Offering Deadline, May 22, 1997. ALLOCATION UPON OVERSUBSCRIPTION In the event of an oversubscription of the Units, each subscriber would have received one Unit for each 100 shares of Old Common Stock held as of the Record Date; any remaining Units thereafter would have been divided pro rata among subscribers based upon the number of Units which had been requested and not provided. EXERCISE OF RIGHTS Holders of Old Common Stock as of the Record Date who desired to exercise Rights to purchase Units were requested to fill out an Expression of Interest in Purchasing Rights Units form. Each party returning a favorable Expression of Interest was forwarded a Subscription Exercise Form for Rights Offering. The Expression of Interest in Purchasing Rights Units was requested to be returned by holders of Old Common Stock in sufficient time to receive and return the Subscription Exercise Form for Rights Offering prior to the Rights Offering Deadline. Upon receiving the Subscription Exercise Form for Rights Offering each holder of Rights desiring to purchase Units was requested to: (1) execute the Subscription Exercise Form for Rights Offering; (2) return the executed Subscription Exercise Form for Rights Offering to the Escrow Agent such that the Subscription Exercise Form for Rights Offering would be received by the Escrow Agent on or before the Rights Offering Deadline; and (3) return a check or wire transfer consisting of good funds for the full price of the number of Units subscribed such that the check or funds would be received by the Escrow Agent on or before the Rights Offering Deadline. Persons who appropriately subscribed were bound or deemed bound by the Subscription Exercise Form and the Escrow Agreement as well as any other applicable subscription documents. Holders of Rights were requested to carefully follow all instructions for due exercise of their Rights, which instructions were provided with the Subscription Exercise Form for Rights Offering. All questions with respect 35 to the validity, form and eligibility of any exercise of Rights were to be determined solely by 50-OFF. 50-OFF, in its sole discretion, could waive any defect or irregularity, including the waiver of the untimeliness of any subscription received, permit a defect or irregularity to be corrected within such time as it may determine or reject the exercise of any Right. A subscription was not deemed to have been made until all irregularities had been waived or cured within such time as 50-OFF determined in its sole discretion. Neither the Debtors nor the Escrow Agent were under any duty to give notification of any defect in a subscription or incur any liability for failure to give any such notification. TRANSMITTAL OF DOCUMENTS AND PURCHASE PRICE The instructions accompanying the Subscription Exercise Form for Rights Offering were requested to be carefully read and strictly followed. QUESTIONS RELATING TO THE METHOD OF SUBSCRIPTION WERE TO BE DIRECTED TO MORROW & CO. AT 909 3RD AVENUE, 20TH FLOOR, NEW YORK, NY 10022; (212) 754-8000; (800) 566-9061; AND (FOR BANKS AND BROKERAGE FIRMS) (800) 662-5200. The risk of delivery of all documents and payments was on the subscribers, not 50-OFF or the Escrow Agent. If the mail was used, it was recommended that insured registered mail be used and that a sufficient number of days be allowed to ensure delivery to the Escrow Agent before the Rights Offering Deadline. The risk of providing the Expression of Interest in Purchasing Rights Units in sufficient time to allow for the receiving and returning of the Subscription Exercise Form for Rights Offering was to be borne by the holders of the Rights. RIGHTS OFFERING CONDITIONED UPON CONFIRMATION All subscriptions for the purchase of Units, including all subscriptions described in "Offerings to Other Persons," below, although binding, were subject to and conditioned upon the confirmation of the Plan. On or promptly after the Effective Date, certificates for shares underlying the Units subscribed on or before June 13, 1997 in the Offering will be mailed to subscribers. On the Effective Date the subscription proceeds held in escrow will be released to the Company. OFFERING TO OTHER PERSONS Prior to expiration of the Offering, the Company may offer for sale and sell to the public all Units unsubscribed in the Rights Offering up to the maximum number of Units for $100.00 per Unit. As stated above, all sales of Units prior to the Effective Date are subject to and conditioned upon occurrence of the Effective Date. 36 DESCRIPTION OF SECURITIES Effective on the Effective Date, the Certificate of Incorporation of the Company will be restated and amended to authorize the issuance of 40,000,000 shares of capital stock, consisting of 25,000,000 shares of Common Stock and 15,000,000 shares of Preferred Stock. Shares of Preferred Stock will be issuable from time to time in series. The following summaries of certain provisions of the Certificates of Designation for Series A and Series B Preferred Stock do not purport to be complete and are qualified in their entirety by reference to the respective Certificates of Designation copies of which are filed as exhibits to the Registration Statement, of which this Prospectus is a part. SERIES A PREFERRED STOCK AUTHORIZATION Reorganized 50-OFF will be authorized to issue 10,000,000 shares of Series A Preferred Stock. PAR VALUE The Series A Preferred Stock will have a par value of $0.01 per share. STOCK EXCHANGE LISTING When and if the requisite criteria are met, Reorganized 50-OFF will use reasonable efforts to cause the Series A Preferred Stock to be listed on the NASDAQ National Market. DESIGNATION OF SERIES The designation of the series will be "Series A Preferred Stock." DIVIDENDS ON SERIES A PREFERRED STOCK AMOUNT; DUE DATES The holders of the Series A Preferred Stock will be entitled to receive, in any calendar year, when and as declared by the Board of Directors, out of funds legally available therefor and subject to the further limitations set out in the Series A Preferred Stock Certificate of Designation, cumulative dividends at the per annum rate of 5.50% of the Series A Liquidation Preference, all such dividends due quarterly in arrears as of the last day of each March, June, September and December of each year, the first dividend being due on the first such date to occur which is at least ninety (90) days after the Effective Date. DIVIDENDS OR REDEMPTION REGARDING OTHER CLASSES OR SERIES Dividends will be payable on account of the Series A Preferred Stock before any sum or sums are paid or set aside for the purchase, redemption of, or payment of dividends on the Reorganized 50-OFF Common Stock or any class or series of stock ranking junior to the Series A Preferred Stock as to dividends or distribution of assets, except as to the extent of the Series B Preferred Stock Lien (described generally as a lien granted to holders of Series B Preferred Stock pursuant to the Plan and the Confirmation Order, securing Reorganized 50-OFF's obligation to pay the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up) and the Class 7 Lien (described generally as a lien granted to holders of allowed general unsecured claims pursuant to the Plan and Confirmation Order, securing Reorganized 50-OFF's obligation to issue Series A Preferred Stock and to distribute Excess Net Lawsuits' Proceeds to such holder when required pursuant to the terms and conditions of the Plan) upon the Net Lawsuits' Proceeds. Dividends upon the Series A Preferred Stock will be cumulative. Accumulations of dividends will not bear interest. REDEMPTION OF REORGANIZED 50-OFF SERIES A PREFERRED STOCK Subject to restrictions imposed by Delaware law, Reorganized 50-OFF may, at its option, redeem the shares of the Series A Preferred Stock in whole or in part, at any time, in exchange for the payment of the Series A Liquidation Preference; provided, however, that for the five consecutive days prior to the date of the notice of redemption, the Reorganized 50-OFF Common Stock must have closed at a price of $3.00 or more per share. Redemption will be accomplished using the procedures set forth within the Series A Preferred Stock Certificate of Designation. PRIORITY OF THE SERIES A PREFERRED STOCK IN THE EVENT OF DISSOLUTION The Series A Preferred Stock will have preference over Series B Preferred Stock, Reorganized 50-OFF Common Stock and any class or series of 37 stock ranking junior to the Series A Preferred Stock as to the distribution of assets in the event of any liquidation, dissolution or winding up of Reorganized 50-OFF and, in that event, subject to the provisions of applicable law, each Series A Holder will be entitled to receive, out of the assets of Reorganized 50-OFF available for distribution to its stockholders, $5.00 per share of Series A Preferred Stock and any accrued and unpaid dividends (the "Series A Liquidation Preference"). Upon any liquidation, dissolution or winding up of Reorganized 50-OFF, after payment shall have been made in full on any other securities which are senior as to distribution of assets to Series A Preferred Stock, and after payment shall have been made in full on the Series A Preferred Stock, as provided in the Certificate of Designation for Series A Preferred Stock, but not prior thereto, the holders of all the remaining capital stock including Series B Preferred Stock, Reorganized 50-OFF Common Stock or any other series or class of stock ranking junior to the Series A Preferred Stock as to distribution of assets shall, subject to the respective terms and provisions of the Restated Certificate of Incorporation of Reorganized 50-OFF, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of Series A Preferred Stock will not be entitled to share therein. The merger or consolidation of Reorganized 50-OFF with another corporation and/or the sale, lease, pledge or mortgage of all or substantially all of the assets of Reorganized 50-OFF will not be deemed to be a liquidation, dissolution or winding up of Reorganized 50-OFF for the purposes hereof. Notwithstanding anything herein to the contrary, the Series A Liquidation Preference will in all things be junior and subordinate to both the Series B Preferred Stock Lien and the Class 7 Lien, as to the Net Lawsuits' Proceeds. RIGHTS OF CONVERSION Subject to the terms of the Certificate of Designation for Series B Preferred Stock, any share of Series A Preferred Stock may be converted, provided that such shares have not been redeemed, on or after the date of issue at the option of each holder of Series A Preferred Stock into two (subject to adjustment) fully paid and nonassessable shares of Reorganized 50-OFF Common Stock. VOTING RIGHTS OF SERIES A PREFERRED STOCK Holders of Series A Preferred Stock will have no voting rights except as provided below and as required by the Delaware General Corporation Law. Holders of Series A Preferred stock will be entitled to vote alongside the Reorganized 50-OFF Common Stock on all matters submitted to a vote of holders of Common Stock from and after the date that Reorganized 50-OFF fails to pay any three consecutive dividends upon the Series A Preferred Stock; provided, however, that, for purposes of voting, each share of Series A Preferred Stock will be entitled to a number of votes equal to the then applicable conversion rate (expressed as the number of shares of Common Stock to be acquired upon conversion of one share of Series A Preferred Stock). SERIES B PREFERRED STOCK AUTHORIZATION Reorganized 50-OFF will be authorized to issue 1,000,000 shares of Series B Preferred Stock. PAR VALUE The Series B Preferred Stock will have a par value of $0.01 per share. DESIGNATION OF SERIES The designation of the series shall be "Series B Preferred Stock." REDEMPTION OF SERIES B PREFERRED STOCK Subject to restrictions imposed by Delaware law, Reorganized 50-OFF may, at its option, redeem the shares of the Series B Preferred Stock, in whole or in part, at any time after the Disposition of the Lawsuits (described generally as the rendering of Final Orders with regard to certain pending lawsuits brought by the Company), in exchange for the payment of the Series B Liquidation Preference. Redemption will be accomplished using the procedures set forth in the Certificate of Designation for Series B Preferred Stock. DIVIDENDS ON SERIES B PREFERRED STOCK Holders of Series B Preferred Stock will participate in any cash dividends paid to holders of Reorganized 50-OFF Common Stock as though each share of Series B Preferred Stock is equal to the then applicable conversion rate (expressed as the number of shares of Common Stock to be acquired upon conversion of one share of Series B Preferred Stock). 38 PRIORITY OF THE SERIES B PREFERRED STOCK IN THE EVENT OF DISSOLUTION LIEN ON NET LAWSUITS' PROCEEDS The holders of Series B Preferred Stock will have a lien on the Net Lawsuits' Proceeds subject to the terms and conditions of the Plan. Such Series B Preferred Stock Lien will be a full assignment and security interest in and upon the Net Lawsuits' Proceeds, securing Reorganized 50-OFF's obligation to pay the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up, which lien will be junior in right and priority to (a) any and all contingent fee interests held by counsel prosecuting such Lawsuits on behalf of the Debtors and the Reorganized Debtors, including, without limitation, such contingent fee interest as secures the reimbursement of all expenses owing to such counsel, (b) the reimbursement of the Debtors and the Reorganized Debtors of all expenses directly relating to the prosecution of the Lawsuits paid by the Debtors or the Reorganized Debtors after the Petition Date, including after confirmation or after any conversion of the Chapter 11 Cases to Chapter 7, (c) the Class 7 Agents' fees and expenses and the fees and expenses of any professionals hired by the Class 7 Agent, (d) the Chapter 11 Professional Fee Lawsuit Carve-Out, and (e) the liens and security interest of the Senior Secured Exit Financing lender or any successor thereto. The Series B Preferred Stock Lien shall be senior to the Class 7 Lien. Such Series B Preferred Stock Lien will be enforceable up to the full amount of the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up of Reorganized 50-OFF. Such Series B Preferred Stock Lien will be deemed satisfied and released as to any portion of the Net Lawsuits' Proceeds for which Series A Conversion Rights (or fractions thereof) are issued, including Series A Conversion Rights (or fractions thereof) which are issued and held in the Contested Claims Escrow. OTHER PREFERENCE The Series B Preferred Stock will have preference over the Reorganized 50-OFF Common Stock and any class or series of stock ranking junior to the Series B Preferred Stock as to the distribution of assets in the event of any liquidation, dissolution or winding up of Reorganized 50-OFF and, in that event, subject to the provisions of applicable law, each Holder of Series B Preferred Stock will be entitled to receive, out of the assets of Reorganized 50-OFF available for distribution to its stockholders, $5.00 per share of Series B Preferred Stock and any accrued but unpaid dividends (the "Series B Liquidation Preference"). Upon any liquidation, dissolution or winding up of Reorganized 50-OFF, after payment has been made in full on any other securities which are senior as to distribution of assets to Series B Preferred Stock, and after payment has been made in full on the Series B Preferred Stock, as provided in the Certificate of Designation for Series B Preferred Stock, but not prior thereto, the holders of all the remaining capital stock including Reorganized 50-OFF Common Stock or any other series or class of stock ranking junior to the Series B Preferred Stock as to distribution of assets will, subject to the respective terms and provisions of the Restated Certificate of Incorporation of Reorganized 50-OFF, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of Series B Preferred Stock will not be entitled to share therein. The merger or consolidation of Reorganized 50-OFF with another corporation and/or the sale, lease, pledge or mortgage of all or substantially all of the assets of Reorganized 50-OFF will not be deemed to be a liquidation, dissolution or winding up of Reorganized 50-OFF for the purposes hereof. RIGHTS OF CONVERSION INTO SHARES OF COMMON STOCK OF REORGANIZED 50-OFF Subject to the terms of the Certificate of Designation for Series B Preferred Stock, each share of Series B Preferred Stock may be converted, provided that such shares have not been redeemed, on or after the date of issue at the option of each holder of Series B Preferred Stock, into two (subject to adjustment) fully paid and nonassessable shares of Reorganized 50-OFF Common Stock. RIGHTS OF CONVERSION INTO SHARES OF SERIES A PREFERRED STOCK Subject to the terms of the Certificate of Designation for Series B Preferred Stock, each share of Series B Preferred Stock may be converted, provided such shares have not been redeemed, on or after such time as such share of Series B Preferred Stock is deemed fully convertible, into fully paid and nonassessable shares of Series A Preferred Stock. A share of Series B Preferred Stock will be deemed fully convertible at such time as a full Series A Conversion Right with respect to such share of Series B Preferred Stock has been deemed distributed by Reorganized 50-OFF. 39 VOTING RIGHTS OF SERIES B PREFERRED STOCK Holders of Series B Preferred Stock will have no voting rights except as provided below and as required by the Delaware General Corporation Law. Holders of Series B Stock will be entitled to vote alongside the Reorganized 50-OFF Common Stock on all matters submitted to a vote of holders of Common Stock from and after the Disposition of the Lawsuits; provided, however, that for purposes of voting, each share of Series B Preferred Stock will be entitled to a number of votes equal to the then applicable conversion rate (expressed as the number of shares of Common Stock to be acquired upon conversion of one share of Series B Preferred Stock). REORGANIZED 50-OFF COMMON STOCK AUTHORIZATION Reorganized 50-OFF will be authorized to issue 25,000,000 shares of Reorganized 50-OFF Common Stock. PAR VALUE The Reorganized 50-OFF Common Stock will have par value of $0.01 per share. RIGHTS Holders of Reorganized 50-OFF Common Stock will be entitled to one vote per share on all matters submitted to a vote of stockholders of the Company, including the election of Directors, and to receive dividends when, as and if declared by the Board of Directors from funds legally available therefor. Upon liquidation of the Company, holders of Common Stock will be entitled to share ratably in any assets available for distribution to stockholders after payment of all obligations of the Company and the liquidation preference of Preferred Stock to be issued pursuant to the Plan and the Offering and such as may be issued in the future. Holders of Common Stock will not have cumulative voting rights or preemptive, subscription, conversion or redemption rights. The shares of Common Stock offered hereby, upon issuance, will be validly issued, fully paid and nonassessable. STOCK EXCHANGE LISTING When and if the requisite criteria are met, Reorganized 50-OFF will use reasonable efforts to cause the Reorganized 50-OFF Common Stock to be listed on the NASDAQ National Market. RIGHTS Holders of the Rights had no voting rights and were not entitled to dividends. In the event of liquidation, dissolution or winding up of the Company, holders of the Rights were not entitled to participate in the distribution of the Company's assets. For a description of the Rights, see "The Offering," above. 40 THE PLAN OF REORGANIZATION THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF THE PLAN DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL PROVISIONS OF THE PLAN, A COPY OF WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. The Plan requires that the Company's existing senior secured revolving credit facility lender, General Electric Credit Corporation ("GECC"), provide a post-confirmation revolving credit facility or be replaced by a new senior secured lender so that the Company has a source of revolving funds to continue to operate. GECC has given a formal commitment to the Company to provide such financing, subject to certain conditions. The Plan also provides for the restructure of the Company's secured obligation to MetLife Capital Corporation ("MetLife") at a face amount of $850,000. The Plan provides for the payment of such amount over approximately seven years. MetLife has agreed to such treatment. The Plan provides for the cancellation of all non-priority unsecured indebtedness of the Company. The Company estimates such cancellation will cause the elimination of approximately $25 million of unsecured debt and $3 million of secured debt which will be converted to unsecured debt from the Company's balance sheet. Each holder of an allowed general unsecured claim will, in cancellation of its claim, receive a pro rata share of the Company's new Series B Preferred Stock. Certain obligations of the Company to such holders of Series B Preferred Stock will be secured by two liens against potential net lawsuit proceeds from significant litigation being prosecuted by the Company. As net proceeds (net of certain items set forth in the Plan) from such litigation are received by the Company, holders of Series B Preferred Stock will receive (i) Series A Conversion Rights, which provide for conversion of Series B Preferred Stock to Series A Preferred Stock, until net proceeds reach $3,991,050 and (ii) Series A Preferred Stock for net proceeds in excess of $3,991,050 (provided that "excess" net proceeds, as defined in the Plan, will be paid in cash). The receipt of Series A Conversion Rights, Series A Preferred Stock and/or cash by holders of Series B Preferred Stock will result in a proportionate release of the liens. By issuing such Series B Preferred Stock to general unsecured creditors, such creditors will be essentially receiving the net value of the Company's significant litigation which was pending prepetition. Finally, the Plan provides for the recapitalization of the Company through cash raised from the Company's existing common stockholders (the "Rights Offering") and others (together with the Rights Offering, the "Offering") and, potentially, as discussed above, from the litigation. Specifically, the Plan provides 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") and requires the sale of a minimum of 30,500 Units at $100.00 per Unit ($3,050,000). The Rights Offering, as extended, expired on May 22, 1997. The Company received approximately 4.4 million in subscriptions pursuant to the Rights Offering. Units not subscribed for pursuant to the Rights Offering may be offered to the public by the Company until such Offering expires. There can be no assurance that any additional subscriptions will be received. Subscriptions received in the Offering will be held in escrow with Bank One, Texas N.A. until the Effective Date of the Plan. TREATMENT OF CLAIMS WITHIN THE PLAN OF REORGANIZATION The Bankruptcy Code requires the Debtors to classify Claims asserted against their estates. The Bankruptcy Code prohibits dissimilar creditors from being placed within the same class. Except for such prohibition, the Bankruptcy Code is silent as to other guidelines to be used in classification. Generally, every secured creditor is classified within a separate class. This is necessary because a secured creditor's rights against unique collateral are generally considered to be sufficiently dissimilar from any other creditor's rights to allow for joint classification. Priority claims, except for section 507(a)(1), (2) and (8) claims, are generally classified within the same class. To the extent that a Claimant and/or Public Equity Interest Holder has Claims and/or Interests in different classes, such Claims and/or Interests will not be aggregated. 41 ADMINISTRATIVE CLAIMS This group consists of all Administrative Claims allowed under section 507(a)(1) of the Bankruptcy Code. This category includes the "hold-back" portions of Claims for professional fees for various professionals (attorneys, accountants, financial advisors, etc.) retained by permission of the Court, estimated at $1,000,000 (approximately $200,000 recorded at January 31, 1997) at confirmation. This group also includes payments to cure defaults to landlords on Leases which the Debtors have assumed (payable over six months with interest at 9% per annum) and payments, which are otherwise unpaid, for post-petition occupancy on leases which the Debtors have rejected. The Debtors estimate that the combined total of such liability to landlords is approximately $730,714 which has been recorded in accrued liabilities at January 31, 1997. Also within this group of potential Claims, but not quantified, are obligations generally incurred in the ordinary course of operations, which Claims will be paid according to the agreed terms with those parties. PAYMENT OF ALLOWED ADMINISTRATIVE CLAIMS Each holder of an Allowed Administrative Claim against a Debtor will receive on the Distribution Date (1) the amount of such holder's Allowed Claim in one Cash payment on the Distribution Date or (2) such other treatment as may be agreed upon in writing by the Committee, the Debtors and such holder; provided, however, that an Administrative Claim representing a liability incurred in the ordinary course of business of a Debtor may be paid in the ordinary course of business by such Debtor; and provided further that the payment of an Allowed Administrative Claim which is a Cure Payment shall be paid in six equal monthly installments with interest, due on the tenth day of the month, with the first such installment being due and payable on the first tenth day of the month to occur after the later of the Effective Date or the date of allowance of such Claim by Final Order. GECC CLAIM All GECC Obligations will be satisfied by refinancing, with GECC as the Senior Secured Exit Financing lender for the Reorganized 50-OFF Companies. PRIORITY TAX CLAIMS This group consists of all Claims for taxes allowable under section 507(a)(8) of the Bankruptcy Code. Each holder of an Allowed Priority Tax Claim against a Debtor shall receive on the Distribution Date, in full satisfaction of such holder's Allowed Priority Tax Claim, (1) the amount of such holder's Allowed Claim, with interest accruing after the Effective Date at 6.62% per annum, in equal annual cash payments on each anniversary of the Distribution Date until the sixth such anniversary; (2) a lesser amount in one cash payment as may be agreed upon in writing; or (3) such other treatment as may be agreed upon in writing. CLASSES For the purposes of the Plan, those Claimants holding Claims against, or stockholders holding Interests in, the Debtors are grouped in the following Classes in accordance with section 1122(a) of the Bankruptcy Code and will be treated under the Plan as described below. CLASS 1 -- ANY ALLOWED SECURED CLAIMS OF AD VALOREM TAXING AUTHORITIES On the Effective Date, each holder of an Allowed Claim in Class 1 will receive a Plan Secured Note and will retain its Tax Liens securing its Allowed Secured Claim as security for the Plan Secured Note until such Plan Secured Note is paid in full. CLASS 2 -- ANY ALLOWED SECURED CLAIM OF METLIFE MetLife's Allowed Secured Claim will be treated as follows: AMOUNT OF ALLOWED SECURED CLAIM OF METLIFE MetLife's Allowed Secured Claim will be fixed at confirmation at the amount provided for in the MetLife Settlement Agreement (the "MetLife Allowed Secured Claim Amount"). 42 ISSUANCE OF RENEWAL NOTE The Reorganized 50-OFF Companies will execute, jointly and severally, and deliver to MetLife a renewal promissory note (the "MetLife Renewal Note") on the Distribution Date, which Note will have the following terms: Original Principal: The MetLife Allowed Secured Claim Amount ($850,000); Interest Rate: 7.5% per annum; Payments: Monthly on the first day of each month beginning on the first day of the first full month occurring after the Effective Date; first 12 payments will be fixed at interest only; the following monthly payments will be in an amount necessary to amortize the remaining principal balance until maturity with equal monthly payments due on the first of each month with the final payment being due on Febru- ary 1, 2004; Maturity: February 1, 2004; and Other: In all other respects, the MetLife Renewal Note will be in a form substantially similar to the existing note payable to MetLife.
METLIFE'S COLLATERAL Except as provided as subpart (iv) below, MetLife will have a first priority senior lien on all FF&E in the Continuing Locations, which relates back to the date on which MetLife filed its financing statements against any of the Debtors in each of the states in which the Continuing Locations are located, which is junior only to the Tax Liens, if any, which prime a perfected lien creditor. Except as provided as subpart (iv) below, such lien will attach to "all present and future additions, attachments, and accessories thereto, all substitutions therefor and replacements thereof and all proceeds thereof, including all proceeds of insurance" to any of the following: all furniture, fixtures and equipment, including, but not limited to, all point of sale systems, telephone systems, surveillance cameras, security systems, receiving equipment, safes, time clocks, tv/vcr(s), office desks, chairs, racking, sizers, shelving, panels, tables, hangers and gondolas. RETENTION OF LIENS In accordance with section 1129(b)(2)(A), MetLife will retain its liens on the FF&E at the Continuing Locations or any new location to which such FF&E may be moved with or without MetLife's consent. Provided, however, MetLife shall not be given nor will it have a lien on after-acquired property which has been or is acquired by the Reorganized 50-OFF Companies after the Petition Date for a new store location so long as none of MetLife's collateral is moved to the new location, except if MetLife's collateral is moved to the new location, MetLife will have an after-acquired lien on all FF&E at that location. Provided, further, however, that MetLife will not have a senior lien on FF&E purchased or leased by one or more of the Debtors post- confirmation, upon which a party perfects a purchase money security interest or in which a party has an ownership interest and/or which is leased to the Debtors; however, the Debtors will provide MetLife with notice of same. The Debtors will execute and deliver any documents necessary to implement the terms of the Plan and/or the MetLife Settlement Agreement, including executing any documents which may be necessary or helpful to cure any existing infirmities in MetLife's pre-Petition Date documents, which lien will be a Senior Lien. RELEASE OF LIENS Upon satisfaction of the MetLife Renewal Note, MetLife will release all of its liens in any property of the Reorganized 50-OFF Companies securing the MetLife Renewal Note. FF&E IN NON-CONTINUING LOCATIONS. MetLife has repossessed and is in the process of foreclosing its security interest in FF&E in approximately 65 store locations at which the Debtors have rejected the leases. To the extent that MetLife has not completed any of the foreclosure sales as of the Confirmation Date, MetLife will retain its liens in that FF&E and be allowed to foreclose on same. Moreover, MetLife will retain its liens on the proceeds of such Foreclosure Sales. Under the MetLife Settlement Agreement, MetLife has agreed to give the Debtors credit for the greater of the actual net proceeds of the Foreclosure Sales or a fixed sum of $350,000. 43 COMPROMISE OF AVOIDANCE ACTIONS Because MetLife and the Debtors have reached a binding agreement, approved by the MetLife Settlement Order, which provides that MetLife will: (1) not make the section 1111(b) Election, (2) timely vote all of its Claims, including its Secured Claim and its Deficiency Amount to accept the Plan without the need of changing its Ballot(s) from an initial rejection or without voting late, (3) not object to confirmation of the Plan, (4) stipulate with the Debtors regarding the value of its FF&E in the Continuing Locations in accordance with the Value Stipulation, (5) agree to grant the Debtors the releases reflected in the MetLife Settlement Agreement of certain claims and (6) agree to compromise the amount of its deficiency unsecured claim; the Debtors have compromised and settled: (1) any preference, fraudulent transfer and other avoidance actions against MetLife; (2) any objections which the Debtors may have had, if any, to the commercial reasonableness of the Foreclosure Sales conducted by MetLife, including but not limited to the amount of MetLife's Deficiency Claim; (3) the Debtors will grant MetLife a lien upon all of the Reorganized Debtors' currently existing FF&E and the proceeds thereof to secure payment of the MetLife Renewal Note all as provided herein, including executing any documents which may be necessary or helpful to cure any existing infirmities in MetLife's pre- Petition Date documents, which lien will be a Senior Lien; and (4) MetLife will have an Allowed Secured Claim in an amount equal to the MetLife Allowed Secured Claim Amount and an Allowed General Unsecured Claim in an amount as set forth in the MetLife Settlement Agreement. This paragraph only summarizes some of the terms of the MetLife Settlement Agreement. CLASS 4 -- OTHER SECURED CLAIMS Each holder of an Allowed Secured Claim against a Debtor which is not otherwise classified will be treated as though in a separate class as follows: GENERAL TREATMENT Each holder of an Allowed Secured Claim against the Debtors will, at the sole option of the Debtors, receive on the Distribution Date on account of its Allowed Secured Claim: (a) a Plan Secured Note; (b) treatment as provided under section 1124(2) or (3) of the Bankruptcy Code, with the cash payments required by section 1124(2)(A) and (C) of the Bankruptcy Code being made on the Distribution Date; or (c) such holder's Collateral. If the holder of an Allowed Secured Claim against a Debtor receives treatment as provided in (a) or (b) above, such holder will retain the liens securing the Allowed Secured Claim until paid in full. Any Deficiency Amount related to a Secured Claim will be treated as a Class 7 General Unsecured Claim. NEGOTIATED TREATMENT Notwithstanding any other provision in the Plan, the Debtors, Committee and any holder of a Class 4 Allowed Secured Claim may agree to any alternate treatment of such Secured Claim which treatment will include preservation of such holder's lien; provided, however, that such treatment shall not provide a return to such holder of an amount having a present value in excess of the amount of such holder's Allowed Secured Claim. Each such agreement will be presented to the Court before or within thirty days after the Effective Date and will not materially and adversely impact the treatment of any other Creditor under the Plan. CLASS 5 -- ANY ALLOWED PRIORITY NON-TAX CLAIMS Each holder of an Allowed Priority Non-tax Claim against a Debtor will receive on the Distribution Date on account of its Allowed Priority Non-tax Claim the amount of such holder's Allowed Priority Non-tax Claim in one cash payment on the Distribution Date. CLASS 6 -- ANY ALLOWED CONVENIENCE CLAIMS In lieu of treatment as any other Class of claimant under the Plan, and in full satisfaction of any and all Claims against the Debtor, a holder of an Allowed Convenience Claim against the Debtor will receive, within 90 days of the Distribution Date, cash equal to the amount of 25% of such Allowed Convenience Claim. CLASS 7 -- ANY ALLOWED GENERAL UNSECURED CLAIMS NOT OTHERWISE CLASSIFIED Allowed Claims in Class 7 will be treated as follows in full satisfaction of any and all claims: 44 Each holder of an Allowed Class 7 Claim will receive on the Distribution Dates on account of its General Unsecured Claim a Pro Rata Share of Series B Preferred Stock having an aggregate Series B Liquidation Preference in the amount of $3,991,050. Subject to the terms of the Plan, upon the Reorganized 50-OFF's receiving Net Lawsuits' Proceeds, it will issue Series A Conversion Rights to the holders of Series B Preferred Stock. A share of Series B Preferred Stock will be deemed fully convertible at such time as a full Series A Conversion Right with respect to such share of Series B Preferred Stock has been deemed distributed by Reorganized 50-OFF. One Series A Conversion Right will be issued for each $5.00 of Net Lawsuits' Proceeds received by the Reorganized 50-OFF. Series A Conversion Rights will be deemed distributed as and when sufficient Net Lawsuits' Proceeds are received by Reorganized 50-OFF to warrant an effective distribution, in Reorganized 50-OFF's discretion; provided, however, an effective distribution will be made upon receipt of $250,000 in Net Lawsuits' Proceeds for which no previous 50-OFF Series A Conversion Rights have been issued. Each distribution will be made on a pro rata basis to the holders of Series B Preferred Stock on the record date for the distribution. Upon the effective distribution of 798,210 (which is 3,991,050 divided by 5) Series A Conversion Rights, no further Series A Conversion Rights shall be issued. After the Reorganized 50-OFF distributes 798,210 Series A Conversion Rights and upon the Reorganized 50-OFF receiving any further Net Lawsuits' Proceeds, Reorganized 50-OFF will issue Series A Preferred Stock to the holders of Class 7 Claims. One share of Series A Preferred Stock will be issued for each $5.00 of Net Lawsuits' Proceeds received in excess of $3,991,050, except no Series A Preferred Stock will be issued on account of the Excess Net Lawsuits' Proceeds. Excess Net Lawsuits' Proceeds are payable to the holders of Class 7 Allowed Claims in cash and are defined as: 75% of all Net Lawsuits' Proceeds over $5 million but less than or equal to $6 million; 50% of all Net Lawsuits' Proceeds over $6 million but less than or equal to $7 million; and 25% of such Proceeds over $7 million but less than or equal to $8 million. Such Series A Preferred Stock will be issued as and when sufficient Net Lawsuits' Proceeds are received by the Reorganized 50-OFF to warrant a distribution, in Reorganized 50-OFF's discretion; provided, however, a distribution will be made upon $250,000 of Net Lawsuits' Proceeds' having been received by the Reorganized 50-OFF for which no previous 50-OFF Series A Conversion Rights or Series A Preferred Stock have been issued or for which no Excess Net Lawsuits' Proceeds have been distributed. Each such distribution will be made on a Pro Rata basis to the holders of Class 7 Allowed Claims. The holders of Allowed Claims in Class 7 have, as a Class, a lien against and assignment of the Net Lawsuits' Proceeds and Excess Net Lawsuits' Proceeds up to the full face amount of the Allowed Class 7 Claims to secure the Debtors' obligation to issue Series A Preferred Stock and to distribute the Excess Net Lawsuits Proceeds in cash to holders of Class 7 Allowed Claims as required in the Plan (the "Class 7 Lien"). The Class 7 Lien is a full assignment and security interest in and upon the Net Lawsuits' Proceeds and Excess Net Lawsuits' Proceeds, subject to the following terms and conditions: Such Class 7 Lien is junior in right and priority to: (1) any and all contingent fee interests held by counsel prosecuting such Lawsuits on behalf of the Debtors or the Reorganized Debtors, including the reimbursement of all expenses owing to such counsel; (2) the reimbursement of the Debtors and the Reorganized Debtors of all expenses directly relating to the prosecution of the Lawsuits paid by the Debtors or the Reorganized Debtors after the Petition Date, including after confirmation or after any conversion of the Chapter 11 Cases to chapter 7; (3) the Class 7 Agent's fees and expenses and the fees and expenses of any professionals hired by the Class 7 Agent; (4) the Chapter 11 Professional Fee Lawsuit Carve-Out; (5) the liens and security interest of the Senior Secured Exit Financing lender or any successor thereto; and (6) the Series B Preferred Stock Lien. Such Class 7 Lien is automatically attached and perfected without the need of the filing of any documents. Such Class 7 Lien is fully enforceable by judicial foreclosure exclusively in the Court, if and only if: (1) the Chapter 11 Cases are converted to Cases under chapter 7 of the Bankruptcy Code, either voluntarily or upon motion pursuant to Bankruptcy Code section 1112; or (2) Reorganized 50-OFF is filing a voluntary petition in 45 chapter 7 bankruptcy or an order for relief in an involuntary chapter 7 bankruptcy is entered against Reorganized 50-OFF (collectively, (1) through (2) is referred to as the "Class 7 Events of Default"). The Class 7 Lien will be deemed satisfied and released as to any portion of the Net Lawsuits' Proceeds or Excess Net Lawsuits' Proceeds for which either Series A Conversion Rights or Series A Preferred Stock (including fractions of such Rights or stock), as the case may be, are issued to the holders of Class 7 Allowed Claims and as to any of the Net Lawsuits' Proceeds distributed to the holders of Class 7 Claims. The Class 7 Lien will be deemed satisfied and released as to any portion of the Net Lawsuits' Proceeds for which either Series A Conversion Rights or Series A Preferred Stock (including fractions of such Rights or stock), are issued and held in the Contested Claims Escrow and as to any Excess Net Lawsuits' Proceeds which are distributed to and held in the contested Claims Escrow. The Debtors estimate that up to $30 million of claims, held by approximately 1,400 creditors, may exist in Class 7. CLASS 8 -- POLICY-INSURED TORT CLAIMS In full satisfaction of any and all Claims, each holder of a Policy-insured Tort Claim against a Debtor(s) will be treated as follows: PAYMENT THROUGH INSURANCE ONLY The holder of any Class 8 Allowed Claim will only receive payment from insurance policies held by the Debtors and will receive no payment of any amount or kind directly from the Debtors or the Reorganized 50-OFF Companies. Upon the later of the classification in this Class or the Effective Date, the stay will be lifted to allow for the liquidation of Policy-insured Tort Claims in any appropriate forum other than the Court. The Debtors may be a nominal party to such action, but will not be required to participate therein except as may be necessary to cooperate with any insurance company of the Debtors to preserve coverage. EFFECT OF RETENTION PROVISIONS If insurance proceeds become payable as a consequence of the Allowance of a Class 8 Claim and the particular insurance policy involved contains a retention or deductible provision that has not been previously paid by the Debtors, then and in such event, the amount of proceeds to be paid to the holder of the Class 8 Claim by the insurer will be reduced by a credit in an amount equal to the unpaid retention or deductible. The holder of such Claim will receive nothing on account of the portion of its Claim attributable to or equal to such unpaid retention or deductible. The credit upon the Class 8 Claim in the amount of the deductible or retention will conclusively be deemed to have satisfied such provisions within any and all insurance policies of the Debtors immediately as of the Effective Date and therefor to have eliminated any obligation of the Debtors to fund any further costs of defense. RIGHT TO OPT OUT OF CLASS In the event that a holder of a Class 8 Claim believes that the Plan has treated such Claim in a manner that unfairly discriminates between such Claim and a holder of a Claim in Class 7, such claimant may opt out of Class 8 by filing written notice of such opt-out with the Court and serving such notice of opt-out on counsel for the Debtors and counsel for the Committee before 90 days after the Effective Date. Upon making such opt-out, the holder of such Claim will have waived any right or ability to receive any proceeds of the Debtors' insurance coverage; instead, such opt- out claimant will be treated as a Class 7 Claim to the extent the opt-out Claim becomes an Allowed Claim. DUTY OF COOPERATION; EFFECT OF NON-PAYMENT OF DEDUCTIBLE The Reorganized 50- OFF Companies will have a continuing duty to cooperate with and assist the insurers issuing or having issued policies to a Debtor(s) in defense of Claims, to the extent that such duty existed pre-Petition Date; provided, however, that the obligation to pay any policy retention or deductible shall be discharged. The discharge of such obligation will have no effect on the validity and enforceability of any insurance policies in which the Debtors are the insured party; such policies will remain in full force and effect. 46 CLASS 9 -- SELF-INSURED TORT CLAIMS Any Allowed Self-insured Tort Claim will be treated as a Class 9 Claim; provided, however, that to the extent that any Allowed Self-insured Tort Claim exceeds the amount necessary to receive payment from or upon any Stop Loss Policy, then such Allowed Claim will receive the amount paid pursuant to any Stop Loss Policy in cash; provided, further, however, that to the extent that a holder of an Allowed Self-insured Tort Claim receives payment from or as a result of any Stop Loss Policy, the holder of such Allowed Self-insured Tort Claim will credit to the portion of its Allowed Claim which is not paid by the Stop Loss Policy $10.00 for each $1.00 received on account of the Stop Loss Policy. In the event that a holder of a Class 9 Claim believes that the Plan has treated such Claim in a manner that unfairly discriminates between such Claim and a holder of a Claim in Class 7, such claimant may opt out of Class 9 by filing written notice of such op-out with the Court and serving such notice of opt-out on counsel for the Debtors and counsel for the Committee before 90 days after the Effective Date. Upon making such opt-out, the holder of such Claim will have waived any right or ability to receive any proceeds of the Debtors insurance coverage; instead, such opt-out claimant will be treated as a Class 7 Claim to the extent the opt-out Claim becomes an Allowed Claim. CLASS 10 -- EQUITY INTERESTS IN THE DEBTOR SUBSIDIARIES A holder of an Equity Interest in one of the Debtor Subsidiaries will continue to own and hold such Equity Interest unaffected by the Plan. CLASS 11 -- PUBLIC EQUITY INTERESTS IN 50-OFF Holders of Public Equity Interests were provided the opportunity to participate in the Rights Offering. See "The Offering." Otherwise, all Public Equity Interests in 50-OFF will be canceled as of the Effective Date. CLASS 12 -- OTHER EQUITY INTERESTS IN 50-OFF Each outstanding warrant or option will be canceled and of no further effect as of the Effective Date. CLASS 13 -- DISALLOWED CLAIMS, SUBORDINATED CLAIMS, SECURITIES LAWS CLAIMS AND PENALTY CLAIMS The holders of Disallowed Claims, Subordinated Claims, Securities Laws Claims, Penalty Claims and any other Claims against the Debtors not otherwise expressly provided for in the Plan will receive no distributions under the Plan on account of such Claims. SELECTED OTHER PROVISIONS OF THE PLAN CHARTER AND BYLAWS The charter and bylaws of Reorganized 50-OFF and the Debtor Subsidiaries were filed as Plan Documents and contain such provisions as are necessary to satisfy the provisions of the Plan and, to the extent necessary, subject to further amendment of the charter and bylaws, as permitted by applicable law. Such charter and bylaws contain indemnification provisions applicable to the officers, Directors and employees of the Reorganized 50-OFF Companies and such other Persons as may, in the discretion of the Boards of Directors of the Debtors, be appropriate. CORPORATE AUTHORITY All actions and transactions contemplated under the Plan, including, but not limited to, the authorization, offer and sale of Units pursuant to the Offering and the Rights Offering, the authorization, offer, sale and issuance of shares of Reorganized 50-OFF Common Stock pursuant to the Offering, the Rights Offering and the Plan, the authorization and distribution of Rights to holders of 50-OFF Old Common Stock pursuant to the Plan, the authorization, offer, sale and issuance of the Series A Preferred Stock pursuant to the Offering, the Rights 47 Offering and the Plan, the authorization and issuance of Reorganized 50-OFF Series B Preferred Stock pursuant to the Plan, the resizing and reconstituting of the Reorganized 50-OFF Board of Directors and the issuance of debt instruments, promissory notes and related securitization documents, were authorized upon Confirmation of the Plan without the need of Board or stockholder approval, notice or meetings, other than the notice provided by serving the Plan on all known Creditors of the Debtors, all Interest Holders as of March 21, 1997 and all current Directors of the Debtors. The Confirmation Order includes provisions dispensing with the need of Board or stockholder approval, notice or meetings in connection with the effectuation of the Plan and authorizing and directing the President and current Assistant Secretary of the Debtors to take all action, including the execution of documents, necessary to effectuate the Plan. ASSUMPTION OF LIABILITIES The liability for and obligations under the Plan will be assumed by and become joint and several obligations of each of the Reorganized 50-OFF Companies. SECURITIES LAW MATTERS r It is an integral and essential element of the Plan that the offer, sale, distribution and issuance to holders of Allowed Claims and Public Equity Interests of the Rights to subscribe to Units pursuant to the Rights Offering, the Units, the Reorganized 50-OFF Common Stock, the Series A Preferred Stock and the Series B Preferred Stock pursuant to the Plan are exempt from registration under the Securities Act of 1933, as amended, and similar state laws pursuant to section 1145 of the Bankruptcy Code. The Confirmation Order includes a finding and conclusion, binding upon all parties to the Cases, any subsequent trustee, the Securities and Exchange Commission ("SEC"), and all state regulatory or enforcement agencies, to the effect that all such offers, sales, distributions and issuances fall within the section 1145 exemption. EXIT FINANCING APPROVAL The Plan was considered a motion, pursuant to Bankruptcy Code sections 364(c) and (d), to approve senior secured exit financing in an amount of up to $15,000,000, with liens granted to the lender of such senior secured exit financing in priority to all other liens, including senior to Statutory Landlords' Liens and Tax Liens, but junior to Senior Liens (the "Senior Secured Exit Financing"). The Confirmation Order includes provisions approving such Senior Secured Exit Financing and granting the liens and priority. DISCHARGE The rights afforded in the Plan and the payments and distributions to be made thereunder will discharge all existing debts and Claims of any kind, nature or description whatsoever against the Debtors or any of their assets or properties to the fullest extent permitted by section 1141 of the Bankruptcy Code; upon the Effective Date, all existing Claims against the Debtors will be, and will be deemed to be discharged; and all holders of Claims will be precluded from asserting against the Debtors, or any of their assets or properties, any other or further Claim based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date, whether or not such holder filed a proof of Claim. Confirmation of the Plan and the obligations imposed on the Debtors therein are in complete satisfaction, discharge and release of all Claims of any nature whatsoever against the Debtors or any of their assets or properties; and, upon the Effective Date, the Debtors will be deemed discharged and released from any and all Claims, including but not limited to demands and liabilities that arose before the Effective Date, and all debts of the kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (a) a proof of Claim based upon such debt is filed or deemed filed under section 501 of the Bankruptcy Code; (b) a Claim based upon such debt is allowed under section 502 of the Bankruptcy Code; or (c) the holder of a Claim based upon such debt has accepted the Plan. Except as provided in the Plan, the Confirmation Order is a judicial determination of discharge of all liabilities of the Debtors. As provided in section 524 of the Bankruptcy Code, such discharge will void any judgment against the Debtors at any time obtained to the extent it relates to a Claim discharged, and operates as an injunction against the prosecution of any action against the Debtors, or the property of any of them, to the extent it relates to a discharged Claim. 48 INJUNCTIONS The Confirmation Order contains such injunctions as may be necessary and helpful to effectuate the discharge of the Debtors provided in the Plan. Without limiting the generality of the foregoing, such injunctions include an absolute prohibition from collecting Claims in any manner other than as provided for in the Plan. EXCULPATIONS Neither the Debtors, the Committee, the Disbursing Agent, the Class 7 Agent nor any of their respective members, officers, Directors, employees, agents or professionals will have or incur any liability to any holder of a Claim or Equity Interest for any act, event or omission in connection with, or arising out of, the Chapter 11 Cases, the confirmation of the Plan, the consummation of the Plan or the administration of the Plan or the property to be distributed under the Plan, except for willful misconduct or gross negligence. DE MINIMIS DISTRIBUTIONS No distribution of less than twenty-five dollars ($25.00) will be made to any holder of an Allowed Claim. Such undistributed amount will be retained by Reorganized 50-OFF. BANKRUPTCY RESTRICTIONS From and after the Effective Date, the Reorganized 50-OFF Companies will no longer be subject to the restrictions and controls provided by the Bankruptcy Code (e.g., section 363 or 364). The Reorganized 50-OFF Companies may operate their businesses in such manner as is consistent with companies not in bankruptcy without the need of seeking Court approval with regard to any aspect of the Reorganized 50-OFF Companies' business. No monthly operating reports will be filed after the Effective Date. BINDING EFFECT The Plan will be binding upon and inure to the benefit of the Debtors, the holders of Claims, the holders of Equity Interests and their respective successors and assigns. GOVERNING LAW Unless a rule of law or procedure is supplied by federal law (including the Bankruptcy Code and Bankruptcy Rules), the Delaware General Corporation Law or the law of the jurisdiction of organization of any entity, the internal laws of the State of Texas will govern the construction and implementation of the Plan and any agreements, documents and instruments executed in connection with the Plan or the Chapter 11 Cases, including the Plan Documents, except as may otherwise be provided in such agreements, documents, instruments and Plan Documents. MODIFICATION OF PLAN The Plan may be modified at any time after the Confirmation Date and before substantial consummation by the Proponents, provided that (i) the Plan, as modified, meets the requirements of sections 1122 and 1123 of the Bankruptcy Code, (ii) the Court, after notice and a hearing, confirms the Plan as modified, under section 1129 of the Bankruptcy Code and (iii) the circumstances warrant such modifications. A holder of a Claim or Equity Interest that has accepted or rejected the Plan will be deemed to have accepted or rejected, as the case may be, such plan as modified, unless, within the time fixed by the Court, such holder changes its previous acceptance or rejection. CLOSING THE CASES Upon (1) paying all Allowed Claims required to be paid pursuant to Article 5 of the Plan, (2) making and delivering the promissory notes contemplated by the Plan to holders of Allowed Claims in Classes 1, 2 and 4, and (3) making all distributions required to holders of Allowed Claims in Classes 5 and 6, and (4) after all Class 7 Claims have been liquidated by Final Order and all Series B Preferred Stock issued, the Plan will be deemed 49 fully consummated and, upon motion by the Reorganized 50-OFF Companies, the Chapter 11 Cases will be closed. Upon such motion the Court will issue final decrees containing such provisions as may be equitable. The Court may reopen such Cases upon a motion filed by the Class 7 Agent as necessary to enforce the Class 7 Lien. OTHER LITIGATION BANKRUPTCY CAUSES OF ACTION PREFERENCES Pursuant to the Bankruptcy Code, a debtor may recover certain preferential transfers of property, including cash, made while insolvent during the 90 days immediately prior to the filing of its bankruptcy petition with respect to pre-existing debts to the extent the transferee received more than it would have in respect of the pre-existing debt had the debtor been liquidated under chapter 7 of the Bankruptcy Code. In the case of "insiders," the Bankruptcy Code provides for a one-year preference period. There are certain defenses to such recoveries. Transfers made in the ordinary course of the debtor's and the transferee's business according to the ordinary business terms are not recoverable. Furthermore, if the transferee extended credit subsequent to the transfer (and prior to the commencement of the bankruptcy case), such extension may constitute a defense, to the extent of any new value, against any otherwise recoverable transfer of property. If a transfer is recovered by debtor, the transferee has a general unsecured claim against the debtor to the extent of the recovery. The Debtors reserve all rights to pursue, in their sole discretion, any preference to the full extent allowed under the Bankruptcy Code and applicable state laws. FRAUDULENT TRANSFERS Under the Bankruptcy Code and various state laws, a debtor may recover certain transfers of property, including the grant of a security interest in property, made while insolvent or which rendered it insolvent if, and to the extent, the debtor receives less than fair value for such property. The Debtors reserve all rights to pursue, in their sole discretion, any fraudulent transfer to the full extent allowed under the Bankruptcy Code and applicable state laws. POTENTIAL LITIGATION In addition to the foregoing, the Debtors believe that certain of the Claims may be subject to offset. There also may exist claims and causes of action against third parties arising prior to the Petition Date. These causes of action may be enforced either by way of setoff against Claims filed against the bankruptcy estate or may be prosecuted by the Debtors. The Debtors have sole discretion to object to any Claims and to prosecute any objection as they see fit. PRE-PETITION DATE LAWSUITS/INSURANCE On the Effective Date, all pre-Petition Date lawsuits, litigations, administrative actions or other proceedings, judicial or administrative, in connection with the assertion of a Claim, including any Self-insured Tort Claim, will be dismissed as to the Reorganized Debtors, except claims which are Policy-insured Tort Claims. Such dismissal will be with prejudice to the assertion of such Claim in any manner other than as prescribed by the Plan. All parties to any such action were enjoined by the Court in the Confirmation Order from taking any action to impede the immediate and unconditional dismissal of such actions. Confirmation and consummation of the Plan will have no effect on insurance policies of the Debtors in which the Debtors or any one of them is or was the insured party; the Reorganized 50-OFF Companies will become the insured party under any such policies. Each insurance company is prohibited from, and the Confirmation Order includes an injunction against, denying, refusing, altering or delaying coverage on any basis regarding or related to the Debtors' bankruptcies, the Plan or any provision within the Plan, including the treatment or means of liquidation set out within the Plan for Policy-insured Tort Claims or Self-insured Tort Claims. SECURITIES LAWS CONSIDERATIONS GENERAL The Reorganized 50-OFF Common Stock and the Reorganized 50-OFF Preferred Stock (both series) to be issued pursuant to the Plan constitute "securities" for purposes of federal and state securities laws. As discussed below, section 1145 of the Bankruptcy Code provides that the registration requirements under federal and state 50 securities laws do not apply to the issuance of securities by a debtor under a plan of reorganization to holders of claims or interests wholly or principally in exchange for those claims or interests. With certain exceptions, recipients of such securities may also resell them without registration under such laws. ISSUANCE Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from registration under the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities law registration requirements. For the original issuance of securities under the Plan to be so exempt, three principal requirements must be satisfied: (i) the securities must be issued by the Debtors or its successor under the Plan, (ii) the recipient of the securities must hold a Claim against or Interest in the Debtors, and (iii) the securities must be issued entirely in exchange for the recipient's Claim against or Interest in the Debtors, or "principally" in such exchange and "partly" for cash or property. The Bankruptcy Code also exempts ". . . the offer of a security through any warrant, option, right to subscribe or conversion privilege that was sold in the manner specified in ...(i) through(iii) in the immediately preceding sentence), or the sale of a security upon the exercise of such a warrant, option, right or privilege". 11 U.S.C. (S) 1145(a)(2). Although uncertainty exists with respect to the issuance of the Units and the securities represented thereby, it is the Company's position that the issuance of all securities pursuant to the Plan satisfies the foregoing requirements and, accordingly, is exempt, pursuant to section 1145 of the Bankruptcy Code, from registration under the Securities Act and state securities laws. The Bankruptcy Court confirmed the Company's position in its Confirmation Order. As part of a compromise with the Securities and Exchange Commission, which had challenged the Company's position at the Company's hearing on its Disclosure Statement, and to permit offers and sales to non-creditors and non- holders of Public Equity Interests, the Company agreed, without waiving its position with respect to section 1145, to file a Registration Statement, of which this Prospectus is a part. The compromise further provided that the Units could be offered and subscribed (with the money placed in escrow) commencing 20 days after the initial filing (on April 11, 1997) of such Registration Statement with the Securities and Exchange Commission. CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES Under the Internal Revenue Code of 1986, as amended (the "Tax Code") and regulations promulgated thereunder (the "Regulations"), there are certain significant federal income tax consequences associated with the Plan for the Debtors, Claimants and Interest Holders. Certain of these consequences are discussed below. The tax consequences described below are subject to significant uncertainties because of (i) the complexity of the transactions contemplated by the Plan, (ii) the uncertainty as to the tax consequences of events in prior years, including changes made by the Bankruptcy Tax Act of 1980 ("BTA80"), the Tax Reform Act of 1985 ("TRA85"), the Tax Reform Act of 1986 ("TRA86"), the Omnibus Reconciliation Act of 1987 ("ORA87"), the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), the Omnibus Budget Reconciliation Act of 1989 ("OBRA89"), the Revenue Reconciliation Act of 1990 ("RRA90") and the Revenue Reconciliation Act of 1993 ("RRA93"), (iii) the differences in the nature of the Claims of the various Claimants, their taxpayer status, residence and methods of accounting (including Claimants within the same Class), (iv) prior actions taken by Claimants with respect to their Claims and (v) the possibility that events or legislation subsequent to the date hereof could change the federal tax consequences of the transactions. There may also be state, local or foreign tax issues that may affect particular Claimants. HOLDERS OF PUBLIC EQUITY INTERESTS ARE URGED TO CONSULT THEIR TAX ADVISORS RESPECTING THE INDIVIDUAL TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED UNDER OR IN CONNECTION WITH THE PLAN, INCLUDING STATE, LOCAL AND FOREIGN TAX CONSEQUENCES. TAX CONSEQUENCES TO DEBTORS GENERAL Pursuant to the Plan, a significant portion of the outstanding indebtedness of the Debtors is being satisfied at a discount. The debt forgiveness income resulting from the satisfaction of Claims at a discount should 51 not constitute taxable income, although it will reduce tax attributes, such as net operating loss ("NOL") carryovers. The utilization of any NOLs remaining after application of the attribute reduction rules may be subject to limitations imposed by section 382 of the Tax Code. DETERMINATION OF AVAILABLE TAX ATTRIBUTES The Debtors are members of a consolidated tax return of which 50-OFF is the common parent. The consolidated tax return for the tax year of the Debtors ended January 31, 1997, reflected NOL carryovers of $48,032,000. Such NOL carryovers do not take into account the possibility of adjustments which may be asserted by the Internal Revenue Service (the "IRS") on any audit. TREATMENT OF DEBT DISCHARGE INCOME UNDER THE PLAN Pursuant to the Plan, the aggregate outstanding indebtedness of the Debtors will be substantially reduced. In general, section 61(a)(12) of the Tax Code provides that a taxpayer who realizes discharge of indebtedness income must include such income ("Debt Discharge Income") in taxable gross income. The Tax Code further provides in section 108(a)(1), however, that if a taxpayer is in a Title 11 case and the discharge of indebtedness is pursuant to a plan approved by a bankruptcy court, such Debt Discharge Income is not required to be included in gross income. However, section 108(b) of the Tax Code further provides that amounts so excluded from gross income will reduce certain tax attributes of the taxpayer, including NOL carryovers and the adjusted tax bases of assets. Debt Discharge Income will arise with respect to those Claimants whose Claims are discharged by a payment of Cash or distributions of property, including common or preferred stock of Reorganized Debtor, with a value less than the face amount of the Allowed Claims. The Debt Discharge Income would equal the excess of the debt canceled over the Cash and fair market value of property received in exchange therefor. The Debtors are satisfying over $29 million of Claims by delivery of Series B Preferred Stock and, possibly, Series A Preferred Stock. The Debtors have not determined what the value of the Series B Preferred Stock will be for purposes of computing the amount of Debt Discharge Income, however the Debtors believe that the amount of debt satisfied will exceed the value of such Series B Preferred Stock. The Debtors estimate that the total amount of Debt Discharge under the Plan will be over $25 million. Regardless of the amount of Debt Discharge Income, there will be no taxes payable by the Debtors as a result of the Debt Discharge Income. The Debt Discharge Income will, however, reduce any NOLs of the Debtor unless the Debtor elects to apply the Debt Discharge Income to reduce the basis of its depreciable assets. EFFECT OF SECTION 382 Under the TRA86, substantial changes were made to Tax Code Sections 382 and 383. These changes placed limitations on the utilization of tax attributes, such as NOL carryovers, after certain ownership changes. In general, an ownership change of more than fifty percent (50%) of the value of stock in a loss corporation within a three-year testing period (hereinafter "Ownership Change") will trigger limitations (hereinafter "Section 382 Limitation") as to the use of a loss corporation's NOL carryovers. The NOL carryovers, which are subject to the Section 382 Limitation, may also include certain losses and deductions which are generated and reportable after the Ownership Change, but which are "built-in" as of the date of the Ownership Change. After an Ownership Change, the amount of a loss corporation's taxable income that can be offset by any existing NOL carryovers cannot exceed an amount equal to the value of the loss corporation, multiplied by a specific rate of return, namely, the federal adjusted long term tax exempt bond rate. Under the Plan, the ownership of the Debtors may change by more than 50%. Accordingly, the NOL carryovers existing as of the date of the Ownership Change could be subject to the Section 382 Limitation. Accordingly, even if any NOL's did survive after application of the attribute reduction rules, the ability to utilize such NOL's could be substantially affected due to a change in ownership of the Debtors unless the Debtors can utilize one of the special exceptions to the normal Section 382 rules. Section 382 of the Tax Code also contains a provision, Section 382(1)(5), which provides that in a Title 11 or similar case under the jurisdiction of a bankruptcy court (hereinafter "Title 11 Case"), the Section 382 Limitation will not apply to any ownership change resulting from such a proceeding if the creditors and stockholders immediately before such ownership change, own after such ownership change and as a result of being stockholders or creditors immediately before 52 such ownership change, 50% of the stock of the loss corporation. For purposes of this provision, only claims held by "qualifying creditors," persons who were creditors as of a date eighteen months before the filing of the petition under Title 11 or whose claims arose in the ordinary course of the trade or business of the loss corporation (and were at all times beneficially owned by such persons), are taken into account. Under Tax Code (S) 382(1)(5), a "toll charge" must be paid. Specifically, the existing NOL carryovers are subject to reduction by 100% of the interest deducted which was paid or accrued during the current and the three tax years prior to the year of the Effective Date of the Plan on indebtedness which is converted to stock. Under the Plan, the Debtors may experience an ownership change and will consider whether it qualifies for treatment under Tax Code (S) 382(1)(5) and, if it qualifies, the amount of the "toll charge." In this respect, it is noted an estimated maximum of $700,000 of interest was deducted with respect to Claims or debt instruments being converted to stock. The Debtors have not determined whether the various requirements of (S) 382(l)(5) will be met. The determination as to whether (S)382(d)(5) will be met is most complex in this factual pattern. This is because, among other factors, it is not clear how much stock will be issued to the qualifying creditors inasmuch as the final distribution will be a function of the recovery from certain litigation actions which may take some time to resolve. Moreover, they may choose not to elect to be governed by this provision if they determine there is a substantial risk of another ownership change. Section 382(l)(5)(D) provides that if a Debtor experiences another ownership change within two years of electing the benefits of (S) 382(l)(5), the Section 382 Limitation after such second ownership change shall be zero, thereby effectively eliminating the NOL carryovers. If the Debtors believe that a second ownership change may likely occur they would not elect Section 382(l)(5) even if eligible but could instead utilize Section 382(l)(6). Section 382(1)(6) of the Tax Code provides a special rule for debtors in Title 11 Cases. In the event Tax Code (S) 382(1)(5) is not available or is undesirable, Reorganized Debtor may benefit from a special valuation rule. Under this special rule, for purposes of computing the annual Section 382 Limitation, the value of the loss corporation is determined by including the increase in the value of stock that occurs as the result of any surrender or cancellation of the Claims of Creditors. This special rule might result in a greater value for the Debtors and a less onerous Section 382 Limitation on the use of the Debtors' NOL or credit carryovers by the Reorganized Debtors. In summary, under the Plan, all the existing stock of the Debtors will be canceled, although former Stockholders who exercise their rights under a "Rights Offering" may acquire shares of the Reorganized Debtors by paying additional Cash. Also, Equity Securities of Reorganized 50-OFF will be issued to Creditors. The transaction contemplated by the Plan will result in an ownership change as defined in Tax Code (S) 382. The determination as to whether the Debtors qualify for the benefits of Section 382(l)(5) and the decision to elect or utilize the bankruptcy exception under section 382(1)(5) or to utilize the special valuation rule under Section 382(l)(6) will be made after a careful examination of all relevant facts, including the value of the stock, the amount and expiration dates of such carryovers, the existence and amount of any built-in losses or deductions and the best available projections of taxable income and loss for succeeding years. COMPUTATION OF ALTERNATIVE MINIMUM TAX ("AMT") AMT must be paid by a corporation when and to the extent that its liability for AMT is greater than its regular tax liability. AMT is equal to twenty percent (20%) of alternative minimum taxable income ("AMTI") less certain allowable credits. Under the Tax Code, AMTI generally equals regular taxable income, increased or decreased by certain adjustments and preference items. However, only ninety percent (90%) of AMTI can be offset with NOL carryovers. AMT liability, regardless of the amount of available NOL carryovers, will be at least twenty percent (20%) of the ten percent (10%) of AMTI that cannot be offset with NOL carryovers. The Debtors do not believe that they will be liable for the AMT. 53 TAX CONSEQUENCES TO HOLDERS OF COMMON STOCK Pursuant to the Plan, all shares of 50-OFF, the parent of the consolidated group of Debtors are being canceled, subject to the Rights Offering. While the issue is not free from doubt, the Company believes the existing common stockholders should be treated as receiving Rights in exchange for their Old Common Stock. Under this view and under current law, each stockholder will recognize gain or loss equal to the difference between (i) the fair market value of the Rights and (ii) the adjusted tax basis the stockholder has in his shares. Each stockholder will have a basis in its Rights equal to the fair market value of the Rights. In this respect it should noted that the Treasury has proposed regulations which would likely cause warrants (subscription rights) to be treated as stock or securities. If these regulations were adopted in their proposed form, existing stockholders might be viewed as participating in a tax-free reorganization and would not be entitled to recognize any loss. The regulations will not be effective until sixty days after adopted. TAX CONSEQUENCES TO NEW INVESTORS AND HOLDERS OF COMMON STOCK Investors who purchase Units must allocate the amount paid for such Units between the Common Stock and Series A Preferred Stock based on the fair market value. Existing holders of Common Stock who received Rights in exchange for their Old Common Stock will include in their basis in the Common Stock and Series A Preferred Stock an allocable portion of their basis in the Rights. BECAUSE THE FINAL OUTCOME DEPENDS SO MUCH ON EACH INDIVIDUAL PUBLIC EQUITY INTEREST HOLDER'S SITUATION, IT IS IMPERATIVE THAT EACH PUBLIC EQUITY INTEREST HOLDER SEEK INDIVIDUAL TAX COUNSEL FOR ADVICE ON HIS PARTICULAR SITUATION. CONFIRMATION OF THE PLAN At the Confirmation Hearing, the Court determined the requirements of section 1129(a) of the Bankruptcy Code had been satisfied, and the Court entered the Confirmation Order. Among the requirements for confirmation under the Bankruptcy Code are: . The Plan complies with the applicable provisions of the Bankruptcy Code. . The proponents of the Plan have complied with the applicable provisions of the Bankruptcy Code. . The Plan has been proposed in good faith and is not by any means forbidden by law. . The proponents of the Plan have disclosed the identity and affiliation of any individual proposed to serve, after confirmation of the Plan, as Director, officer or voting trustee of the Debtors, and the appointment to, or the continuance in, such office of such individual, is consistent with the interests of Creditors and equity security holders and with public policy. . The proponents of the Plan have disclosed the identity of any insider that will be employed or retained by the Reorganized Debtors and the nature of the compensation for such insider. . With respect to each Class of impaired Claims, either each holder of a Claim in such Class has accepted the Plan, or will receive or retain under the Plan on account of such Claims property of a value, as of the Effective Date of the Plan, that is not less than the amount such Claimant would receive or retain if the Debtors were liquidated on such date under chapter 7 of the Bankruptcy Code. . Confirmation of the Plan is not likely to be followed by the liquidation of the Debtors or the need for further financial reorganization of the Debtors or any successors to the Debtors under the Plan, unless such liquidation or reorganization is proposed in the Plan. 54 LEGAL OPINION The validity of the Common Stock and Series A Preferred Stock offered hereby will be passed upon for the Company by Akin, Gump, Strauss, Hauer & Feld LLP, San Antonio, Texas. In passing on the validity of the Common Stock and Series A Preferred Stock, Akin, Gump, Strauss, Hauer & Feld, LLP will rely upon the opinion of Sheinfeld, Maley & Kay, P.C., bankruptcy counsel to the Company, regarding the confirmation by the United States Bankruptcy Court for the Western District of Texas, San Antonio Division, of the Company's Joint Plan of Reorganization, as amended, and matters pertaining to Section 303 of the Delaware General Corporation Law in connection with the approval of the Company's Joint Plan of Reorganization, as amended. EXPERTS The consolidated financial statements of the Company as of January 31, 1997 and February 2, 1996 and for each of the years in the three-year period ended January 31, 1997, included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and in the Registration Statement (which report expresses an unqualified opinion and includes explanatory paragraphs referring to a substantial doubt as to 50- OFF Stores, Inc.'s ability to continue as a going concern and bankruptcy filing), and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy and information statements filed by the Company with the Commission pursuant to the information requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, Seven World Trade Center, 13th Floor, New York, New York 10048, Los Angeles Regional Office, Suite 1100, 5670 Wilshire Boulevard, Los Angeles, California 90036, and Chicago Regional Office, 500 W. Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or through the Internet from the SEC's home page on the World Wide Web at http://www.sec.gov. This Prospectus, which constitutes a part of a Registration Statement filed by the Company with the Commission under the Securities Act, omits certain information contained in the Registration Statement, and reference is hereby made to the Registration Statement and to the exhibits thereto for further information with respect to the Company and the securities offered hereby. Statements contained herein concerning provisions of any documents are not necessarily complete, and each amendment is qualified in its entirety by reference to the copy of such document filed with the Commission. 55 50-OFF STORES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Independent Auditors' Report......................................... F-2 Consolidated Balance Sheets--January 31, 1997 and February 2, 1996... F-3 Consolidated Statements of Operations--Years ended January 31, 1997, February 2, 1996 and February 3, 1995................................................ F-4 Consolidated Statements of Changes in Stockholders' (Deficit) Equity--Years ended January 31, 1997, February 2, 1996 and February 3, 1995............................................................. F-5 Consolidated Statements of Cash Flows--Years ended January 31, 1997, February 2, 1996 and February 3, 1995................................................ F-6; F-7 Notes to Consolidated Financial Statements........................... F-8--F-18
Schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders 50-OFF Stores, Inc. San Antonio, Texas We have audited the accompanying consolidated balance sheets of 50-OFF Stores, Inc. and subsidiaries (Debtor in Possession) as of January 31, 1997 and February 2, 1996, and the related consolidated statements of operations, changes in stockholders' (deficit) equity and cash flows for each of the three years in the period ended January 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of 50-OFF Stores, Inc. and subsidiaries as of January 31, 1997 and February 2, 1996, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1997 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's need to increase sales and ultimately to attain profitable operations; the need to successfully complete negotiation of a post-confirmation credit facility and ultimately comply with its terms, covenants and conditions; and the need to complete the offering of the shares by the Company pursuant to its plan of reorganization which is required in order for the Company to emerge from bankruptcy raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Deloitte & Touche LLP San Antonio, Texas June 9, 1997 F-2 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS ASSETS
JANUARY 31, 1997 FEBRUARY 2, 1996 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents.................... $ 491,297 $ 341,334 Cash in escrow............................... 330,000 -- Accounts receivable.......................... 717,852 1,129,604 Merchandise inventories...................... 12,974,958 27,753,965 Prepaid and other current assets............. 393,526 437,226 ----------- ----------- Total current assets....................... 14,907,633 29,662,129 ----------- ----------- PROPERTY AND EQUIPMENT-NET................... 3,988,760 24,888,222 OTHER ASSETS................................. 358,343 899,126 ----------- ----------- TOTAL ASSETS............................... $19,254,736 $55,449,477 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Credit Facility.............................. $ 5,396,580 $ -- Accounts payable-trade....................... 1,381,708 8,595,246 Accounts payable-other....................... 2,032,512 4,238,123 Accrued expenses and other current liabilities.................................. 1,757,468 3,280,093 Current portion of closed store costs........ -- 1,168,213 Current portion of long-term debt............ 266,667 1,286,372 ----------- ----------- Total current liabilities.................. 10,834,935 18,568,047 ----------- ----------- CREDIT FACILITY, refinanced.................. -- 11,218,051 LONG-TERM DEBT, less current portion......... -- 3,884,515 LIABILITIES SUBJECT TO COMPROMISE............ 30,250,544 -- COMMITMENTS AND CONTINGENCIES (NOTE 2, 4, 5, 8 AND 10) STOCKHOLDERS' (DEFICIT) EQUITY: Preferred stock, $1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding............ -- -- Common stock, $.01 par value, 20,000,000 shares authorized, 12,200,915 outstanding at January 31, 1997 and February 2, 1996........................ 122,009 122,009 Additional paid-in-capital................... 36,022,264 36,022,264 Subscription receivable...................... (3,991,050) (3,991,050) Accumulated deficit.......................... (53,983,966) (10,374,359) ----------- ----------- Total stockholders' (deficit) equity....... (21,830,743) 21,778,864 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY....................................... $19,254,736 $55,449,477 =========== ===========
See accompanying notes to consolidated financial statements. F-3 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, FEBRUARY 2, FEBRUARY 3, 1997 1996 1995 ------------ ------------ ------------ NET SALES............................ $106,193,561 $175,022,949 $201,543,133 COST OF SALES........................ 78,560,029 118,628,507 135,559,833 ------------ ------------ ------------ GROSS PROFIT......................... 27,633,532 56,394,442 65,983,300 ------------ ------------ ------------ OPERATING EXPENSES: Selling, advertising, general and administrative.................... 42,295,234 57,376,682 63,827,264 Depreciation and amortization...... 3,223,122 3,950,680 3,779,082 Closed store costs................. -- (409,145) 5,018,593 ------------ ------------ ------------ ------------ ------------ ------------ REORGANIZATION ITEMS: Severance payroll.................. 191,385 Professional fees.................. 996,841 Loss on disposal of stores......... 23,142,473 Gain on sale of building........... (356,144) ------------ ------------ ------------ 23,974,555 -- -- TOTAL OPERATING EXPENSES............. 69,492,911 60,918,217 72,624,939 ------------ ------------ ------------ OPERATING LOSS....................... (41,859,379) (4,523,775) (6,641,639) ------------ ------------ ------------ OTHER EXPENSE (INCOME): Interest income.................... (74,270) (111,616) (136,280) Interest expense................... 1,671,624 2,366,269 1,518,697 ------------ ------------ ------------ TOTAL OTHER EXPENSE (INCOME)......... 1,597,354 2,254,653 1,382,417 ------------ ------------ ------------ LOSS BEFORE INCOME TAXES............. (43,456,733) (6,778,428) (8,024,056) ------------ ------------ ------------ PROVISION FOR INCOME TAXES........... 152,874 -- -- ------------ ------------ ------------ NET LOSS............................. $(43,609,607) $ (6,778,428) $ (8,024,056) ------------ ------------ ------------ LOSS PER COMMON SHARE................ $ (3.57) $ (.56) $ (.76) ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
COMMON STOCK RETAINED ------------------- ADDITIONAL EARNINGS NUMBER OF PAID-IN SUBSCRIPTION (ACCUMULATED SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT) TOTAL ---------- -------- ----------- ------------ ------------ ------------ BALANCE: January 28, 1994................... 10,370,915 $103,709 $31,150,955 $ 4,428,125 $ 35,682,789 Net proceeds from issuance of common stock for: Exercise of stock options............... 7,500 75 37,960 38,035 1,810,000 share offering.............. 1,810,000 18,100 4,833,474 4,851,574 Subscription for 1,500,000 shares...... $(3,991,050) (3,991,050) Net loss................ (8,024,056) (8,024,056) ---------- -------- ----------- ----------- ------------ ------------ BALANCE: February 3, 1995................... 12,188,415 121,884 36,022,389 (3,991,050) (3,595,931) 28,557,292 Other................... 12,500 125 (125) Net loss................ (6,778,428) (6,778,428) ---------- -------- ----------- ----------- ------------ ------------ BALANCE: February 2, 1996................... 12,200,915 122,009 36,022,264 (3,991,050) (10,374,359) 21,778,864 Net loss................ (43,609,607) (43,609,607) ---------- -------- ----------- ----------- ------------ ------------ BALANCE: January 31, 1997................... 12,200,915 $122,009 $36,022,264 $(3,991,050) $(53,983,966) $(21,830,743) ========== ======== =========== =========== ============ ============
See accompanying notes to consolidated financial statements. F-5 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, FEBRUARY 2, FEBRUARY 3, 1997 1996 1995 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................... $(43,609,607) $(6,778,428) $(8,024,056) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization...... 3,223,122 3,950,680 3,779,082 Closed store charge................ -- -- 4,942,194 Loss on disposition of fixed assets............................ -- 187,032 654,311 Loss on disposal of stores......... 23,063,554 -- -- Non-cash interest expense on long- term debt......................... 117,981 -- -- Changes in assets and liabilities: Accounts receivables................. 411,752 515,699 1,342,026 Merchandise inventories.............. 14,779,007 3,925,773 (1,050,890) Prepaid and other current assets..... 43,700 280,335 56,371 Other assets......................... 221,559 337,150 337,170 Accounts payable-trade............... 8,675,907 (1,416,566) (5,208,013) Accounts payable-other............... 2,010,344 (657,910) (794,383) Deferred federal income taxes........ 152,874 -- 549,000 Closed store costs................... (1,168,213) (1,566,981) -- Accrued expenses and other current liabilities......................... (1,522,625) 132,414 (254,557) ------------ ----------- ----------- Net cash provided by (used in) operating activities.................. 6,399,355 (1,090,802) (3,671,745) ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of building....... 1,342,648 -- -- Captial expenditures................. (694,541) (3,691,561) (3,436,475) ------------ ----------- ----------- Net cash provided by (used) in investing activities................... 648,107 (3,691,561) (3,436,475) ------------ ----------- -----------
See accompanying notes to consolidated financial statements. F-6 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, FEBRUARY 2, FEBRUARY 3, 1997 1996 1995 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments) proceeds from credit facility............................. $(5,821,471) $ 4,263,026 $ 6,945,025 Payments on long-term debt............ (746,028) (1,202,005) (1,223,276) Cash in escrow........................ (330,000) -- -- Net proceeds from the issuance of common stock......................... -- -- 898,559 ----------- ----------- ----------- Net cash (used in) provided by financing activities.............................. (6,897,499) 3,061,021 6,620,308 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents.......................... 149,963 (1,721,342) (487,912) Cash and cash equivalents at beginning of year.............................. 341,334 2,062,676 2,550,588 ----------- ----------- ----------- Cash and cash equivalents at end of year................................. $ 491,297 $ 341,334 $ 2,062,676 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid/received during the period for: Interest paid......................... $ 1,553,643 $ 2,034,339 $ 1,407,788 Income tax refund received............ -- -- 1,658,134 SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES: Subscription receivable for 1,500,000 shares of common stock......................... -- -- $ 3,991,050
See accompanying notes to consolidated financial statements. F-7 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The financial statements include the accounts of 50-OFF Stores, Inc. and its wholly-owned subsidiaries (50-OFF or the Company). All significant intercompany balances and transactions have been eliminated. Operations The Company operates a chain of close-out retail stores located in 5 states in the southern and southwestern United States that carry a broad mix of merchandise targeted at value-conscious, lower to moderate income customers and other "bargain hunters". Reorganization On October 9, 1996 (the "Petition Date"), the Company filed a petition (the "Filing") for relief under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Texas (the "Bankruptcy Court"). The filing was precipitated by the notification from the Company's asset based lender that it was in violation of the minimum gross margin (disputed) and the minimum working capital financial covenants of its credit agreement and that such breaches constituted events of default under the loan documents. The lenders subsequently established additional availability reserves, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing, which, individually and together, substantially impacted the Company's financial liquidity and, therefore, its ability to acquire and maintain much needed inventory for its stores. The Company was unable to secure the resources required to cure the defaults under the loan documents and to implement its business plan and effect the changes believed necessary to improve operations and reverse the Company's disappointing operating results without the protections afforded under the Bankruptcy Code. The Company will continue to manage its affairs and operate its business under Chapter 11 as debtor in possession while the plan of reorganization is formulated. Through the reorganization under Chapter 11, management intends to implement the Company's plan to restructure the operations and capitalization of the Company in order to strengthen the Company's financial position and operating performance. Consistent with the Chapter 11 proceedings, the accompanying financial statements have been prepared on a going concern basis assuming the realization of assets and liquidation of liabilities in the ordinary course of business. However, under Chapter 11, actions to enforce certain claims against the Company are stayed if such claims arose, or are based on events that occurred, before the Petition Date. The terms of the ultimate settlement of these liabilities is determined based on the plan of reorganization approved by the Bankruptcy Court. Such liabilities in existence at October 9, 1996 are reflected as Liabilities Subject To Compromise in the January 31, 1997 consolidated balance sheet. Additional liabilities subject to settlement may arise subsequent to the Petition Date, as a result of claims filed by parties affected by the Company's rejection of executory contracts, including leases, and from the Bankruptcy Court's fixing of allowed claims for contingencies and other disputed amounts. The procedures used to determine the amount of any additional liabilities have not been completed. Additional liabilities may arise as the Chapter 11 proceeding continues. In November 1996, the Company obtained a debtor in possession credit facility with borrowings up to $15 million from General Electric Capital Corporation ("GECC"). This facility is for a term of one year and is collateralized primarily by inventory (see Note 5). On February 12, 1997, the Bankruptcy Court entered an order to extend the time for the Company to assume or reject unexpired store leases. The order provides that the time for which the Company must assume or reject F-8 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) its store leases is extended to April 14, 1997. Other deadlines were provided for treatment of specific leases where the landlord objected to the extension period. A plan of reorganization (the "Plan" or "Plan of Reorganization") was filed on February 26, 1997, amended on March 27, 1997 and confirmed by the Bankruptcy Court on June 3, 1997 (see Note 2). Fiscal Year The Company's fiscal year is a fifty-two or fifty-three week period ending on the Friday nearest to January 31. Fiscal years 1997 and 1996 were comprised of fifty-two weeks and fiscal year 1995 was comprised of fifty-three weeks. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a remaining maturity of three months or less to be cash equivalents. In January 1997, the Company sold its corporate headquarters. An order issued by the Bankruptcy Court escrowed $330,000 to pay the outstanding principal, accrued interest and attorneys fees. In February 1997, approximately $301,000 was paid to satisfy the debt (see Note 5). Pre-opening Store Costs Pre-opening store costs which are included in selling, advertising, general and administrative, are charged to income within the fiscal year in which they are incurred. Inventory Valuation Merchandise inventories are valued at the lower of cost (first-in, first- out) or market, using the retail inventory method. Merchandise inventories consist entirely of finished goods. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed on the straight-line method at rates based upon the estimated useful lives of the respective assets. Leasehold improvements are amortized on the straight-line method over the shorter of the economic life of the improvements or the respective terms of the lease. Gains and losses upon retirement or disposal of fixed assets are recognized currently. In connection with the Chapter 11 Filing, the Company recorded as a reorganization expense the write-down to fair value, as determined by the Company's lender based on the value of certain assets liquidated by the lender and on the Company's, the lender's and an independent party's strategic review, certain equipment and leasehold improvements (see Note 6). Income Taxes Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reported net of a valuation allowance that reduces deferred tax assets to an amount that management believes is more likely than not realizable. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Loss Per Common Share Loss per common share is based on the weighted average number of shares of common stock and common stock equivalents outstanding. Fully diluted loss per common share is not presented as it is not materially different than the calculation of primary loss per common share.
1997 1996 1995 ---------- ---------- ---------- Weighted average shares................... 12,200,915 12,200,915 10,539,089
In February 1997, Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128") was issued. SFAS No. 128, which establishes standards for computing and presenting earnings per share, is effective for the fiscal year ending after December 15, 1997 and when adopted will require restatement of earnings per share presented in prior periods. Early adoption is not permitted. The Company believes that the adoption of SFAS No. 128 will not materially impact its financial condition or results of operations. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable and debt instruments. The book value of cash and cash equivalents, accounts receivable and accounts payable are representative of their respective fair values due to the short- term maturity of these instruments. The book value of the Company's debt instruments is considered to approximate their fair value, based on current market rates and conditions. Certain debt instruments classified as liabilities subject to compromise (see Note 4) may be subject to future adjustments by the Bankruptcy Court. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation The Company accounts for stock-based compensation using the intrinsic value method described in Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's Common Stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure requirements of Statements of Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation," (SFAS No. 123) as included in Note 11. Reclassifications Certain reclassifications have been made to the fiscal 1996 and 1995 consolidated financial statements to conform to the fiscal 1997 consolidated financial statement presentation. NOTE 2--PLAN OF REORGANIZATION AND MANAGEMENT PLANS The Plan provides for the cancellation of all non-priority unsecured indebtedness of the Company. The Company estimates such cancellation will cause the elimination of over $25 million of unsecured debt and $3 million of secured debt which will be converted to unsecured debt from the Company's balance sheet. Each holder of an allowed general unsecured claim will, in cancellation of its claim, receive a pro rata share of the Company's Series B Preferred Stock. Certain obligations of the Company to such holders of Series B Preferred Stock will be secured by two liens against potential net lawsuit proceeds from significant litigation being prosecuted by the Company. As net proceeds (net of certain items set forth in the Plan) from such litigation are received by the Company, holders of Series B Preferred Stock will receive (i) Series A Conversion Rights, which provide for the conversion of Series B Preferred Stock to Series A Preferred Stock, until net proceeds reach F-10 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) $3,991,050, and (ii) Series A Preferred Stock for net proceeds in excess of $3,991,050 (provided that "excess" net proceeds, as defined in the Plan, will be paid in cash). The receipt of Series A Conversion Rights, Series A Preferred Stock and/or cash by holders of Series B Preferred Stock will result in a proportionate release of the liens. By issuing such Series B Preferred Stock to general unsecured creditors, such creditors are essentially receiving the value of the Company's litigation which was pending prepetition. Finally, the Plan provides for the recapitalization of the Company through cash proposed to be raised from the Company's existing common stockholders and others. Specifically, the Plan provides for the issuance to existing common stockholders of rights to purchase units, consisting of 20 shares of Series A Preferred Stock and 20 shares of new Common Stock (a "Unit"), with a minimum required purchase amount of $3,050,000. The cumulative dividend rate on the Series A Preferred Stock is 5.5%. At confirmation, the Company announced it had received subscriptions for 44,736 ($4,473,600) units at expiration of the rights offering, and the required minimum would be met. Contemporaneously with filing the Plan, the Company filed a related disclosure statement (the "Disclosure Statement") setting forth more detailed information regarding the Company and the Plan. Under applicable Bankruptcy Court rules and procedures, a hearing was scheduled by the Court to review and approve the Disclosure Statement which was approved on March 20, 1997. Upon approval of the Disclosure Statement, the Plan and Disclosure Statement were furnished to creditors and stockholders and votes in support of the Plan were solicited. The Plan was approved by both creditors and stockholders. An order confirming the Plan was entered on June 3, 1997. Approximately ten days subsequent to confirmation, the Plan will become effective. It is presently anticipated that the Effective Date of the Plan will be on or about June 16, 1997. Management has been redirecting 50-OFF's retail activities from 50-OFF's off-price retailing concept to LOT$OFF's close-out retailing concept. Coincident and consistent with this change has been a change in the mix of products, historically a majority in family apparel, to a majority in non- apparel merchandise, principally through the addition of new product categories to the Company's historical non-apparel offerings which include cosmetics, housewares and giftware, home furnishings, shelf-stable food products, toys, luggage, footwear, stationery and health and beauty aids. New categories include sporting goods, automotive, greeting cards, jewelry, books, party goods, seasonal, pet supplies and hardware, among others. The Company will continue to maintain a healthy showing of basic family apparel products in the LOT$OFF stores. The actual merchandise mix will fluctuate 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, less inventory shrinkage, increased store traffic and improved operating results. 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 complete the offering of shares pursuant to the Plan, the need to successfully complete negotiations of a post-confirmation credit facility and ultimately comply with its terms, covenants and conditions, uncertainty regarding the eventual outcome of the Chapter 11 Cases, the degree of success in reversing the Company's recent business trends (by increasing sales and operating profits) and the ability to alleviate trade credit concerns and restore merchandise flow to adequate levels. While management believes that the recent closings of stores and the implementation of expense cuts commensurate with the downsizing of the total stores in operation (from 101 to 41 stores) facilitates its efforts to improve the Company's operating performance and that the recapitalization to be implemented on the effective date of its Plan or Reorganization should strengthen its financial position and alleviate concerns of credit and merchandise suppliers, no assurance can be given that the Company will be successful in its continuing efforts to reverse recent business trends which have continued through May 1997 and return to profitability. The anticipated F-11 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) judgment and receipt of proceeds from the Company's lawsuits related to certain parties breach of contractual obligations as well as certain other violations related to the Company's November 1994 Regulation S offering (see Note 10) should further strengthen its financial position. If the Company's plans to improve operations are not successful, management will consider, among other alternatives, strategic and/or financial alliances with third parties (including wholesalers or manufacturers) and the merger, sale or liquidation of all or a part of the Company. NOTE 3--PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JANUARY FEBRUARY 2, 31, 1997 1996 ---------- ----------- Land............................................... $ -- $ 226,608 Building........................................... -- 752,231 Store equipment, furniture and fixtures............ 1,184,242 26,692,653 Leasehold improvements............................. 5,930,742 12,255,958 Other.............................................. 160,657 1,936,223 ---------- ----------- 7,275,641 41,863,673 Less: accumulated depreciation..................... (3,286,881) (16,975,451) ---------- ----------- $3,988,760 $24,888,222 ========== ===========
NOTE 4--LIABILITIES SUBJECT TO COMPROMISE The principal categories of claims reclassified in the consolidated balance sheet as of January 31, 1997 and included in liabilities subject to compromise are as follows: Secured debt, 8.5%, collateralized by furniture, fixtures and equipment............................................. $ 4,190,881 Secured debt, capital leases, collateralized by signs...... 80,763 Trade and other miscellaneous claims including costs of lease rejections.......................................... 25,978,900 ----------- $30,250,544 ===========
These amounts may be subject to future adjustments depending on: filings of additional claims against the Company; actions of the Bankruptcy Court; further developments with respect to disputed claims--whether or not such claims are secured and the value of any security interest securing any such claims; and other events. The Company has estimated that certain pre-petition debt exceeds the related collateral and therefore, in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company has discontinued accruing interest on these obligations. The above amounts represent the Company's best estimate of claims which will ultimately be allowed by the Court. NOTE 5--CREDIT FACILITY AND LONG-TERM DEBT Credit Facility: On November 18, 1996, the Company, with the approval of the Bankruptcy Court, entered into a credit agreement with General Electric Capital Corporation providing the Company with a line of credit through November 1997 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 F-12 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) yield on 30-day commercial paper (5.95 as of January 31, 1997) plus 3%. The line of credit is collateralized by inventory, accounts receivable and other assets. The credit agreement contains various restrictive covenants. The agreement also contains minimum gross margin, minimum EBITDA, minimum inventory, minimum sales, minimum trade support and maximum capital expenditure financial covenants. On February 25, 1997 and April 2, 1997, the Company was notified that it was in violation of not receiving net proceeds of $1,000,000 (received $998,000) from the sale of its headquarters building and the following financial covenants regarding minimum (a) EBITDA, (covenant $400,000, actual ($484,000)) (b) net sales (covenant $15,900,000, actual $12,609,000) (c) inventory balances (covenant $16,000,000, actual $13,504,000) and (d) accounts payable (covenant $2,000,000, actual $1,940,000). The violations constituted events of default under the loan documents. GECC waived the default on net proceeds from sale of headquarters building and is forebearing from exercising any remedies in connection with such financial defaults. At January 31, 1997, the Company had approximately $5,397,000 outstanding under the credit facility and had approximately $1,225,000 available for use. At May 16, 1997, the Company had approximately $6,974,000 outstanding under the credit facility and had approximately $611,000 available for use. On May 13, 1996, the Company entered into a credit facility with two financial corporations providing the Company with a line of credit through May 1998 of up to $22,500,000, including letters of credit. Borrowings under the line were limited to a borrowing base equal to the lessor of, (i) eligible inventory at cost: December 16 to February 28, 55.75%, March 1 to September 15, 60.75% and September 16 to December 15, 63.75% or (ii) eligible inventory at retail: December 16 to February 28, 33.45%, March 1 to September 15, 37.25% and September 16 to December 15, 39.0%. Interest under the line was charged on funds borrowed at the First National Bank of Boston's base rate plus 1.75% and there was a monthly administrative fee of $12,000 and an annual facility fee of 1.5% ($337,500). The line of credit was secured by inventory, accounts receivable and other assets. In addition, the Company issued the lenders a three year warrant to purchase 400,000 shares of Common Stock at $2.50 per share. The agreement contained various restrictive covenants, including minimum gross margin, minimum EBITDA, minimum and maximum inventory levels, minimum working capital and minimum trade support financial covenants. On August 8, 1996, the Company was notified that it was in violation of the minimum gross margin and the minimum working capital financial covenants and that such breaches constituted events of default under the loan documents. The lenders subsequently established additional availability reserves, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing. This facility was paid off in November 1996 after the Company's bankruptcy filing. Prior to entering into such credit facility on May 13, 1996, the Company had a credit facility with a financial institution providing the Company a line of credit through January 1998, as amended, of up to $20,000,000, including letters of credit of up to $4,000,000. Borrowings under the facility were limited to a borrowing base equal to the lesser of, (i) 45% of eligible inventory, or (ii) 80% of liquidation value of inventory, both minus a permanent block of $1,500,000. Interest under the line was charged on funds borrowed at the lender's prime rate plus 1.75%. The agreement contained various restrictive covenants, including restrictions on the payment of cash dividends. This credit facility was secured by inventory, certain accounts receivable and other assets. The Company had total borrowings of $80,196,626, $51,713,410 and $66,772,292 and repayments of $86,018,097, $47,450,384 and $59,827,267 for fiscal years 1997, 1996, and 1995, respectively, under its lines of credit. Long-Term Debt: The long-term debts that will be settled as part of the reorganization have been classified as "Liabilities Subject to Compromise" (see Note 4) for the year ending January 31, 1997. In February 1997, the Company received authorization from the Bankruptcy Court to pay the promissory note secured by land and building. Due to the uncertain duration of the Chapter 11 proceeding, no current maturities have been reflected for the year ending January 31, 1997. The Company's bankruptcy filing resulted in events of default for all pre-petition loan agreements. F-13 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Long-term debt consists of the following:
JANUARY 31, FEBRUARY 1997 2, 1996 ----------- ---------- Borrowings under promissory notes secured by furnitures, fixtures and equipment.............. $ -- $4,754,220 Borrowings under promissory note secured by land and building.................................... 266,667 416,667 Less: Current portion............................ 266,667 1,286,372 ------- ---------- $ -- $3,884,515 ======= ==========
In fiscal 1993 the Company borrowed $1,000,000 from a financial institution. The promissory note provides for outstanding principal to be paid in monthly installments of $16,666 until January 29, 1998. Interest is charged at a rate of 7.02%. The note is secured by a deed of trust on the land and building used for the corporate offices. In February 1997, with the approval of the Bankruptcy Court, $301,000 was paid to satisfy the outstanding principal, accrued interest and attorneys' fees. In February 1996 and with the support of its vendors, 50-OFF implemented a payment plan with respect to its $8,447,000 of unsecured trade payables as of February 26, 1996. Under the plan, such payables were to be paid in full within a two year period. Approximately $4,681,000 of such payables remained outstanding at January 31, 1997 and are included in "Liabilities Subject To Compromise" (see Note 4) as trade and other miscellaneous claims. In April 1996, the Company restructured its $4,000,000 and $2,775,000 long term borrowings with an affiliate of an insurance company into one promissory note for approximately $4,645,000. The promissory note provides for monthly installments (including principal and interest) of $94,638 until March 2001. Interest is charged at a rate of 8.50%. The note is secured by the Company's furniture and fixtures. Approximately $4,190,881 of such note remained outstanding at January 31, 1997 and is included in "Liabilities Subject To Compromise" (see Note 4). NOTE 6--CLOSED STORE COSTS During the third quarter of fiscal 1997, in connection with the Company's planned Chapter 11 Filing, the Company liquidated inventory at 37 stores in non-strategic markets through an arrangement with an affiliate of its then lender. The Company received approximately $5,162,000 representing approximately 45% of the retail value of the inventory on hand at the 37 stores. During the second quarter, the Company recorded to cost of sales inventory liquidation markdowns of $2,218,000. Additionally, the Company recorded reorganization items expense related to fixed asset write-offs of $12,570,000. During the third quarter of fiscal 1997, the Company recorded reorganization items expense of approximately $3,956,000 for liabilities associated with estimated monthly lease payments and $467,000 of other store closing costs associated with the 37 stores. After a further review, the Company closed an additional 18 stores during the fourth quarter of fiscal 1997. Additionally, the Company recorded reorganization items expense for liabilities associated with estimated monthly lease payments of approximately $1,592,000; other store closing costs of approximately $266,000 and related goodwill of approximately $155,000 associated with the 18 stores. The Company also recorded to reorganization items expense fixed asset write-downs of approximately $4,776,000 for the 18 closed stores as well as an impairment of the fixed assets for the remaining stores and corporate offices of the Company. Subsequent to fiscal 1997, the Company closed 3 stores plus the clearance center. In connection with these closures, the Company recorded inventory liquidation markdowns of $302,000 during the fourth quarter of fiscal F-14 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1997. Additionally, the Company recorded to reorganization items expenses associated with estimated monthly lease payments of approximately $321,000 and other store closing costs of approximately $334,000 associated with the 3 stores and the clearance center. The 60 stores and the clearance center closed in fiscal 1997 and fiscal 1998 contributed approximately $45,455,000; $86,632,000 and $92,971,000 of net sales and $11,534,000 and $273,000 of operating losses and $3,169,000 of operating income during fiscal 1997, 1996 and 1995, respectively, to the Company's operations. The Company's store consolidation program closed seven stores in fiscal 1995 and 14 stores in fiscal 1996. The store closings involved exiting certain smaller markets which proved unable to support a store and certain other markets in which it would have been cost prohibitive to open the number of stores required to effectively develop such markets' potential. The amount of the closing costs associated with the stores closed in fiscal 1996, was approximately $4,942,000 of which approximately $835,000 pertained to inventory liquidation write-downs charged to cost of sales and approximately $1,372,000 associated with fixed asset write-downs and was expensed in fiscal 1995 as part of a formal plan to complete the store consolidation program. The Company has recorded approximately $1,168,000 of liabilities associated with estimated monthly lease payments and other store closing costs at February 2, 1996. During fiscal 1996, the Company undertook negotiations with the lessors of 12 of the stores closed in fiscal 1996 and successfully completed early buyouts of the remaining lease obligations for 11 stores, resulting in a credit to closed store costs of $409,000 during the fourth quarter of fiscal 1996. During fiscal 1997, the Company completed its negotiations and executed terminations on the remaining obligations from the store consolidation program plus negotiated other buyouts and recorded income to reorganization items of approximately $1,295,000. NOTE 7--INCOME TAXES The benefit from (provision for) income taxes consists of the following:
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, 1997 FEBRUARY 2, 1996 FEBRUARY 3, 1995 ---------------- ---------------- ---------------- Federal: Current................ -- -- $(547,000) Deferred............... -- -- 547,000 Net operating loss carryforwards......... -- -- -- State: Current................ -- $(100,000) -- Deferred............... $ (153,000) 100,000 -- Net operating loss carryforwards......... -- -- -- ---------- --------- --------- $(153,000) $ -- $ -- ========== ========= =========
F-15 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Temporary differences which gave rise to deferred tax assets and liabilities are as follows:
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31, 1997 FEBRUARY 2, 1996 FEBRUARY 3, 1995 ---------------- ---------------- ---------------- Deferred tax assets: Net operating loss carryforwards......... $ 19,269,000 $ 6,448,000 $ 2,801,000 AMT and other credit carryforwards......... 515,000 515,000 507,000 Merchandise inventories........... 150,000 45,000 377,000 Lease obligations...... 2,149,000 455,000 1,034,000 Property and equipment. 974,000 -- -- Other.................. 152,000 7,000 49,000 ------------ ----------- ----------- 23,209,000 7,470,000 4,768,000 Deferred tax liabilities: Property and equipment. -- (1,536,000) (1,422,000) Net deferred tax assets before valuation allowance............... 23,209,000 5,934,000 3,346,000 Valuation allowance...... (23,209,000) (5,781,000) (3,093,000) ------------ ----------- ----------- Net deferred tax assets.. $ --0-- $ 153,000 $ 253,000 ============ =========== ===========
As of January 31, 1997, the Company had federal tax net operating loss carryforwards of approximately $48,032,000 expiring through 2012, alternative minimum tax credit carryforwards of approximately $337,000 which are available to offset regular federal income taxes in the future until fully utilized, and targeted jobs credit carryforwards of approximately $178,000 expiring in 2006 through 2009. As a result of the bankruptcy proceedings and related plan of reorganization, the net operating loss (NOL) carryforwards, tax credit carryforwards and other tax attributes of the Company may be significantly reduced as a result of debt forgiveness income in accordance with section 108(b) of the Internal Revenue Code (IRC). In addition, IRC section 382 limits NOL and tax credit carryforwards when an ownership change of more than fifty percent of the value of stock in a loss corporation occurs within a three year testing period. Under the plan of reorganization, the ownership of the Company may change by more than fifty percent. Accordingly, to the extent NOL and tax credit carryforwards remain after reduction under IRC section 108(b), the ability to utilize such remaining NOL and tax credit carryforwards may be significantly restricted. NOTE 8--COMMITMENTS AND CONTINGENCIES The Company leases the store facilities, its headquarters and the distribution warehouse used in its operations under operating leases. Most leases contain escalation clauses for real estate taxes, renewal options ranging from five to ten years and required additional payments based on percentages of sales (contingent rentals). Approximate future minimum lease payments (excluding renewal options) under leases having a remaining non- cancelable term in excess of 12 months as of January 31, 1997 are as follows:
YEAR ENDING ----------- 1998........................................................... $ 3,888,000 1999........................................................... $ 3,882,000 2000........................................................... $ 3,637,000 2001........................................................... $ 3,338,000 2002........................................................... $ 2,715,000 2003 and subsequent............................................ $ 7,920,000 Actual rental expense, including contingent rentals, was as follows: Year Ended February 3, 1995..................................... $10,762,000 Year Ended February 2, 1996..................................... $ 9,743,000 Year Ended January 31, 1997..................................... $ 7,353,000
F-16 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under the relevant provisions of the Bankruptcy Code, the Company can reject executory contracts, including leases. In conjunction with the Company's restructuring process, a review was performed of all lease obligations. Rejection of a lease gives the right to assert a claim against the Company. Through January 31, 1997, the Company had rejected 57 leases. Two leases were subsequently rejected in February 1997. The amounts of the related claims are included in the loss on disposal of stores of approximately $5,869,000 in the accompanying consolidated statements of income. Contingent rentals represented approximately 4% in the year ended February 3, 1995, 2% in the year ended February 2, 1996 and 0% in the year ended January 31, 1997 of actual rent expense. The Company is party to certain legal proceedings arising in the ordinary course of business, none of which are believed to be material (see Note 10). NOTE 9--RELATED PARTY TRANSACTIONS The Company had three store leases in force during fiscal 1996 and two store leases in force during fiscal 1995 with Spigel Properties, the owner of which was a director of the Company through September 1995. The Company paid an aggregate of approximately $136,000 and $124,000 in minimum rental and approximately $27,000 and $14,000 in percentage rental for these locations during fiscal 1995 and 1996, respectively. The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. has regularly performed legal services as counsel to the Company. Cecil Schenker, a director of the Company, is the sole shareholder of Cecil Schenker, P.C., a partner with Akin, Gump, Strauss, Hauer & Feld, L.L.P. The investment firm of James M. Raines & Company, the owner of which is a director of the Company, performed consulting services in connection with the Company's Regulation S offering in fiscal 1995. Charles J. Fuhrmann II, a director of the Company, has performed certain financial and strategic advisory services for the Company and was compensated $127,500 and $31,250 during fiscal 1996 and 1997, respectively. In May 1996, Mr. Fuhrmann was appointed President, Chief Executive and Financial Officer of the Company. NOTE 10--COMMON STOCK In November 1994, the Company received subscriptions for approximately 1,810,000 shares of Common Stock in a Regulation S offering to qualified investors. The Company received net proceeds of approximately $861,000 from the purchase of 310,000 shares and has purchase agreements for 1,500,000 shares for which proceeds have not been received. On February 21, 1995, the Company filed a lawsuit [50-Off Stores, Inc. v. Banque Paribas (Suisse), S.A., Betafid, S.A., Yanni Koutsoubos, Andalucian Villas (Forty Eight) Limited, Arnass Limited, Brocimast Enterprises Ltd., Dennis Morris, Howard White, and Morris & Associates, Case No. SA-95-CA-0159] in the United States District Court in San Antonio, Texas against Banque Paribas (Suisse) S.A., Betafid S.A., three purchaser entities allegedly controlled by them and certain affiliated individuals in connection with the breach by certain of the defendants of their contractual obligations to purchase an aggregate of 1,500,000 shares of the Company's common stock at $3.65 per share. The lawsuit also includes securities fraud, promissory estoppel, conspiracy and conversion claims. The conversion claim relates to actions of the defendants in transferring, selling and trading the shares even though the defendants have never paid for such shares. The Company seeks recovery of actual and punitive damages, an injunction against the defendants' transfer of such stock in violation of the Securities Act, pre- and post- judgment interest, attorneys' fees and such other remedies to which the Company may show itself entitled. F-17 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Dennis Morris and Howard White have answered the complaint with White raising the affirmative defense of contributory negligence. White also served a third party complaint on Chase Manhattan Bank, N.A. 50-OFF has recently joined Chase and Aries Peak, Inc. as additional defendants. Defaults have been entered against Arnass, Andalucian Villas, Brocimast, Betafid and Koutsoubos for failure to appear or answer. Banque Paribas (Suisse) ("Paribas") moved to dismiss the action for lack of jurisdiction, failure to state a claim and for forum non conveniens. The District Court referred all pre-trial matters to U.S. Magistrate Judge John W. Primomo, who denied each of Paribas' motions to dismiss. U.S. District Judge H.F. Garcia has adopted Judge Primomo's rulings in their entirety. On March 20, 1997, Paribas answered 50-OFF's complaint asserting a number of affirmative defenses, including contributory negligence. Paribas also asserted a counterclaim against 50-OFF for defamation. 50-OFF has moved to dismiss this counterclaim and strike Paribas' affirmative defenses. Judge Primomo has recommended such dismissal and the striking of affirmative defenses. Written discovery has been served on all defendants who have appeared, and depositions have been taken of numerous parties and non-party witnesses. Judge Primomo has required that all discovery of Paribas take place pursuant to the provisions of the Hague Evidence Convention. Paribas recently responded to 50- OFF's requests for production and interrogatories. This matter is currently set for trial on August 25, 1997. On January 9, 1996, the Company filed another lawsuit [50-OFF Stores, Inc. v. Jefferies & Company, Inc. and Jefferies International, Ltd., Cause No. 96- CI-00349] in Bexar County District Court in San Antonio, Texas against the Company's placement agents in the securities offering referenced in the lawsuit discussed above. The suit alleges that the defendants breached their contracts with the Company, breached their fiduciary duties to the Company and were reckless or grossly negligent in failing to investigate properly the qualifications of the purchasers they introduced to the Company. The Company seeks to recover actual and exemplary damages in excess of $10,000,000, pre- and post-judgment interest, costs and attorneys' fees. Both defendants have answered the petition and raised the affirmative defense of contributory negligence. Additionally, Jefferies & Company filed a cross-claim against Howard White. Discovery is proceeding. Soon after the Company filed for protection under the Bankruptcy Code, Jefferies and White removed this case to the Bankruptcy Court. The United States District Court granted 50-OFF's motion to abstain from hearing the case and remanded the case back to the Bexar County District Court. This matter has been specially set for jury trial on October 4, 1997. The Bexar County District Court also ordered the parties to conduct mediation of the case prior to such trial date. The Company will continue to prosecute these cases vigorously. The Company, based upon advice of counsel, believes that it will obtain a favorable judgment against one or more of the defendants referenced in the preceding two lawsuits. Until the matter has been resolved, the Company will treat the 1,500,000 shares of Common Stock as outstanding with no proceeds recognized from their sale. The related subscription receivable recorded in the accompanying consolidated balance sheet is based upon a share price of $2.94, the closing price of the Company's Common Stock on January 12, 1995 and the date the stock was removed from escrow. NOTE 11-- STOCK OPTION PLAN Under the Company's Stock Option Plan, as amended (the "Option Plan"), stock options may be granted to full-time employees, outside directors, advisors and outside consultants of the Company for the purchase of up to a maximum of 3,000,000 shares of common stock. Options (either incentive or nonqualified options) may be granted for a term not to exceed ten years. The exercise price of all incentive stock options must be at least equal to the fair market value of the common stock on the date of grant, or 110% of such fair market value with respect to any optionee who is more than a 10% stockholder of the Company's shares. Any nonqualified stock F-18 50-OFF STORES, INC. AND SUBSIDIARIES (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) option issued pursuant to the Option Plan must be at an exercise price equal to at least 85% of the fair market value of the Company's common stock on the date of grant. Shares of unissued common stock reserved for the Plan totals 2,461,000 at January 31, 1997. The following table summarizes certain information regarding stock options granted under the Plan:
OPTIONS OUTSTANDING ----------- Balances at January 28, 1994...................................... 1,170,895 Granted......................................................... 273,250 Exercised....................................................... (7,500) Canceled........................................................ (110,085) --------- Balances at February 3, 1995...................................... 1,326,560 Granted......................................................... 247,015 Canceled........................................................ (418,950) --------- Balances at February 2, 1996...................................... 1,154,615 Granted......................................................... 833,752 Canceled........................................................ (514,116) --------- Balances at January 31, 1997...................................... 1,464,261
Options exercisable were 1,220,959, 926,175 and 689,385 at January 31, 1997, February 2, 1996 and February 3, 1995, respectively. Options outstanding at January 31, 1997 have a weighted-average remaining contractual life of 4.2 years with exercise prices ranging from $.94 to $1.56. Options exercisable at January 31, 1997 have a weighted-average remaining contractual life of 4.2 years with exercise prices ranging from $1.00 to $12.75. The weighted average exercise price for options outstanding at January 31, 1997 was $3.72. The Company applies APB No. 25 and related interpretations in accounting for its Option Plan. Accordingly, no compensation expense has been recognized for stock option transactions discussed above. Compensation cost for option awards (granted after January 29, 1994) in accordance with SFAS No. 123, is not material to the results of proforma operations for fiscal 1997 and 1996, as the estimated fair value of the options granted was not significant. In November 1994, the Company's Board of Directors effected a repricing of employee stock options at $4.125 per share effective December 5, 1994, excluding executive officers, directors, advisors and outside consultants. Upon the effective date of the Plan Of Reorganization, the Option Plan and all outstanding options will be terminated. F-19 APPENDIX GLOSSARY OF SELECTED TERMS USED IN THIS PROSPECTUS "50-OFF" shall mean 50-OFF Stores, Inc., a Delaware corporation, Debtor and Debtor-in-possession. "50-OFF Old Common Stock" shall mean the Public Equity Interests of 50-OFF which consist of common stock as of the Rights Offering Record Date. "Bankruptcy Code" shall mean the Bankruptcy Reform Act of 1978, as amended, and codified at title 11 of the United States Code. "Class 7 Lien" shall mean that certain lien granted to the holders of Allowed Claims in Class 7 as described in paragraph 4.1(f)(v) of the Plan. "Chapter 11 Cases" shall mean the cases commenced under chapter 11 of the Bankruptcy Code by the Debtors on the Petition Date. "Claim" shall mean (1) any right to payment from any of the Debtors, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; (2) any right to an equitable remedy for breach of performance if such breach gives rise to a right of payment from any of the Debtors, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured; or (3) any right under section 502(h) of the Bankruptcy Code. "Confirmation Date" shall mean the date on which the Clerk of the Bankruptcy Court entered the Confirmation Order. "Confirmation Hearing" shall mean the hearing held by the Bankruptcy Court pursuant to Bankruptcy Code section 1128, on June 3, 1997, on confirmation of the Plan. "Convenience Claim" shall mean any General Unsecured Claim of $250 or less, and any such Claim in excess of $250 that, by written election of the holder prior to the commencement of the Confirmation Hearing, is reduced to $250. "Committee" shall mean the Official Committee of Unsecured Creditors appointed in the Chapter 11 Cases. "Common Stock" shall mean the new Common Stock to be authorized for Reorganized 50-OFF pursuant to the Plan; such Stock shall from time to time also be referred to as the "Reorganized 50-OFF Common Stock." "Court" shall mean the Bankruptcy Court unit of the United States District Court for the Western District of Texas, San Antonio Division, or such other court having jurisdiction over the Chapter 11 Cases. "Cure Payment" shall be the monetary payments required pursuant to Bankruptcy Code section 365(b)(1)(A) to cure defaults under Leases to which the Debtors, or any one of them, are a party and which will be assumed pursuant to the Plan. "Debtors" shall mean 50-OFF Stores, Inc., 50-OFF Multistate Operations, Inc., 50-OFF Texas Stores, L.P. and 50-OFF Operating Company. "Deficiency Amount" shall mean, with respect to a Secured Claim, the amount by which the Allowed Claim exceeds the sum of (1) any set-off rights of the holder of such Claim against a Debtor under sections 506 and 553 of the Bankruptcy Code and (2) the net proceeds realized from the disposition of the Collateral securing such Claim or, if such Collateral is not liquidated to Cash, the value of the interest of the holder of the Claim in A-1 the Debtor's interest in the Collateral securing such Claim, as determined by the Bankruptcy Court under section 506 of the Bankruptcy Code; provided, however, that if the holder of such Claim makes the Election, there shall be no Deficiency Amount in respect of such Claim. "Disbursing Agent" shall mean the Reogranized 50-OFF Companies or their designee(s). The Reorganized 50-Off Companies may, but need not, employ a third-party to distribute the Series A Preferred Stock, the Series B Preferred Stock and/or the new Common Stock. "Disclosure Statement" shall mean the Disclosure Statement that has been approved by order of the Bankruptcy Court pursuant to section 1125 of the Bankruptcy Code. "Disposition of the Lawsuits" shall mean each and all of the Lawsuits being resolved by Final Orders. "Distribution Date" shall mean, for any Claim that is an Allowed Claim on the Effective Date, the Effective Date, and, for any Contested Claim, shall mean the date as soon as practicable, but within 90 days, after the date upon which such Claim becomes an Allowed Claim. "Effective Date" shall mean a Business Day selected by the Debtors or Reorganized 50-OFF, as the case may be, after the first Business Day which is 10 days after the Confirmation Date on which (i) the Confirmation Order is not stayed and (ii) all conditions to the effectiveness of the Plan have been satisfied or waived, provided, however, that the satisfaction of conditions under this subsection (ii) shall not delay the Effective Date more than 45 days after the Confirmation Date. "Equity Interest" shall mean the interest represented by an "equity security," as defined in section 101(16) of the Bankruptcy Code. "Escrow Agent" shall mean the party designated by the Debtors to receive Rights subscriptions, Bank One, Texas, NA. "FF&E" shall mean furniture, fixtures and equipment as such terms are commonly used in commercial transactions governed by the Uniform Commercial Code. "Fee Claim" shall mean a Claim under section 330 or 503 of the Bankruptcy Code for allowance of compensation and reimbursement of expenses in the Chapter 11 Cases. "Final Order" shall mean (1) an order as to which the time to appeal, petition for certiorari or move for reargument or rehearing has expired and as to which no appeal, petition for certiorari or other proceedings for reargument or rehearing shall then be pending or (2) in the event that an appeal, writ of certiorari, reargument or rehearing thereof has been sought, such order shall have been affirmed by the highest court to which such order was appealed, or certiorari has been denied or from which reargument or rehearing was sought, and the time to take any further appeal, petition for certiorari or move for reargument or rehearing shall have expired; provided, however, that no order shall fail to be a Final Order solely because of the possibility that a motion pursuant to Rule 60 of the Federal Rules of Civil Procedure may be filed with respect to such order. "GECC" shall mean General Electric Capital Corporation. "GECC Loan Agreement" shall mean that certain $15,000,000 Senior Secured Super Priority, Debtor-in-Possession Revolving Credit Agreement dated as of November 18, 1996 among GECC and the Debtors. "General Unsecured Claim" shall mean any Claim against a Debtor that is not a Secured Claim, an Administrative Claim, a Priority Tax Claim or a Priority Non-tax Claim. "Lawsuits" shall mean those actions pending (a) in the United States District Court, Western District of Texas, San Antonio Division, styled as 50- OFF Stores, Inc. v. Banque Paribas (Suisse) S.A., et al., Case No. A-2 SA-95-CA-0159; and (b) in the Texas District Court for Bexar County, styled as 50-OFF Stores, Inc. v. Jefferies & Company, Inc. & Jefferies Int'l. Ltd.,Cause No. 96-CI-00349 and any and all claims or causes of actions arising from the transactions described within such Lawsuits whether presently known or unknown, asserted or unasserted. "MetLife" shall mean MetLife Capital Corporation. "MetLife Settlement Agreement" shall mean that certain agreement dated March 20, 1997, by and between the Debtors and MetLife, which final agreement was filed with the Bankruptcy Court on March 20, 1997 and which was approved by the Bankruptcy Court pursuant to the MetLife Settlement Order. "Net Lawsuits' Proceeds" shall mean all proceeds derived from the Lawsuits, net of: (1) all contingency fees paid or owing to counsel for the Reorganized 50-OFF Companies which prosecuted such Lawsuits, including the reimbursement of expenses to such counsel; (2) the reimbursement to the Reorganized 50-OFF Companies of all expenses incurred by them in connection with the prosecution of such Lawsuits since the Petition Date; (3) all fees and expenses paid by the Reorganized 50-OFF Companies to the Class 7 Agent and its Professional Persons; and (4) the Chapter 11 Professional Fee Carve-Out. "Old Common Stock" shall mean 50-OFF Old Common Stock. "Petition Date" shall mean October 9, 1996. "Plan" or "Plan of Reorganization" shall mean the Joint Plan of Reorganization, as Amended, dated March 27, 1997, either in its present form or as it may hereafter be altered, amended or modified from time to time. "Plan Documents" shall mean the documents that aid in effectuating the Plan as specifically identified as such in the Plan or as attached as exhibits thereto, which will be substantially in the respective forms filed by the Debtors with the Bankruptcy Court. "Plan Secured Note" shall mean a promissory note made payable jointly and severally by the Reorganized 50-OFF to a holder of an Allowed Secured Claim in certain Classes of the Plan. Each such Plan Secured Note shall be in an amount equal to the amount of such Allowed Secured Claim, bear simple interest at the Post-confirmation Interest Rate and provide for full amortization of all principal and interest in equal annual payments over seven years from the Distribution Date; provided, however, that if such Allowed Secured Claim is less than $50,000, then the full amortization of all principal and interest shall be in equal quarterly payments over three years from the Distribution Date; provided, however, that if the Allowed Secured Claim is held by an Ad Valorem Taxing Authority, then the full amortization of all principal and interest shall be in equal quarterly payments over six years from the Distribution Date, without regard to the amount of the Claim. "Post-confirmation Interest Rate" shall mean simple interest at the rate equal to the yield upon United States Treasury Bonds having a maturity as near to, but greater than, seven years after the date that the Confirmation Hearing commences, as such yield is published in the Wall Street Journal on the day that the Confirmation Hearing commences, or such other rate as the Bankruptcy Court may determine at the Confirmation Hearing is appropriate. "Pro Rata Share" shall mean the proportion that the amount of an Allowed Claim in a particular class of Claims bears to the aggregate amount of all Claims in such class of Claims, including Contested Claims, but not including Disallowed Claims. "Proponents" shall mean, collectively, the Debtors. "Public Equity Interests" shall mean the Equity Interests in 50-OFF as of the Voting Record Date, March 21, 1997, but only the Old Common Stock and not any warrants or options with regard to such Common Stock which have not been fully exercised. A-3 "Reorganized 50-OFF" shall mean collectively the Debtors, as reorganized, on and after the Effective Date. "Reorganized 50-OFF Common Stock" shall mean new Common Stock. "Rights Offering Deadline" shall mean May 20, 1997, unless extended in the sole discretion of the Debtors. The Rights Offering Deadline shall be the deadline for the Escrow Agent to receive all items and payments necessary for the purchase of Reorganized 50-OFF Rights Offering Units pursuant to the Rights Offering. "Rights Offering Record Date" shall mean March 21, 1997, the date fixed by the Bankruptcy Court as the Voting Record Date. The Rights Offering Record Date shall be the date to determine the holders of Old Common Stock which may purchase Units pursuant to the Rights Offering. "Senior Liens" shall mean any lien securing any Allowed Secured Claim of: (1) MetLife on the FF&E as such lien may have existed on the Petition Date or as it may be granted pursuant to the Plan; and (2) any contractual lien in favor of a landlord of the Debtor(s) which was validly attached and properly perfected prior to the Petition Date, which liens shall be senior to any Senior Secured Exit Financing as to the Collateral held by such Lienholder. "Series A Preferred Stock" shall mean the new Series A Preferred Stock to be authorized for Reorganized 50-OFF pursuant to the Plan. "Series A Preferred Stock Certificate of Designation" shall mean that certain Series A Preferred Stock Certificate of Designation attached hereto as Appendix "B." "Series B Preferred Stock" shall mean the new Series B Preferred Stock to be authorized for Reorganized 50-OFF pursuant to the Plan. "Series B Preferred Stock Certificate of Designation" shall mean that certain Series B Preferred Stock Certificate of Designation attached hereto as Appendix "C." "Series B Preferred Stock Lien" shall mean the Lien granted to holders of Series B Preferred Stock as described in Paragraph 6.2(f)(i) of the Plan. "Units" shall mean Reorganized 50-OFF Rights Offering Units. "Voting Record Date" shall mean March 21, 1997, the date set by the Bankruptcy Court for determining the holders of Public Equity Interests entitled to vote to accept or reject the Plan. "Voting Deadline" shall mean May 20, 1997, the date set by the Bankruptcy Court by which Ballots for accepting or rejecting the Plan must be received by the Person appointed in the Chapter 11 Cases for tabulating such Ballots. A-4 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE PLAN OF REORGANIZATION, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIEF UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION ON AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ---------------- TABLE OF CONTENTS
PAGE ---- Introduction............................................................... 1 Certain Risk Factors....................................................... 2 The Company................................................................ 7 Business................................................................... 17 Management................................................................. 20 Business Plan.............................................................. 26 Material Litigation........................................................ 30 The Offering............................................................... 32 Description of Securities.................................................. 37 Plan of Reorganization..................................................... 41 Legal Opinion.............................................................. 55 Experts.................................................................... 55 Available Information...................................................... 55 Index to Consolidated Financial Statements................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 50-OFF STORES, INC. RIGHTS TO PURCHASE UNITS MAXIMUM 122,009 UNITS MINIMUM 30,500 UNITS 7,320,540 SHARES OF COMMON STOCK 2,440,180 SHARES OF SERIES A PREFERRED STOCK ---------------- PROSPECTUS ---------------- June 11, 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses (other than underwriting discounts and commissions) in connection with the issuance and distribution of the securities registered hereby are as follows: SEC registration fee............................................... $ 3,697 Legal fees and expenses............................................ 80,000 Accounting fees and expenses....................................... 25,000 Blue Sky fees and expenses......................................... 30,000 Printing and engraving expenses.................................... 67,000 -------- Total............................................................ $205,697 ========
- -------- The foregoing expenses will be paid by the Registrant. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Pursuant to provisions of the Delaware General Corporation Law, the Certificate of Incorporation (and prospective Restated Certificate of Incorporation) of Registrant (the "Company") includes a provision which eliminates the personal liability of its directors to the Company and its stockholders for monetary damage to the fullest extent permissible under Delaware law. This provision does not eliminate liability (a) for any breach of a director's duty of loyalty to the Company or its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) in connection with payment of any illegal dividend or an illegal stock repurchase; or (d) for any transaction from which the director derives an improper personal benefit. Further, this provision has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to the Company's stockholders for any violation of a director's fiduciary duty to the Company or its stockholders. Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a corporation to indemnify any person ("indemnitee") who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of the corporation) because such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation in a similar position with another corporation or entity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. With respect to actions or suits by or in the right of the corporation, however, an indemnitee who acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation is generally limited to attorneys' fees and other expenses, and no indemnification shall be made if such person is adjudged liable to the corporation unless and only tot he extent that a court of competent jurisdiction determines that indemnification is appropriate. Section 145 further provides that any indemnification shall be made by the corporation only as authorized in each specific case upon a determining by the (i ) board of directors by a majority vote of directors who were not parties to such action, suit or proceeding even though less than a quorum, (ii) independent counsel if there are no such disinterested directors or if such directors so direct, or (iii) stockholders, that indemnification of the indemnitee is proper because he has met the applicable standard of conduct. Section 145 provides that indemnification pursuant to its provisions is not exclusive of other rights of indemnification to which a person may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. II-1 The Company's Certificate of Incorporation (and prospective Restated Certificate of Incorporation) and Bylaws (and prospective Amended and Restated Bylaws) require the Company to indemnify its officers, directors and employees (and agents under the Bylaws and prospective Amended and Restated Bylaws only) to the fullest extent permitted by Delaware law. An insurance policy obtained by the registrant provides for indemnification of officers and directors of the Registrant and certain other persons against liabilities and expenses incurred by any of them in certain stated proceedings and under certain stated conditions. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. No securities were sold by the Registrant within the past 3 years. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits 2.1 Disclosure Statement, including Joint Plan of Reorganization, as amended*** 2.2 Letter to Stockholders, Expression of Interest, Ballot, Chapter 7 Liquidation Analysis, and Executory Contracts and Leases to be Assumed and Cure Payments**** 2.3 Confirmation Order**** 3.1 Certificate of Incorporation* 3.2 Restated Certificate of Incorporation to be effective on the Effective Date****(1) 3.3 Bylaws* 3.4 Amended and Restated Bylaws to be effective on the Effective Date**** 4.1 Certificate of Designation for Series A Preferred Stock to be effective on the Effective Date****(1) 4.2 Certificate of Designation for Series B Preferred Stock to be effective on the Effective Date****(1) 4.3 Escrow Agreement**** 4.4 Subscription Exercise Form and Instructions**** 5.1 Opinion of Sheinfeld, Maley & Kay, P.C.**** 5.2 Opinion of Akin, Gump, Strauss, Hauer & Feld LLP**** 10.1 Stock Option Plan to be effective on the Effective Date**** 10.2 Loan Agreement with General Electric Capital Corporation*** 10.3 Promissory Note, Security Agreement, Trademark and License Security Agreement, Stock Pledge Agreement, Guaranty, and Assignment of Partnership Interest with General Electric Capital Corporation**** 21 Subsidiaries of the Registrant** 23.1 Consent of Deloitte & Touche LLP**** 23.2 Consent of Sheinfeld, Maley & Kay, P.C. (included in Exhibit 5.1)**** 23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, LLP (included in Exhibit 5.2)**** 24 Power of Attorney (included on signature page) 27 Financial Data Schedule****(1) 99.1 Notification of resignation to SEC by directors Raines and Lehrman**** 99.2 Consents of persons about to become directors****
- -------- * Contained in exhibits to the Registration Statement No. 33-48216 on Form S-4 filed with the Securities and Exchange Commission on July 28, 1992. ** Contained in exhibits to the annual report on Form 10-K for the fiscal year ended January 29, 1993. *** Contained in exhibits to the Registration Statement No. 333-25061 on Form S-1 filed with the Securities and Exchange Commission on April 11, 1997. **** Filed herewith. (1) Replaces and supercedes document filed as an exhibit to the Registration Statement No. 333-25061 on Form S-1 filed with the Securities and Exchange Commission on April 11, 1997. (b) Financial Statement Schedules None. II-2 ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post- effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions set forth or described in Item 14 of the Registration Statement, or otherwise, the registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Exchange Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling proceeding, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Exchange Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer and the terms of any subsequent reoffering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Antonio, State of Texas, on June 11, 1997. 50-0FF STORES, INC. BY: Charles J. Fuhrmann II ----------------------------------- CHARLES J. FUHRMANN II, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Charles J. Fuhrmann II and James G. Scogin, and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any or all further amendments to this Registration Statement (including post-effective amendments), and to file the same with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each of said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person hereby ratifying and confirming that each of said attorneys-in-fact and agents or his substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement has been signed below by the following persons in the capacities and on the dates indicated below. NAME TITLE DATE /s/ Charles J. Fuhrmann II President, Chief - ------------------------------------- Executive and Financial June 11, 1997 CHARLES J. FUHRMANN II Officer and Director (Principal Executive and Financial Officer) /s/ James G. Scogin Vice President, - ------------------------------------- Controller, Chief June 11, 1997 JAMES G. SCOGIN Accounting Officer, Assistant Secretary (Principal Accounting Officer) /s/ Cecil Schenker Director June 11, 1997 - ------------------------------------- CECIL SCHENKER II-4 INDEX TO EXHIBITS
SEQUENTIAL EXHIBIT NUMBERED NUMBER EXHIBIT PAGE ------- ------- ---------- 2.1 Disclosure Statement, including Joint Plan of Reorganization, as amended*** 2.2 Letter to Stockholders, Expression of Interest, Ballot, Chapter 7 Liquidation Analysis, and Executory Contracts and Leases to be Assumed and Cure Payments**** 2.3 Confirmation Order**** 3.1 Certificate of Incorporation* 3.2 Restated Certificate of Incorporation to be effective on the Effective Date****(1) 3.3 Bylaws* 3.4 Amended and Restated Bylaws to be effective on the Effective Date**** 4.1 Certificate of Designation for Series A Preferred Stock to be effective on the Effective Date****(1) 4.2 Certificate of Designation for Series B Preferred Stock to be effective on the Effective Date****(1) 4.3 Escrow Agreement**** 4.4 Subscription Exercise Form and Instructions**** 5.1 Opinion of Sheinfeld, Maley & Kay, P.C.**** 5.2 Opinion of Akin, Gump, Strauss, Hauer & Feld LLP**** 10.1 Stock Option Plan to be effective on the Effective Date**** 10.2 Loan Agreement with General Electric Capital Corporation*** 10.3 Promissory Note, Security Agreement, Trademark and License Security Agreement, Stock Pledge Agreement, Guaranty, and Assignment of Partnership Interest with General Electric Capital Corporation**** 21 Subsidiaries of the Registrant** 23.1 Consent of Deloitte & Touche LLP**** 23.2 Consent of Sheinfeld, Maley & Kay, P.C. (included in Exhibit 5.1)**** 23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, LLP (included in Exhibit 5.2)**** 24 Power of Attorney (included on signature page) 27 Financial Data Schedule****(1) 99.1 Notification of resignation to SEC by directors Raines and Lehrman**** 99.2 Consents of persons about to become directors****
- -------- * Contained in exhibits to the Registration Statement No. 33-48216 on Form S-4 filed with the Securities and Exchange Commission on July 28, 1992. ** Contained in exhibits to the annual report on Form 10-K for the fiscal year ended January 29, 1993. *** Contained in exhibits to the Registration Statement No. 333-25061 on Form S-1 filed with the Securities and Exchange Commission on April 11, 1997. **** Filed herewith. (1) Replaces and supercedes document filed as an exhibit to the Registration Statement No. 333-25061 on Form S-1 filed with the Securities and Exchange Commission on April 11, 1997. EX-2.2 2 LETTER TO STOCKHOLDERS & MISC ADDENDUM MATERIAL EXHIBIT 2.2 March 27, 1997 To Our Stockholders: The purpose of this letter is to advise you of the important progress made in the reorganization of our Company and of your opportunity to participate as an owner in our post-bankruptcy operations. THE PLAN OF REORGANIZATION - -------------------------- Enclosed please find our Disclosure Statement dated March 27, 1997. This Disclosure Statement relates to the Plan of Reorganization, as Amended (the "Plan") proposed by 50-OFF Stores, Inc. and our significant affiliates (collectively, our "Company"), all of which filed voluntary chapter 11 bankruptcy on October 9, 1996. The Plan provides a mechanism for our Company to emerge from chapter 11 as a reorganized, viable business concern, and includes an important offer to our current Stockholders, whose interests will otherwise be canceled on the Effective Date of the Plan. The Official Committee for the Unsecured Creditors has expressed its unanimous support for the Plan, as has MetLife Capital Corporation, an impaired, secured creditor of our Company. General Electric Capital Corporation, the current provider of debtor-in-possession financing for our Company, has expressed its interest in providing the Senior Secured Exit Financing required by the Plan. WE URGE YOU TO SEND IN YOUR BALLOTS PROMPTLY AND TO VOTE TO ACCEPT THE PLAN. The Plan is the result of a substantial amount of hard work and negotiations with creditors of our Company. As a result of those negotiations, the reorganized Company will emerge from bankruptcy with over 70% of our debt eliminated, and management has secured the right of our existing Stockholders to buy new equity in the newly reorganized Company on an advantageous basis. THE OFFERING - ------------ The Plan offers our Stockholders of record March 21, 1997 the right to buy Units which consist of 20 shares of reorganized 50-OFF Series A Preferred Stock and 20 shares of reorganized 50-OFF Common Stock for a price of $100 per Unit (the "Offering"). Of that price, and for basis purposes, $60, or $3.00 per share, is being allocated to the purchase of the Series A Preferred Stock and $40, or $2.00 per share, is being allocated to the purchase of the new Common Stock. Letter to Stockholders March 27, 1997 Page 2 The Plan provides that holders of Series A Preferred Stock will be entitled to: a liquidation preference in the amount of $5 per share of Series A Preferred Stock and cumulative dividends of 5.5% of such Preferred Stock's liquidation value per year ($5.50 per Unit). The Series A Preferred Stock is also convertible into two shares of new Common Stock. Participants in this Offering will hold ALL of the new Common Stock issued pursuant to the Plan. SIGNIFICANT CHANGES IN THE COMPANY'S OPERATIONS - ----------------------------------------------- In the course of the reorganization process, many positive changes have occurred in the core business of our Company. These changes include: . Our Company is being lead by new management (including my position as President of our Company for less than one year) and a new Board of Directors that are committed and motivated to maximize the value of the reorganized Company's equity securities. . Our Company has used the bankruptcy process to close undesirable store locations and retrench geographically; it is now operating a carefully selected, core group of 41 stores (selected from the 101 stores formerly operated), each of which has demonstrated the capacity to operate profitably. The bankruptcy filing allowed the rejection of the lease obligations on the other store locations with no out-of-pocket payment by our Company. . Our Company is implementing a program to convert our continuing stores from the old "50-OFF" off-price retailing concept with its strong weighting of softline inventories to our new "LOT$OFF" closeout retailing concept with a majority of inventories in hardlines. Results have been encouraging in the stores that have been converted to date. This conversion is not merely a name change; it is a continuation of our commitment to carry a broader mix of inventory at closeout prices. The concept we are implementing with the LOT$OFF stores has been implemented successfully by other retail chains which are experiencing large increases in sales and profits and which enjoy high earnings multiples for their equities in the stock market. . Increased discipline and the downsizing in the number of stores we operate have allowed our Company to reduce our corporate staff and other store support overhead substantially. Today, our Company employs 44 full time employees at our store support center, and in the field providing other store support services, at a total payroll cost of approximately $2.0 million per year. Approximately one year ago, our Company had 147 such employees at a total payroll cost of $4.9 million per year. This reduction alone should have a meaningful and favorable impact on our bottom line. Letter to Stockholders March 27, 1997 Page 3 . We have recently sold the corporate headquarters building and leased back only that portion of the building actually needed for our continuing operations. The sale eliminated substantial additional overhead at the corporate level and has also allowed our Company to direct meaningful cash resources to restocking our remaining stores with more appropriate inventory levels, which should lead to increased sales and profitability. . Our Company has filed two major lawsuits to recover damages related to our issuance of securities in late fiscal 1995 (the "Lawsuits"). In this securities offering, our Company placed 1.5 million shares of our Common Stock in escrow pending receipt of the agreed purchase price of $3.65 per share ($5,475,000, in the aggregate). Before any of the purchase price was paid, our Common Stock was released to the putative buyers who subsequently traded the stock in the open market and disappeared. We have sued various parties involved in the transaction; one of the Lawsuits is currently set for trial in August 1997, and the second is "specially" set in October 1997. We expect that, within this calendar year, the Lawsuits will be resolved, and we have a high expectation that favorable recoveries will be made. Any such recoveries will add important resources to our implementation of the closeout retailing concept and, coupled with the required proceeds of the Offering and the Senior Secured Exit Financing facility, should accelerate our reaching the "Target" operating results in our business plan (summarized in the Disclosure Statement). . Under the Plan, over $25 million of liabilities are being eliminated as liabilities from 50-OFF's balance sheet, while substantial other liabilities are being compromised and/or paid out over significant periods of time. . The Company obtained a new revolving, asset based lending facility from General Electric Capital Corporation during its chapter 11 proceeding. This new facility has substantially better terms than the prior facility, including a favorable interest rate. The Company is optimistic that this relationship will continue after bankruptcy and, although no definitive agreement has been signed, we have received a letter from General Electric Capital Corporation formally expressing its interest in providing the Senior Secured Exit Financing required on the Effective Date of the Plan. . Under the Plan, the general unsecured creditors are given a lien on the net proceeds of the Lawsuits (see the Plan and Disclosure Statement regarding such lien); however, pursuant to the Plan and so long as the reorganized Company is not in liquidation, general unsecured creditors are REQUIRED to buy Series A Preferred Stock, including their initial positions, for $5 per share upon receipt of any Net Lawsuits' Proceeds. Under the Offering, current Stockholders are buying one share of Series A Preferred Stock AND one share of new Common Stock for $5.00. Letter to Stockholders March 27, 1997 Page 4 YOUR DECISION - ------------- The Bankruptcy Court may not confirm the Plan without adequate commitments to buy the Units. Your subscription for the Units is, therefore, extremely important to the future of our Company. WE STRONGLY URGE YOU TO PURCHASE THE UNITS BEING OFFERED TO YOU IN THE PLAN. To subscribe for the purchase of Units in the Offering pursuant to the Plan, fill out the NON-BINDING Expression of Interest in Purchasing Rights Units form and return the completed form consistent with the instructions. You will then receive a Subscription Exercise Form for execution to return with your check, or wire for the full purchase price of the number of Units for which you wish to subscribe. Your funds will be held in escrow by Bank One, Texas N.A. until the Offering closes. If the Offering does not close, your funds will be returned to you by Bank One, Texas, N.A. Complete instructions are included in the Plan and the Disclosure Statement. As with any investment, risks are associated with the purchase of the Series A Preferred Stock and the new Common Stock. You are urged to read this Disclosure Statement in its entirety for a description of the reorganized Company's prospects, the associated risks and detailed discussions of each of the matters outlined above. Your prompt consideration of this important matter is appreciated. Sincerely, /s/ CHARLES J. FUHRMANN II Charles J. Fuhrmann II President, CEO & CFO ================================================================================ 50-OFF STORES, INC. EXPRESSION OF INTEREST IN PURCHASING RIGHTS OFFERING UNITS (NON-BINDING) ---------------------------------------------------------- As of the close of business on March 21, 1997, the undersigned was the record or beneficial owner of the following number of shares of common stock of 50-OFF Stores, Inc. -------------------- Pursuant to its Plan of Reorganization, as amended, 50-OFF Stores, Inc. is offering its stockholders of record (as of March 21, 1997) the right to purchase Rights Offering Units at $100 each (each such Unit consists of 20 shares of Series A Preferred Stock and 20 Shares of New Common Stock both in reorganized 50-OFF Stores, Inc.). By signing below, you hereby express an interest in purchasing the following number of such Units (this expression of interest is non-binding; you are not required to purchase such Units by signing this document): -------------------- If you express a favorable interest, a binding Subscription Exercise Form for Rights Offering, together with instructions, will be mailed to you at the address below. To exercise your right to purchase Units you must complete the Subscription Exercise Form for Rights Offering and return it with the full purchase price on or before May 20, 1997. You will not be obligated to purchase the Units unless and until you sign and return the Subscription Exercise Form for Rights Offering. PLEASE RETURN THIS EXPRESSION OF INTEREST PROMPTLY TO PROVIDE YOU WITH SUFFICIENT TIME TO RECEIVE AND RETURN THE SUBSCRIPTION EXERCISE FORM FOR RIGHTS OFFERING PRIOR TO MAY 20, 1997. Upon subscribing, your funds will be held in escrow by Bank One, Texas, N.A. pending receipt of the required minimum number of subscriptions (30,500 Units) and the United States Bankruptcy Court's approving 50-OFF's proposed Plan of Reorganization. Your money will be promptly returned if the required minimum is not subscribed for or the Court does not approve the Plan. THIS FORM WILL BE ACCEPTED VIA FACSIMILE. Date: ----------------------------- Signature: ------------------------------- Name (typed or printed): -------------------------- Address: --------------------------------- ----------------------------------------- ----------------------------------------- Phone ( ) ----------------------------------- ------------------------------- Return completed form to: SHEINFELD, MALEY & KAY, P.C. ATTN: RICHARD G. GRANT 1700 PACIFIC AVENUE, SUITE 4400 DALLAS, TX 75201 FAX: (214) 953-1189 ------------------------------- IMPORTANT NOTICE REGARDING SHARES HELD IN THE NAME OF A STOCK BROKER/DEALER ----------------------------------------- IF YOU ARE THE BENEFICIAL OWNER OF STOCK HELD IN THE NAME OF A STOCK BROKER OR DEALER, YOU SHOULD DISREGARD THE ADDRESS ABOVE AND INSTEAD RETURN THIS EXPRESSION OF INTEREST TO YOUR STOCK BROKER/DEALER, WHO IN TURN WILL INDICATE YOUR INTEREST TO 50-OFF. A SUBSCRIPTION EXERCISE FORM FOR RIGHTS OFFERING WILL BE PROVIDED TO YOU WHICH YOU SHOULD ALSO RETURN TO YOUR STOCK BROKER/DEALER. TO ALLOW SUFFICIENT TIME FOR PROCESSING, YOU SHOULD RETURN THIS EXPRESSION OF INTEREST TO YOUR BROKER/DEALER PRIOR TO APRIL 30, 1997. ============== ================================================================================ United States Bankruptcy Court for the Western District of Texas San Antonio Division In re: (S) (S) 50-OFF STORES, INC., (S) Case No. 96-54430-C through a Delaware corporation; (S) Case No. 96-54433-K, respectively, 50-OFF MULTISTATE OPERATIONS, INC., (S) a Nevada corporation; (S) Jointly Administered under 50-OFF TEXAS STORES, L.P., (S) Case No. 96-54430-C a Texas limited partnership; and (S) 50-OFF OPERATING COMPANY, INC., (S) Chapter 11 a Nevada corporation, (S) (S) Debtors. (S) - -------------------------------------------------------------------------------- BALLOT FOR ACCEPTING OR REJECTING DEBTORS' PLAN OF REORGANIZATION, AS AMENDED - -------------------------------------------------------------------------------- The Debtors' Plan of Reorganization, as Amended, dated March 27, 1997 (the "Plan") and filed jointly by the above-captioned Debtors can be confirmed by the Court and thereby made binding on you if it is accepted by the holders of two- thirds in amount of the equity security interests (i.e., of the shares of stock). In the event that the requisite acceptances are not obtained, the Court may nevertheless confirm the Plan if the Court finds that the Plan accords fair and equitable treatment to the class rejecting it and otherwise satisfies the requirements of section 1129(b) of the Bankruptcy Code. To have your vote counted, you must complete and return this ballot to: Sheinfeld, Maley & Kay, P.C. Attn: Richard G. Grant 1700 Pacific, Suite 4400 Dallas, Texas 75201-4618 Facsimile No. 214-953-1189 All ballots must be received at the above address on or prior to May 20, 1997 at 5:00 Central Time. Any ballot received after this date will not be counted. Ballots that are untimely, unsigned or not properly completed may not be counted. Ballots will be accepted by telecopy; however, no assurances can be made that the telecopy number above will not be busy, especially near the deadline when numerous ballots may be forthcoming. The risk of timely delivery is upon the voting stockholder. No confirmation of receipt will be provided. IF YOU ARE THE BENEFICIAL OWNER OF STOCK HELD IN THE NAME OF A STOCK BROKER/DEALER: YOU SHOULD DISREGARD THE ADDRESS ABOVE AND INSTEAD RETURN THIS BALLOT TO STOCK BROKER/DEALER, WHO IN TURN WILL VOTE YOUR STOCK ON YOUR BEHALF IN THE MANNER THAT YOU HAVE INDICATED ON THIS BALLOT. YOUR BROKER/DEALER MUST VOTE PRIOR TO MAY 20, 1997, THUS YOU SHOULD RETURN YOUR BALLOT TO YOUR BROKER/DEALER IN SUFFICIENT TIME TO ENSURE SUFFICIENT TIME FOR YOUR BROKER/DEALER TO CAST YOUR VOTE PRIOR TO MAY 20, 1997. PREFERRABLY, YOU SHOULD RETURN YOUR BALLOT TO YOUR BROKER/DEALER ON OR BEFORE APRIL 30, 1997. - -------------------------------------------------------------------------------- YOUR VOTE - CHECK ONLY ONE BOX: - -------------------------------------------------------------------------------- The undersigned, the beneficial or record holder of _______________ shares of common stock in 50-OFF Stores, Inc. hereby votes as follows with regard to the Plan: [_] ACCEPTS [_] REJECTS - -------------------------------------------------------------------------------- DATED: _______________________, 1997. Name of Voting Shareholder (Print or Type): -------------------------------- Signature: -------------------------------- Name of Signatory: -------------------------------- Office or Title of Signatory (if applicable): -------------------------------- Street Address: -------------------------------- City/State/Zip: -------------------------------- Telephone: -------------------------------- IF YOU WISH TO SUBSCRIBE FOR UNITS IN THE RIGHTS OFFERING, YOU MUST ALSO FILL OUT AND RETURN THE EXPRESSION OF INTEREST IN PURCHASING RIGHTS OFFERING UNITS HYPOTHETICAL CHAPTER 7 LIQUIDATION ANALYSIS PRO FORMA FOR MARCH 1, 1997
ASSETS ASSUMPTIONS 000'S - ------ ----------- ------- Cash 3 Days Float $ 475 Inventory 74% of Cost 11,822 FF&E 70% of Stipulated Fair Market Value 829 Prepaids and Other 100 ------- Total Assets $13,226 SECURED CLAIMS - -------------- GECC 57% of Inventory Cost Less Reserves $ 8,206 MetLife Value of FF&E 829 Professional Carve-out Inventory Portion 300 Total Secured Claims $ 9,335 ------- NET UNENCUMBERED PROCEEDS $ 3,891 - ------------------------- ======= CHAPTER 7 EXPENSES - ------------------ Trustee's Fees 3% of Unencumbered Assets $ 117 Professional Fees Trustee's Counsel and Accountant 250 Lawsuit "Warchest" 300 Miscellaneous Office Rental, Storage, Insurance and Other 35 ------- Total Chapter 7 Expenses $ 702 CHAPTER 11 EXPENSES AND PRIORITY CLAIMS - --------------------------------------- Chapter 11 Professionals 2 Months at 150, Plus Unpaid (Less Carve-out) $ 325 Post-petition Trade Payables Merchandise 1,000 Payroll One Payroll, In Arrears, Due 3/1/97 327 Insurance 100 Rent October Stub for Occupied Property 752 Unpaid Occupancy Costs Utilities, Phone, Etc. 250 Sales Tax Prepetition and Unpaid Post-petition at 3/1/97 600 Property Taxes 1996 and 1997 on 44 Stores Only 740 Accrued and Unpaid Overhead 200 ------- Total Chapter 11 Expenses and Priority Claims $ 4,294 TOTAL CHAPTER 7 AND 11 EXPENSES AND - ----------------------------------- PRIORITY CLAIMS $ 4,996 - --------------- ------- NET AVAILABLE TO NON-PRIORITY, UNSECURED - ---------------------------------------- CREDITOS/1/ $(1,105) - ----------- =======
________________________________________ /1/ Excludes any consideration of Net Lawsuits' Proceeds. EXHIBIT "A" TO THE DEBTORS' JOINT PLAN OF REORGANIZATION, AS AMENDED EXECUTORY CONTRACTS AND LEASES TO BE ASSUMED AND CURE PAYMENTS ------------------------------- PART 1 - STORE LEASES (42 LEASES CONSTITUTING 41 STORE LOCATIONS)
- -------------------------------------------------------------------------------------------------------------------- STORE CITY STREET ADDRESS LANDLORD NAME CURE AMOUNT STORE NO. NO. - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- 854 Albuquerque 9500 Montgomery Blvd., Ste. 5 Sentinel Associates 16,000.00 854 - -------------------------------------------------------------------------------------------------------------------- 935 Albuquerque 5555 Zuni Road S.E. WalMart Stores, Inc. 11,150.62 935 - -------------------------------------------------------------------------------------------------------------------- 846 Albuquerque 4201 Central Blvd. N.W. WalMart Stores, Inc. 13,346.82 846 - -------------------------------------------------------------------------------------------------------------------- 821 Amarillo 3415 Bell Street Amarillo Centers Inc. 26.69 821 C/O Weingarten Realty - -------------------------------------------------------------------------------------------------------------------- 833 Austin 5441 North IH-35 Capital/Highway 35, Ltd. c/o 21,794.66 833 Cencor Realty Service, Inc. - -------------------------------------------------------------------------------------------------------------------- 859 Baton Rouge 7389 Florida Blvd. Bon Marche Mall 14,816.08 859 c/o Sentinel Associates - -------------------------------------------------------------------------------------------------------------------- 858 Baton Rouge 5151 Plank Street Delmont Village S.C. 16,038.71 858 - -------------------------------------------------------------------------------------------------------------------- 843 Bossier City 1701 Old Minden Road Heart O Bossier S.C. c/o Latter & 14,534.92 843 Blum - -------------------------------------------------------------------------------------------------------------------- 825 Brownsville 812 North Expressway Fausto Yturria, Jr. 7,096.77 825 - -------------------------------------------------------------------------------------------------------------------- 822 Corpus Christi 4717 S. Padre Island Dr. Padre Everheart Corp. 24,143.22 822 - -------------------------------------------------------------------------------------------------------------------- 850 Dallas 220 Wynnewood Village Bellaire Capital Partnership LP 17,819.91 850 - -------------------------------------------------------------------------------------------------------------------- 847 Dallas 117-123 Pleasant Grove Shopping Pleasant Grove S.C., Inc. c/o 23,345.83 847 Center Intershop - -------------------------------------------------------------------------------------------------------------------- 873 El Paso 5567 Alameda Avenue Nussbaum, Torres & Co., PC -- 31,452.84 873 RPM Fox Plaza - -------------------------------------------------------------------------------------------------------------------- 813 El Paso 1323 Lee Trevino Road The Steel Corp. of Texas 18,565.01 813 - -------------------------------------------------------------------------------------------------------------------- 879 Garland 3359 W. Walnut Ste. 100 Holly Webber, Inc. c/o Quine & 19,379.35 879 Assoc - -------------------------------------------------------------------------------------------------------------------- 871 Gretna #8 Westside Shopping Center Sarpy Properties, Inc. 17,146.66 871 Westside North Shopping Center - -------------------------------------------------------------------------------------------------------------------- 839 Haltom City 3125 Denton Highway N.S. Joint Venture c/o Quine & 6,700.00 839 Assoc. - -------------------------------------------------------------------------------------------------------------------- 831 Harlingen 901 N. 13th Street, Space 26 Spigel Properties 12,629.37 831 - -------------------------------------------------------------------------------------------------------------------- 851 Houston 1238 Uvalde Bellaire Capital Partnership LP 16,196.66 851 - -------------------------------------------------------------------------------------------------------------------- 845 Houston 11737 Eastex Freeway CenterAmerica Property Trust, LP 17,634.90 845 - -------------------------------------------------------------------------------------------------------------------- 861 Houston 6059 SLE 610 at Long J. Michael Epstein or Bob Sisson 12,938.28 861 - -------------------------------------------------------------------------------------------------------------------- 852 Houston 201 Northline Mall Northline Joint Venture c/o 14,534.98 852 Manley, Berenson & Assoc. - -------------------------------------------------------------------------------------------------------------------- 883 Laredo 4510 San Bernardo Avenue WalMart Stores, Inc. 22,964.07 883 - --------------------------------------------------------------------------------------------------------------------
Page 1 - -------------------------------------------------------------------------------- Exhibit "A" to the Debtors' Joint Plan of Reorganization, as Amended--Executory Contracts and Leases to be Assumed and Cure Payments
- -------------------------------------------------------------------------------------------------------------------- STORE CITY STREET ADDRESS LANDLORD NAME CURE AMOUNT STORE NO. NO. - -------------------------------------------------------------------------------------------------------------------- 912 Lawton 50 N. Sheridan Road Rogers Commercial Properties 9,724.69 912 - -------------------------------------------------------------------------------------------------------------------- 818 Lubbock 5025-B 50th Street Equity Development Corp. 20,714.00 818 - -------------------------------------------------------------------------------------------------------------------- 896 McAllen 123 S. Main Street Omega Realty, Inc. 24,302.81 896 - -------------------------------------------------------------------------------------------------------------------- 880 Memphis 1367 Poplar Avenue Boyle Investment Co. 13,833.34 880 -- D Canale & Co. - -------------------------------------------------------------------------------------------------------------------- 809 Midland 3111 B. Cuthbert Street 3111 Cuthbert Corporation 15,820.38 809 - -------------------------------------------------------------------------------------------------------------------- 867 Midwest City 160 Air Depot Road Weingarten/Oklahoma Inc. 3,894.50 867 - -------------------------------------------------------------------------------------------------------------------- 832 Oklahoma City 2908 S.W. 29th Street Economy Square Inc. 15,653.80 832 - -------------------------------------------------------------------------------------------------------------------- 840 Oklahoma City 7357 South Shields South Shields #1 Ltd. c/o J. Herzog 6,194.64 840 - -------------------------------------------------------------------------------------------------------------------- 810 Pharr 500 North Jackson Road WalMart Stores, Inc. 37,623.15 810 - -------------------------------------------------------------------------------------------------------------------- 814 Roma River View Shopping Center Hwy. 83 Armando Pena 11,299.77 814 - -------------------------------------------------------------------------------------------------------------------- 814A Roma Riverview Shopping Plaza Jose Cantu 3,936.00 814A - -------------------------------------------------------------------------------------------------------------------- 933 San Antonio 4100 S. New Braunfels, Ste. 912 Bexar McCreless Corp 20,000.00 933 c/o MEPC Mgmt - -------------------------------------------------------------------------------------------------------------------- 802 San Antonio 1007 South W.W. White Road HEB Store Property #1 9,102.67 802 - -------------------------------------------------------------------------------------------------------------------- 894 San Antonio 1745 S.W. Loop 410 Las Vegas Boys & Girls Club 31,177.56 894 Foundation - -------------------------------------------------------------------------------------------------------------------- 842 San Antonio 4252 Fredericksburg Rd #A18 Madison Marquette Realty Services 15,838.70 842 - -------------------------------------------------------------------------------------------------------------------- 801 San Antonio 803 Castroville Road #418 TCP Las Palmas Partners, Ltd. 27,563.91 801 - -------------------------------------------------------------------------------------------------------------------- 812 San Antonio 2555 S.W. Military Road W-D Enterprises 33,367.76 812 - -------------------------------------------------------------------------------------------------------------------- 838 Shreveport 2707 West 70th Street The Penn Mutual Life Ins. Co. 5,668.50 838 - -------------------------------------------------------------------------------------------------------------------- 824 Waco 253-A Lake Air Center Spigel Properties 15,000.00 824 - -------------------------------------------------------------------------------------------------------------------- 690,972.53 - --------------------------------------------------------------------------------------------------------------------
PART 2 - CONTRACTS AND PERSONAL PROPERTY LEASES
- ----------------------------------------------------------------------------------------------------------------- NAME OF OTHER PARTY TO CONTRACT DESCRIPTION OF CONTRACT CURE AMOUNT - ----------------------------------------------------------------------------------------------------------------- Ford Motor Credit Co. Lease of 1994 Ford Taurus P.O. Box 834101 Vin# 1FALP52UIRA260569 $11,257.53 Richardson, TX 75083-4101 Expires June 1997 - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52UORA259560 Expires July 1997 Car purchased and sold to Doug Sims - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52U5RA252099 Expires July 1997 Car purchased and sold to Kathy Harvey - ----------------------------------------------------------------------------------------------------------------- Lease of 1995 Ford Taurus Vin# 1FALP52U1SA160154 Expires December 1996 ---------------------------------------
Page 2 - -------------------------------------------------------------------------------- Exhibit "A" to the Debtors' Joint Plan of Reorganization, as Amended--Executory Contracts and Leases to be Assumed and Cure Payments
- ----------------------------------------------------------------------------------------------------------------- NAME OF OTHER PARTY TO CONTRACT DESCRIPTION OF CONTRACT CURE AMOUNT - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Explorer Vin# 1FMDU32Y8RUA64631 Expires December 1996 - ----------------------------------------------------------------------------------------------------------------- Lease of 1995 Ford Taurus Vin# 1FALP5ZU4SGZ15368 Expires March 1997 Car totalled, Ford paid by Wassau - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52UORA232472 Expires June 1997 - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52U6RA273883 Expires September 1997 - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP524XRG156904 Expires May 1997 - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52U3RA252098 Expires June 1997 - ----------------------------------------------------------------------------------------------------------------- Lease of 1994 Ford Taurus Vin# 1FALP52U54A159096 Expires May 1997 - ----------------------------------------------------------------------------------------------------------------- Felco Office Systems, Inc. Lease of office copiers and maintenance agreements 1560 Cable Ranch Road - Mita 8585 Copier $ 5,998.64 San Antonio, TX 78245 - Mita 5685 Copier and 1,709.33 - Mita 20 bin sorter 234.91 ---------- $ 7,942.88 - ----------------------------------------------------------------------------------------------------------------- First United Leasing Corporation Lease of mailroom equipment $ 545.42 P. O. Box 828 Expires September 1997 Deerfield, IL 60015-0828 - ----------------------------------------------------------------------------------------------------------------- Advanced Signing Inc. Contract to purchase sign at Albequerque, $ 1,896.00 4202 Dividend NM location in novation of Lease of sign San Antonio, TX 78219 - ----------------------------------------------------------------------------------------------------------------- The Shoftman Company Sublease of space for shoe department $ 0 .00 P.O. Box 4758 at certain continuing locations Tyler, TX 75712 Subleases expire at various dates through 2000 - ----------------------------------------------------------------------------------------------------------------- Fox Foto, Inc. Debtor leases property to photo processing Previously 8758 Tesoro Drive store Expires October 1998 assumed and San Antonio, TX 78217 assigned (no cure owing) - ----------------------------------------------------------------------------------------------------------------- New Texas Media, Inc. Debtor leases office suite to media Previously 8750 Tesoro Drive, Suite One group Expires September 1997 assumed and San Antonio, TX 78217 assigned (no cure owing) - -----------------------------------------------------------------------------------------------------------------
Page 3 - -------------------------------------------------------------------------------- Exhibit "A" to the Debtors' Joint Plan of Reorganization, as Amended--Executory Contracts and Leases to be Assumed and Cure Payments
- ----------------------------------------------------------------------------------------------------------------- NAME OF OTHER PARTY TO CONTRACT DESCRIPTION OF CONTRACT CURE AMOUNT - ----------------------------------------------------------------------------------------------------------------- Casa de Oro Enterprises, Inc. Sublease of space for retail jewelry at 6 locations $ 0.00 147 E. Commerce St. Subleases expire September 1999 San Antonio, TX 78205 - ----------------------------------------------------------------------------------------------------------------- Gibson Greetings, Inc. Sublease of space for greeting card dept. at 13 locations $ 0.00 1431 Greenway Drive, Suite 330 Expires October 1996 Irving, TX 75039 - -----------------------------------------------------------------------------------------------------------------
March 24, 199 Page 4 - -------------------------------------------------------------------------------- Exhibit "A" to the Debtors' Joint Plan of Reorganization, as Amended--Executory Contracts and Leases to be Assumed and Cure Payments EX-2.3 3 CONFIRMATION ORDER EXHIBIT 2.3 UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION In re: (S) (S) 50-OFF STORES, INC., (S) Case No. 96-54430-C through a Delaware corporation; (S) Case No 96-54433-K, respectively, 50-OFF MULTISTATE OPERATIONS, INC. (S) a Nevada corporation; (S) Jointly Administered under 50-OFF TEXAS STORES, L.P., (S) Case No. 96-54430-C a Texas limited partnership:; and (S) 50-OFF OPERATING COMPANY, (S) Chapter 11 a Nevada corporation, (S) Debtors (S) - -------------------------------------------------------------------------------- ORDER CONFIRMING DEBTORS' JOINT PLAN OF REORGANIZATION, AS AMENDED AND MODIFIED - -------------------------------------------------------------------------------- At San Antonio, Texas, on June 3, 1997, the Court convened the confirmation hearing pursuant to 11 U.S.C (S) l128 upon the Debtors' Joint Plan of Reorganization, as Amended, dated March 27, 1997 as modified by the First Modification to Debtors' Joint Plan of Reorganization filed on May 30, 1997, and orally at the confirmation hearing (the Plan)/1/ filed jointly by 50-OFF Stores, Inc., a Delaware corporation (the Parent Debtor), 50-OFF Multistate Operations, Inc., a Nevada corporation, 50-OFF Texas Stores, L.P., a Texas limited partnership, and 50-OFF Operating Company, a Nevada corporation (collectively, including the Parent Debtor, the Debtors). - -------------- /1/ Terms herein shall have the same meaning as set forth in the definitions provided in the Plan. The Court has considered the Plan, the evidence presented, the presentations of counsels, and the results of the voting on the Plan, and, based upon such considerations and the findings of facts and conclusions of law stated in the record at the hearing and/or set forth in the Findings of Fact and Conclusions of Law Regarding Order Confirming Debtors' Plan, hereby ORDERS, ADJUDGES and DECREES as follows: PLAN CONFIRMATION 1. The Plan is in all things CONFIRMED pursuant to 11 U.S.C. (S) 1129. 2. The provisions of the Plan and this Confirmation Order are binding on the Debtors, each Creditor and Interest Holder and each other party in interest in these cases. 3. The Plan shall be and hereby is made binding upon any chapter 7 or chapter 11 trustee which may be appointed in any one or more of these cases. In the event of a conversion of one or more of these cases to chapter 7, the transfers made and obligations incurred or authorized to be made pursuant to the Plan or pursuant to order(s) entered as contemplated by the Plan, including financing to be entered into and all liens granted or authorized to be granted pursuant to the Plan and including all payments of Administrative Claims (including Cure Payments and fees and expenses paid to Professional Persons), shall not be subject to disgorgement or avoidance. 4. As of or following the time at which the conditions to the occurrence of the Effective Date set forth in the Plan are satisfied or duly waived, the appropriate Debtors or Reorganized Debtors shall be, and hereby are authorized to effectuate and perform all transactions, actions and filings contemplated by the Plan, and in each case in accordance with applicable terms of the Plan, the Exhibits thereto and this Confirmation Order with each such transaction, action and filing deemed to have been taken by the unanimous action of directors and stockholders of the ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 2 appropriate Debtor or Reorganized Debtor. Such transactions, actions and filings include, without limitation the following: a. The amendments to and restatement of the Certificate of Incorporation, as evidenced by the Restated Certificate of Incorporation to be filed with the Delaware Secretary of State. b. The amendments to and restatement of the Bylaws, as evidenced by the Amended and Restated Bylaws. c. The creation, establishment and authorization of the Series A Preferred Stock, as evidenced by the Certificate of Designations in respect of Series A Preferred Stock to be filed with the Delaware Secretary of State. d. The creation, establishment and authorization of the Series B Preferred Stock, as evidenced by the Certificate of Designations in respect of Series B Preferred Stock to be filed with the Delaware Secretary of State. e. The reconstitution of the Boards of Directors of the Reorganized Parent Debtor and 50-OFF Operating Company f. The adoption of the Stock Option Plan in satisfaction of the stockholder approval requirement of Section 422 of the Internal Revenue Code of 1986, as amended. g. The authorization, registration, offer, sale and issuance of the Rights, Units, Common Stock and Series A Preferred Stock and the authorization, offer, sale and issuance of the Series B Preferred Stock. When issued, delivered and paid for (if applicable) in accordance with the terms of the Plan and the applicable Plan Documents, each of the Rights, Units, Common Stock, Series A Preferred Stock and Series B Preferred Stock will be duly and validly issued, fully paid and non-assessable. ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 3 h. The obtaining of a secured credit facility including, without limitation, the execution, delivery and performance of a loan agreement, note and security agreement. See Senior Secured Exit Financing, below. 5. Without limiting the generality or effect of any other provision of this Confirmation Order, the appropriate Debtors and Reorganized Debtors shall be, and hereby are specifically authorized and empowered to take any and all such actions as (a) Charles J. Fuhrmann II who is the (i) President of each of the corporate Debtors and corporate Reorganized Debtors, and (ii) the President of the general partner of Texas Stores and the Reorganized Texas Stores, and (b) James G Scogin, who is the (i) Assistant Secretary of each of the corporate Debtors and the Secretary of the corporate Reorganized Debtors, and (ii) the Assistant Secretary of the general partner of Texas Stores and the Secretary of the general partner of the Reorganized Texas Stores (collectively, Messrs. Fuhrmann and Scogin will be referred to as the Designated Officers) may determine are necessary or appropriate to implement, effectuate and consummate the Plan, this Confirmation Order and the transactions respectively contemplated thereby and hereby, all in accordance with the terms of the Plan and this Confirmation Order. Each of the Designated Officers of each Debtor and Reorganized Debtor shall be, and hereby is authorized to execute, deliver, file or record such contracts, instruments, releases, indentures, mortgages, deeds, assignments, leases or other agreements or documents and take such other actions as such Designated Officers may determine are necessary or appropriate to effectuate and further evidence the terms and conditions of the Plan, this Confirmation Order and the transactions respectively contemplated thereby and hereby, all without further application to or order of this Court and whether or not such actions or documents are specifically referred to in the Plan, the Disclosure Statement, this Confirmation Order or the Exhibits to any of the foregoing, and the Secretary or any Assistant Secretary of each such Debtor or Reorganized Debtor shall be, and ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 4 hereby is, authorized to certify or attest to any of the foregoing actions. To the extent that, under applicable non-bankruptcy law, any of the foregoing actions would otherwise require the consent or approval of the directors or stockholders or partners of any Debtor or Reorganized Debtor, this Confirmation Order shall constitute such consent or approval; and such actions shall be, and hereby are, deemed to have been taken by unanimous action of the directors and stockholders, or, with regard to Texas Stores, partners, of the appropriate Debtor or Reorganized Debtor. 6. Bank One, Texas, N.A. (Bank One) is hereby authorized and directed to remit to 50-OFF Stores, Inc. all of the funds which Bank One currently holds in escrow pursuant to the Escrow Agreement attached to the Plan as Exhibit E together with a list of all subscribers which deposited such funds. LIMITED SUBSTANTIVE CONSOLIDATION 7. The Court hereby orders as follows: (1) all intercompany Claims by and among the Debtors are hereby eliminated, (2) any pre-Effective Date obligation of any of the Debtors and all pre-Effective Date guaranties thereof executed by any of the Debtors are hereby deemed to be prepetition joint and several obligations of all of the Debtors, (3) any Claim or Claims filed or to be filed against any of the Debtors are hereby deemed one Claim against each of the Debtors, (4) for purposes of determining the availability of the right of offset under section 553 of the Bankruptcy Code, the Debtors shall be treated as one entity so that, subject to the other provisions of section 553 of the Bankruptcy Code, debts due to any of the Debtors may be offset against the debts of any of the Debtors. 8. The Debtors are hereby consolidated for the limited purposes of voting with regard to the Plan as though the Debtor were a single debtor, nunc pro tunc as of March 27, 1997. ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 5 9 All Claims based upon prepetition guaranties of collection, payment or performance made by one Debtor as to the obligations of any other Debtor are hereby discharged, released and without further force and effect. 10. Neither the Plan nor this Order effectuate a substantive consolidation of the assets of the respective Debtors into a single entity or estate and do not cause the perfection of Liens again any Debtor's assets by any secured lender which may have a financing statement filed with regard to a separate Debtor. 11. The limited substantive consolidation of the Debtors set out above, and the stated exceptions to such limited substantive consolidation, shall not affect or diminish the obligations of the Debtors to MetLife as set forth within the Plan and the MetLife Settlement Agreement. BOARD OF DIRECTORS 12. The initial Board of Directors of Reorganized Parent Debtor and 50-OFF Operating Company will consist of the following directors: Charles J Fuhrmann, II, Sheryle J. Bolton, Cecil Schenker, William B. Snow and M. David White. The director of the remaining Reorganized Debtors, excluding Texas Stores, shall be Charles J. Fuhrmann II. All of the foregoing directors shall be, and hereby are, deemed appointed as if unanimously approved by the Board of Directors and stockholders. Such Boards of Directors are hereby authorized and directed to take such actions as may be necessary to fully consummate the Plan. The initial Board of Directors for Reorganized Parent Debtor shall call the first annual meeting of stockholders no sooner than twelve months after the Effective Date, unless an earlier meeting is determined to be called by such Board upon and with the consent of a majority of its members. The subsequent tenure and manner of selection of directors shall be as provided in the respective charters and bylaws of the respective Debtors. ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 6 SECURITIES LAWS CLAIMS/PENALTY CLAIMS 13. All Securities Laws Claims and Penalty Claims are hereby subordinated pursuant to section 510 of the Bankruptcy Code, to all other Claims and Equity Interests. CONTRACTS AND LEASES 14. All executory contracts and leases listed in Exhibit "A" to the Plan are hereby assumed by the Debtors pursuant to the terms of the Plan without the need of further documentation. The assumption of such executory contracts and leases is hereby approved, with cure amounts to accrue interest from the effective date at the rate of 9% The rejection of all other contracts and leases of the Debtors is hereby approved. POST CONFIRMATION FINANCING - GECC 15. Pursuant to Bankruptcy Code sections 364(c) and (d), 1123, and 1142 and as may otherwise be allowed, the Court hereby approves Senior Secured Exit Financing in an amount of up to $15,000,000 (the "Exit Financing Facility"). General Electric Capital Corporation, as the Exit Financing Facility lender is hereby granted a fully perfected first priority lien and security interest in all existing and after acquired real and personal, tangible and intangible, assets of the Debtors, which shall be subject to no liens, claims and encumbrances senior in priority to the liens securing the Exit Financing Facility, except the Senior Liens (which includes certain liens and security interests of MetLife as granted pursuant to the Plan and the MetLife Settlement Agreement, including the Assigned Landlord Lien Avoidance Actions on FF&E, defined hereafter). The liens and security interests hereby granted shall have priority over all other Liens, including any Statutory Landlords' Liens and Tax Liens, except the Senior Liens (which include certain liens and security interests of MetLife as granted pursuant to the Plan and the MetLife Settlement Agreement, including the Assigned Landlord Lien Avoidance Actions on FF&E). The security interest and lien granted to the Exit Financing Facility lender hereunder are merely ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 7 deemed in and upon those items and such types of collateral in which a security interest may be created under Article 9 of the Uniform Commercial Code, and shall not be subject to any lien or Security interest that is avoided and preserved for the benefit of the Debtors' estate under section 551 of the Bankruptcy Code, except with respect to the Assigned Landlord Lien. AVOIDANCE ACTIONS ON FF&E 16. The Debtor and the Designated Officers are expressly authorized and empowered to enter into, among other documents, a credit agreement with regard to the Exit Financing Facility and the other attendant loan documents. The terms and conditions of the Exit Financing Facility are approved, and the Debtors are authorized to perform and do all acts that may be required in connection with the Exit Financing Facility, including, without limitations, to pay the fees to the Exit Financing Facility lender under the commitment letter. 17. This Order is entered pursuant to sections 363, 364, 1123, 1129 and 1142 of the Bankruptcy Code. The Exit Financing Facility lender is entitled to all protection afforded by sections 364(e) and 363(m) of the Bankruptcy Code. If any or all of the provisions of this Order are hereafter reversed, modified, vacated or stayed, such reversal, stay, modification or vacation shall not affect (a) the validity of any obligation, indebtedness or liability incurred by the Debtors to the Exit Financing Facility lender prior to the date of receipt of written notice to the Exit Financing Facility lender of the effective date of such reversal, stay, modification or vacation, or (b) the validity and enforceability of any lien or priority authorized or created hereby or pursuant to the Exit Financing Facility credit agreement or the other Exit Financing Facility loan documents. Notwithstanding any such reversal, stay, modification or vacation, any indebtedness, obligation or liability incurred by the Debtors to the Exit Financing Facility lender prior to written notice to the Exit Financing Facility lender of the effective date of such reversal, stay modification or vacation shall be governed in all respects by the original provisions of this Order, ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 8 and the Exit Financing Facility lender shall be entitled to all the rights, remedies, privileges and benefits granted herein and pursuant to the Exit Financing Facility credit agreement and the other Exit Financing Facility loan documents with respect to all such indebtedness, obligation or liability. l8. In accordance with Bankruptcy Code section 1146(c), the issuance, transfer or exchange of a security, or the making or delivery of an instrument of transfer under the Plan, including but not limited to the filing of any documents necessary to evidence perfection of the senior secured priority position of GECC, may not be taxed under any law imposing a stamp tax or similar tax such as recording fees for purposes of recording any lien instruments. METLIFE PROVISIONS 19. Retention of Liens. In accordance with section 1l29(b)(2)(A), MetLife shall retain its Liens on the FF&E at the Continuing Locations or any new location to which such FF&E may be moved with or without MetLife's consent, which Liens shall be Senior Liens; provided, however, MetLife shall not be given nor shall it have a Senior Lien on after-acquired property which has been or is acquired by the Reorganized 50-OFF Companies after the Effective Date for a new store location so long as none of MetLife's collateral is moved to the new location; except if MetLife's collateral is moved to the new location, MetLife shall have a Senior Lien on after-acquired property and all FF&E at that location. Provided, however, that MetLife will not have a Senior Lien on furniture, fixtures and equipment purchased by or leased by one or more of the Debtors post-confirmation, upon which a party timely and properly perfects a purchase money security interest or which is leased to the Debtors pursuant to a true lease; however, the Reorganized Debtors shall provide MetLife with written notice of same at or about the time of entering such arrangements. The Debtors shall execute and deliver any documents necessary to implement the terms of the Plan and/or the MetLife Settlement Agreement, including executing ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 9 any documents which may be necessary or helpful to cure any existing infirmities in MetLife's pre-Petition Date documents. 20. Further, with regard to the FF&E originally located in the Non-Continuing Locations and which may be in various stages of foreclosure, MetLife shall retain its liens and be given a Senior Lien on such FF&E and the proceeds thereof, which relates back to the date on which MetLife filed its financing statements in each of the states against any of the Debtors in which the Non- Continuing locations are located. The Debtors shall execute and deliver any documents necessary to implement the terms of the MetLife Settlement Agreement and the Plan, including executing any documents which may be necessary or helpful to cure any existing infirmities in MetLife's pre-Petition Date documents, which Lien shall be a Senior Lien. 21. Landlord Liens. In accordance with the MetLife Settlement Agreement, on the Effective Date, the Debtors shall assign their rights to assert claims to avoid liens pursuant to Bankruptcy Code section 545(3) and (4) on FF&E (the "Assigned Landlord Lien Avoidance Actions on FF&E) and the Court hereby approves same. MetLife shall have no obligation or duty to assert or pursue the Assigned Landlord Lien Avoidance Actions on FF&E. In determining whether to bring any such Assigned Landlord Lien Avoidance Actions on FF&E, MetLife may consider only its own interest. The Debtors shall also assign all proceeds which may be recovered from such Assigned Landlord Lien Avoidance Actions on FF&E pursuant to Bankruptcy Code section 550 and all lien interests preserved for the benefit of the estates pursuant to Bankruptcy Code section 551 in connection with such Assigned Landlord Lien Avoidance Actions on FF&E. DISCHARGE 22. The rights afforded in the Plan and the payments and distributions to be made hereunder shall and do hereby discharge all existing debts and Claims of any kind, nature or description whatsoever against the Debtors or any of their assets or properties to the fullest extent permitted ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 10 by section 1141 of the Bankruptcy Code; upon the Effective Date, all existing Claims against the Debtors shall be, and shall be deemed to be, discharged; and all holders of Claims shall be and hereby are precluded from asserting against the Debtors, or any of their assets or properties, any other or further Claim based upon any act or omission, transaction or other activity of any kind or nature that occurred prior to the Effective Date, whether or not such holder filed a proof of Claim. Confirmation of the Plan and the obligations imposed on the Debtors therein shall be in complete satisfaction, discharge and release of all Claims of any nature whatsoever against the Debtors or any of their assets or properties; and, upon the Effective Date, the Debtors shall be deemed discharged and released from any and all Claims, including but not limited to demands and liabilities that arose before the Effective Date, and all debts of the kind specified in sections 502(g), 502(h) or 502(i) of the Bankruptcy Code, whether or not (a) a proof of Claim based upon such debt is filed or deemed filed under section 501 of the Bankruptcy Code; (b) a Claim based upon such debt is allowed under section 502 of the Bankruptcy Code; or (c) the holder of a Claim based upon such debt has accepted the Plan. Except as expressly provided in the Plan, this Order is a judicial determination of discharge of all liabilities of the Debtors. As provided in section 524 of the Bankruptcy Code, such discharge hereby voids any judgment against the Debtors at any time obtained to the extent it relates to a Claim discharged and operates as an injunction against the prosecution of any action against the Debtors) or the property of any of them, to the extent it relates to a Claim discharged. 23. The discharge provided above shall not affect the rights of creditors or the obligations of the Reorganized Debtors, as such rights and obligations are created or granted pursuant to the Plan. ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 11 INJUNCTIONS 24. Collections in General. All holders of Claims or Interests accruing prior to June 3, 1997 are hereby enjoined from attempting to collect upon such Claims or Interests, from the Debtors or property of the Debtors, in any manner other than is provided for in the Plan. 25. Utilities. Any Utility, as such term is used in 11 U.S.C. (S) 366, is hereby enjoined from seeking or obtaining a security deposit, altering its usual building practices, or otherwise refusing or discontinuing services to the Debtors for a period of 18 months after the Effective Date of the Plan; provided, however, that a Utility will no longer be subject to such injunction in the event that the Debtors fail to pay the post confirmation utility bills to such Utility no later than 10 days after such bills are due. 26. Prepetition lawsuits. As of the Effective Date of the Plan, all entities who are parties to any prepetition date lawsuits, litigation, administrative actions, or other proceedings, judicial or administrative, in connection with the assertion of a Claim shall be dismissed as to the Debtors. Such dismissal shall be with prejudice to the assertion of such Claim in any manner other than that prescribed in the Plan. All parties to any such action are hereby enjoined from taking any action to impair or impede the immediate and unconditional dismissal of such actions. Confirmation and consummation of the Plan shall have no effect on insurance policies where the Debtors are or were the insured party. 27. Insurance. Each insurance company insuring the Debtors or losses of the Debtors is hereby enjoined from denying, refusing, altering or denying coverage on any basis regarding or related to the Debtors' bankruptcy, the Plan, or any provision within the Plan, including, without limitation, the treatment or means of liquidation set out within the Plan for Policy-insured Tort Claims or Self- insured Tort Claims. ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 12 28. Responsible Party Injunction. Each and every holder of a Priority Tax Claim and holder of a Class 1 Claim is hereby enjoined from commencing or continuing any action or proceeding against any responsible Person or officer or director of any Debtor that otherwise would be liable to such holder for payment of a Priority Tax Claim or Class 1 Claim so long as the Reorganized Debtors are not in default of the payment terms of such Priority Tax or Class 1 Claim. All amounts paid by the Reorganized Debtors; or any one of them, on account of any Allowed Claim held by a governmental entity shall be applied first to any "trust fund" amounts owing, then to any other balances due. OBJECTIONS OVERRULED 29. All objections to confirmation are hereby overruled except as expressly provided for herein. DATED: June 3, 1997. San Antonio, Texas /s/ LEIF M. CLARK ------------------------------------- LEIF M. CLARK UNITED STATES BANKRUPTCY JUDGE After entry, please transmit a conformed Copy to; Samuel M. Stricklin Richard G. Grant Sheinfeld, Maley & Kay, P.C. 1700 Pacific Avenue, Suite 4400 Dallas, Texas 75201-4618 Telephone: 214-953-0700 Facsimile: 2l4-953-1189 ORDER CONFIRMING PLAN OF REORGANIZATION PAGE 13 EX-3.2 4 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.2 RESTATED CERTIFICATE OF INCORPORATION (DULY ADOPTED PURSUANT TO A CONFIRMATION ORDER OF THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS, SAN ANTONIO DIVISION AND SECTIONS 242, 245 AND 303 OF THE DELAWARE GENERAL CORPORATION LAW) OF 50-OFF STORES, INC. Upon the filing of this Restated Certificate of Incorporation, the Corporation's name will be changed from 50-OFF Stores, Inc. to LOT$OFF Corporation. The original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on May 28, 1992. This Restated Certificate of Incorporation amends and restates such original Certificate of Incorporation. This Restated Certificate of Incorporation was duly adopted pursuant to a Confirmation Order of the United States Bankruptcy Court for the Western District of Texas, San Antonio Division, dated June 3, 1997 (confirming the Corporation's Joint Plan of Reorganization, as amended, which Plan of Reorganization became effective on June ___, 1997) and Sections 242, 245 and 303 of the Delaware General Corporation Law. The Corporation filed for bankruptcy on October 9, 1996. NOW, THEREFORE, the text of the present Certificate of Incorporation is hereby amended and restated to read as follows: RESTATED CERTIFICATE OF INCORPORATION OF LOT$OFF CORPORATION ARTICLE ONE The name of the Corporation is LOT$OFF Corporation. ARTICLE TWO The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THREE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOUR The aggregate number of shares of capital stock that the Corporation shall have the authority to issue is 40,000,000 consisting of 25,000,000 shares of common stock, $.01 par value (the "Common Stock"), and 15,000,000 shares of preferred stock, $.01 par value (the "Preferred Stock"). Holders of shares of Common Stock shall be entitled to receive such dividends as from time to time may be declared by the Board of Directors, subject to the rights of holders of Preferred Stock. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to holders of Preferred Stock to which they shall be entitled, the holders of Common Stock shall be entitled to share ratably based upon the number of shares of Common Stock held by them in all remaining assets of the Corporation available for distribution to its stockholders. All shares of Common Stock shall be identical with each other in every respect. The shares of Common Stock shall entitle the holders thereof to one vote for each share upon all matters upon which stockholders have the right to vote. Shares of Preferred Stock may be issued from time to time in one or more series, each such series to have such distinctive designation or title as may be fixed by the Board of Directors prior to the issuance of any shares thereof. Each such series shall have such designations, preferences, limitations, and relative rights, including voting rights, as shall be stated in the resolution or resolutions providing for the issuance of such series of Preferred Stock, as may be adopted from time to time by the Board of Directors prior to the issuance of any shares thereof, in accordance with the laws of the State of Delaware. The Board of Directors, in such resolution or resolutions, may increase or decrease the number of shares within each such series; provided, however, the Board of Directors may not decrease the number of shares within a series to less than the number of shares within such series that are then issued. ARTICLE FIVE The number of directors constituting the Board of Directors, the term and manner of election thereof, the provisions for removal thereof and the manner of expanding or filling vacancies upon the Board of Directors shall be fixed by, or in the manner provided in the Bylaws of the Corporation, as amended from time to time. ARTICLE SIX In furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation shall have the power to adopt, amend or repeal the Bylaws of the Corporation. ARTICLE SEVEN The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, in the manner prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. ARTICLE EIGHT A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this Article shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the Corporation or stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after the date of filing of this Restated Certificate of Incorporation to authorize corporate action further limiting or eliminating the personal liability of a director, then the liability of the directors of the Corporation shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article by the stockholders of the Corporation or otherwise shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ARTICLE NINE The Corporation shall indemnify each director, officer or employee of the Corporation who may be indemnified, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law ("Section 145"), as it may be amended from time to time, in each and every situation where the Corporation is obligated to make such indemnification pursuant to Section 145. In addition, the Corporation shall indemnify each of the Corporation's directors, officers and employees in each and every situation where, under Section 145, the Corporation is not obligated, but is permitted or empowered, to make such indemnification. The Corporation may, in the sole discretion of the Board of Directors, indemnify any other person who may be indemnified pursuant to 2 Section 145 to the extent the Board of Directors deems advisable, as permitted by such section. The Corporation shall promptly make or cause to be made any determination which Section 145 requires. ARTICLE TEN The Corporation shall not be subject to the provisions of Section 203 of the Delaware General Corporation Law with respect to restrictions upon business combinations involving the Corporation. This Restated Certificate of Incorporation has been signed this _____ day of June, 1997. ---------------------------------------- CHARLES J. FUHRMANN II President 3 EX-3.4 5 AMENDED AND RESTATED BYLAWS EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF LOT$OFF CORPORATION a Delaware corporation (the "Corporation") TABLE OF CONTENTS Contents Page - -------- ---- ARTICLE I. STOCKHOLDER MEETINGS. 1.1. Annual Meetings............................. 1 1.2. Special Meetings............................ 1 1.3. Notice of Meetings.......................... 1 1.4. Adjournments................................ 1 1.5. Quorum...................................... 1 1.6. Organization; Order of Business............. 1 1.7. Voting; Proxies............................. 2 1.8. Stockholder List............................ 2 1.9. Consent of Stockholders in Lieu of Meeting.. 2 1.10. Attendance via Communications Equipment..... 2 ARTICLE II. BOARD OF DIRECTORS...................... 3 2.1. Powers...................................... 3 2.2. Number; Term of Office; Qualifications...... 3 2.3. Removal..................................... 3 2.4. Resignations................................ 3 2.5. Vacancies................................... 3 2.6. Regular Meetings............................ 3 2.7 Special Meetings............................ 3 2.8. Telephonic Meetings Permitted............... 3 2.9. Quorum; Vote Required For Action............ 4 2.10. Action-Without Meeting...................... 4 2.11. Organization................................ 4 2.12. Compensation................................ 4 ARTICLE III. COMMITTEES OF DIRECTORS................. 4 3.1. Establishment............................... 4 3.2. Available Powers............................ 4 3.3. Unavailable Powers.......................... 5 3.4. Conduct of Business......................... 5 ARTICLE IV. OFFICERS................................ 5 4.1. Executive Officers; Term of Office.......... 5 4.2. Powers and Duties........................... 5 4.2.1. President.......................... 5 4.2.2. Vice presidents.................... 6 4.2.3. Secretary.......................... 6 4.2.4. Treasurer.......................... 6 4.2.5. Assistant Secretary................ 6 4.2.6. Assistant Treasurer................ 6 4.3. Resignations and Removal.................... 6 4.4. Vacancies................................... 6 4.5. Compensation................................ 6 Contents Page - -------- ---- ARTICLE V. STOCK AND DIVIDENDS....................... 7 5.1. Certificates................................ 7 5.2. Multiple Classes of Stock................... 7 5.3. Payment for Shares.......................... 7 5.4. Transfer of Stock........................... 7 5.5. Transfer and Registry Agents................ 7 5.6. Lost, Stolen or Destroyed Certificates...... 8 5.7. Registered Stockholders..................... 8 5.8. Dividends, Surplus, Reserves................ 8 5.9. Additional Regulations...................... 8 ARTICLE VI. MISCELLANEOUS............................. 8 6.1. Offices..................................... 8 6.2 Place of Meetings........................... 8 6.3. Fixing Record Dates......................... 8 6.4. Means of Giving Notice...................... 9 6.5. Waiver of Notice............................ 9 6.6. Contracts and Negotiable Instruments........ 9 6.7. Facsimile Signatures........................ 9 6.8. Fiscal Year................................. 9 6.9. Seal........................................ 9 6.10. Books and Records........................... 10 6.11. Reliance Upon Books and Records............. 10 6.12. Form of Records............................. 10 6.13. Inspection of Books and Records............. 10 6.14. Indemnification............................. 10 6.15. Insurance................................... 10 6.16. Surety Bonds................................ 10 6.17. Interested Directors, Officers and Stockholders.......................... 10 6.17.1. Validity...................... 10 6.17.2. Disclosure, Approval.......... 11 6.17.3. Non-Exclusive................. 11 6.18. Voting of Securities of Other Corporations.. 11 6.19. Amendments.................................. 11 AMENDED AND RESTATED BYLAWS ARTICLE I. STOCKHOLDER MEETINGS. 1.1. Annual Meetings. An annual meeting of the stockholders for the --------------- purpose of electing directors and for the transaction of such other business as may be brought before the meeting shall be held at such time and place, within or without the State of Delaware, as may be designated by the Board of Directors. 1.2. Special Meetings. Special meetings of the stockholders may be ---------------- called for any purpose or purposes at any time by the President, the Board of Directors, or a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as expressly provided in a resolution of the Board of Directors, include the power to call such meetings; but such special meetings may not be called by any other person or persons. 1.3. Notice of Meetings. Whenever stockholders are required or permitted ------------------ to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. An affidavit of the Secretary of the Corporation that the notice required by this Section has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. ----- ----- 1.4. Adjournments. Any meeting of stockholders, annual or special, may ------------ adjourn to another time or place. Notice of any such adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. 1.5. Quorum. At any meeting of stockholders, the presence, in person or ------ by proxy, of the holders of shares representing a majority of the entire number of votes entitled to be cast at the meeting shall constitute a quorum for all purposes, except as otherwise provided by law, the Certificate of Incorporation or these Bylaws. In the absence of a quorum, the chairman of the meeting or the holders of shares of stock present in person or by proxy and entitled to vote at such meeting (determined by a majority of the votes cast) may adjourn the meeting to another time or place. The stockholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding the subsequent withdrawal of stockholders leaving less than a quorum. 1.6. Organization; Order of Business. Such person as the Board of ------------------------------- Directors may have designated or, in the absence of such a person, the President of the Corporation or, in his absence such person as may be chosen by the holders of shares representing a majority of the votes which could be cast by those present, in person or by proxy, and entitled to vote shall call to order any meeting of the stockholders and act as chairman of the meeting. The Secretary of the Corporation, if present, shall act as secretary of the meeting but in his absence, the secretary of the meeting shall be such person as the Chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including regulation of the manner of voting and the conduct of discussion; but the order of business to be followed at any meeting at which a 1 quorum is present may be changed by the holders of shares of stock present in person or by proxy and entitled to vote at such meeting (determined by a majority of the votes cast). 1.7. Voting; Proxies. Except as may be otherwise provided by the --------------- Certificate of Incorporation or a resolution adopted by the Board of Directors pursuant to Section 151(a) of the General Corporation Law of the State of Delaware, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. Each proxy shall be revocable unless expressly provided therein to be irrevocable and unless made irrevocable by law. Each proxy shall be filed with the Secretary of the Corporation prior to or at the time of the meeting. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing with the Secretary of the Corporation an instrument in writing revoking the proxy or another duly executed proxy bearing a later date. Voting at meetings of stockholders need not be by written ballot and need not be conducted by inspectors of election unless so determined by the chairman of such meeting or the holders of shares representing a majority of the votes that could be cast by those present, in person or by proxy, and entitled to vote. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law, the Certificate of Incorporation or these Bylaws, all other matters shall be determined by a majority of the votes cast. 1.8. Stockholder List. A complete list of the stockholders entitled to ---------------- vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each such stockholder and the number of shares registered in his name, shall be open to examination by any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the place of the meeting throughout the entire meeting and shall be open to examination by any stockholder who is present. The original stock ledger shall be the only evidence as to the stockholders entitled to examine such stock ledger, the stockholder list or the books required by this Corporation or to vote in person or by proxy at any meeting of stockholders. Failure to comply with the requirements of this section shall not affect the validity of any action taken at any meeting. 1.9. Consent of Stockholders in Lieu of Meeting. Unless otherwise ------------------------------------------ restricted by the Certificate of Incorporation, any action which must or may be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the actions so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. 1.10. Attendance via Communications Equipment. Unless otherwise --------------------------------------- restricted by law, the stockholders may hold any meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can effectively communicate with and hear each other. Such participation shall constitute presence in person at the meeting. 2 ARTICLE II. BOARD OF DIRECTORS. 2.1. Powers. The business and affairs of the Corporation shall be ------ managed by the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the Certificate of Incorporation or these Bylaws directed or required to be exercised or done by the stockholders. 2.2. Number; Term of Office; Qualifications. The number of directors -------------------------------------- constituting the Board of Directors shall be determined from time to time by resolution of the Board of Directors; provided, however, that at all times the number of directors shall be at least one (1) and no decrease shall have the effect of shortening the term of any incumbent director. Except as otherwise provided herein or required by law, each director shall be elected at each annual meeting of stockholders and shall hold office until his successor has been duly elected and qualified. Directors need not be stockholders or residents of the State of Delaware. 2.3. Removal. Subject to Section 141(k) of the General Corporation Law ------- of the State of Delaware, any director may be removed, either for or without cause, at any meeting of stockholders by the holders of shares of stock representing a majority of the entire number of votes entitled to be cast at an election of directors, provided that notice of the intention to act upon such matter shall have been given in the notice calling such meeting if such meeting is a special meeting. 2.4. Resignations. Any director may resign at any time by written notice ------------ to the Corporation. Such resignation shall take effect at the time therein specified, or if no such time is specified, upon receipt by the Corporation. Unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. 2.5. Vacancies. Any vacancy in the Board of Directors caused by death, --------- resignation, removal (whether or not for cause), disqualification, an increase in the number of directors or any other cause may be filled by a majority vote of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the expiration of the term of office of the director whom he has replaced and until his successor is duly elected and qualified. 2.6. Regular Meetings. Regular meetings of the Board of Directors may be ---------------- held at such places within or without the State of Delaware and at such times as shall have been established by the Board of Directors and communicated to all directors. A notice of each regular meeting shall not be required. 2.7. Special Meetings. Special meetings of the Board of Directors may be ---------------- held at any time or place within or without the State of Delaware and (i) may be called by the President, and (ii) must be called by the President or Secretary on the written request of two directors or the sole director, as the case may be. Notice of each special meeting of the Board of Directors must be given to each director at least twenty-four (24) hours before the meeting if such notice is delivered personally or by means of telegram, telex or facsimile transmission; two (2) days before the meeting if such notice is delivered by a recognized express delivery service; and three (3) days before the meeting if such notice is delivered through the United States mail. Any and all business which may be transacted at a regular meeting of the Board of Directors may be transacted at a special meeting. Neither notice of a special meeting nor waiver of notice of a special meeting need state the purpose of or business to be transacted at such meeting. 2.8. Telephonic Meetings Permitted. Members of the Board of Directors, ----------------------------- or any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by 3 means of which all persons participating in the meeting can hear and communicate with each other. Such participation shall constitute presence in person at such meeting. 2.9. Quorum; Vote Required For Action. A majority of the directors shall -------------------------------- constitute a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws. If a quorum shall not be present at any meeting, a majority of the directors present may adjourn the meeting to another time or place, without notice other than announcement at the meeting, until a quorum is present. At any such adjourned meeting any business may be transacted which might have been transacted at the meeting as originally notified. 2.10. Action Without Meeting. Unless otherwise restricted by the ---------------------- Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. 2.11. Organization. The Board of Directors may, if it chooses, elect a ------------ Chairman of the Board and a Vice Chairman of the Board from its members. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary of the Corporation, if present, shall act as secretary of the meeting; but in his absence, the secretary of the meeting shall be such person as the chairman of the meeting appoints. 2.12. Compensation. The Board of Directors shall have authority to ------------ determine from time to time the amount of compensation, if any, which shall be paid to its members for their services as directors and as members of committees of the Board of Directors. The directors may be reimbursed their expenses, if any, of attendance at such Board and committee meetings. No director is precluded from serving the Corporation in any other capacity and receiving compensation appropriate to the value of such services rendered. ARTICLE III. COMMITTEES OF DIRECTORS. 3.1. Establishment. The Board of Directors may, by resolution passed by ------------- a majority of the whole Board of Directors, designate from time to time one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. 3.2. Available Powers. Any such committee, to the extent provided in the ---------------- resolution of the Board of Directors establishing such committee and as limited by law, the Certificate of Incorporation and these Bylaws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal, if any, of the Corporation to be affixed to all papers which may require it. Without limiting the generality of the foregoing, a committee of the Board of Directors may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of the State of 4 Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series. 3.3. Unavailable Powers. No committee of the Board of Directors shall ------------------ have the power or authority to amend the Certificate of Incorporation (except in connection with the issuance of shares of stock as provided in the previous section); adopt an agreement of merger or consolidation; recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets; recommend to the stockholders a dissolution of the Corporation or a revocation of such a dissolution; amend the Bylaws of the Corporation; and, unless the resolution establishing such committee or the Certificate of Incorporation expressly so provides, declare a dividend, authorize the issuance of stock or adopt a certificate of ownership and merger. 3.4. Conduct of Business. Unless the Board of Directors provides ------------------- otherwise, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. IV. OFFICERS. 4.1. Executive Officers; Term of Office. The Board of Directors shall ---------------------------------- elect a President, Secretary and Treasurer. The Board of Directors may elect one or more Vice Presidents (with such descriptive title, if any, as the Board of Directors shall deem appropriate), one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as the Board of Directors may determine. Vice Presidents, Assistant Secretaries and Assistant Treasurers may also be appointed by the President as provided in Section 4.2.1. Each officer shall hold office until his successor is elected and qualified or until his earlier death, resignation or removal in the manner provided in these Bylaws. Any number of offices may be held by the same person. The Board of Directors may require any officer to give bond or other security for the faithful performance of his duties, in such amount and with such sureties as the Board of Directors may determine. 4.2. Powers and Duties. The officers of the Corporation shall have such ----------------- powers and duties in the management of the Corporation as may be provided by applicable laws, the Certificate of Incorporation and these Bylaws, and as may be prescribed by the Board of Directors and, to the extent not so provided, as generally pertain and are incident to their respective offices, subject to the control of the Board of Directors. Without limiting the generality of the foregoing, the following officers shall have the respective duties and powers enumerated below: 4.2.1. President. The President shall be the chief executive --------- officer of the Corporation. He shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive. The President may sign and execute, in the name of the Corporation, stock certificates, deeds, mortgages, bonds, contracts or other instruments authorized by the Board of Directors, except when signing and execution thereof shall be expressly and exclusively delegated by the Board of Directors or the Bylaws to some other person, or shall be required by law to be signed otherwise. The President shall also have the power to appoint Vice Presidents, Assistant Secretaries and Assistant Treasurers as he deems necessary from time to time. The President may remove such appointed officers at any time for or without cause. The President shall have general supervision and direction of all other officers, employees and agents of the Corporation. 5 4.2.2. Vice Presidents. The Vice President, or if there be more --------------- than one, the Vice Presidents in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the President or in the event of his inability or refusal to act, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the President or the Board of Directors may from time to time prescribe. The Vice President may sign certificates evidencing shares of stock of the Corporation. 4.2.3. Secretary. The Secretary shall issue all authorized --------- notices for, and shall keep minutes of, all meetings of stockholders and the Board of Directors. He may sign certificates evidencing shares of stock of the Corporation. He shall have custody of the corporate seal, if any, and shall have authority to affix the seal to any instrument requiring it, and when so affixed, it may be attested by his signature or by the signature of an Assistant Secretary. The Secretary shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent is properly accountable. 4.2.4. Treasurer. The Treasurer shall be either the chief --------- accounting or chief financial officer of the Corporation. He shall have the custody of the corporate funds and securities, and shall disburse the funds of the Corporation as are authorized. He shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation, and, when requested by the President or Board of Directors, shall render from time to time an accounting of all such transactions and of the financial condition of the Corporation. The Treasurer may sign certificates evidencing shares of stock of the Corporation. 4.2.5. Assistant Secretary. The Assistant Secretary, or if there ------------------- be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the President, Secretary or Board of Directors may from time to time prescribe. 4.2.6. Assistant Treasurer. The Assistant Treasurer, or if there ------------------- be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election or appointment) shall, in the absence of the Treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the President, Treasurer or Board of Directors may from time to time prescribe. 4.3. Resignations and Removal. Any officer may resign at any time by ------------------------ giving written notice to the Board of Directors or, if the President is not resigning, to the President of the Corporation. Such resignation shall take effect at the time therein specified, or if no time is specified, upon receipt. Unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. All officers serve at the pleasure of the Board of Directors; any elected or appointed officer may be removed at any time for or without cause by the Board of Directors. Officers appointed by the President may also be removed at any time for or without cause by the President. 4.4. Vacancies. Any vacancy in any office because of death, resignation, --------- removal, disqualification or any other cause shall be filled for the unexpired term in the manner prescribed in these Bylaws for the regular election or appointment to such office. 4.5. Compensation. Salaries or other compensation of officers shall be ------------ set from time to time by the Board of Directors. No officer shall be prevented from receiving a salary or other compensation by reason of the fact that he is also a director. 6 ARTICLE V. STOCK AND DIVIDENDS. 5.1. Certificates. The shares of capital stock of the Corporation shall ------------ be represented by certificates in such form as shall be approved by the Board of Directors and consistent with the provisions of Section 158 of the General Corporation Law of the State of Delaware. Unless and to the extent the Board of Directors by resolution provides that any or all classes or series of stock shall be uncertificated, every holder of the capital stock of the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by him in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 5.2. Multiple Classes of Stock. If the Corporation issues more than one ------------------------- class of stock or more than one series of any class, a statement of the powers, designations, preferences and rights of each class or series of stock and the qualifications, limitations or restrictions thereof shall (unless the Board of Directors provides that such class or series of stock shall be uncertificated) be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock; provided that, to the extent allowed by law, in lieu of such statement, the face or back of such certificate may state that the Corporation will furnish a copy of such statement without charge to each requesting stockholder. 5.3. Payment for Shares. The capital stock so issued shall be considered ------------------ to be fully paid and nonassessable if: (1) the entire amount of such consideration has been received by the Corporation in the form of cash, services rendered, personal property, real property, leases of real property, or a combination thereof; or (2) not less than the amount of the consideration determined to be capital by the Board of Directors has been received by the Corporation in such form and the Corporation has received a binding obligation of the purchaser of the capital stock, in the form of a promissory note fully secured by collateral, to pay the balance of the purchase price. In the absence of fraud in the transaction, the judgment of the Board of Directors as to the value of consideration received shall be conclusive. 5.4. Transfer of Stock. Shares of stock shall be transferable only on ----------------- the books of the Corporation by the holder thereof in person or by his duly authorized legal representative. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate or certificates representing shares, duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, and of the payment by the transferor of all taxes applicable to the transfer of such shares, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate or certificates to the person entitled thereto, cancel the old certificate or certificates and record the transaction upon the corporate books. Provided, however, that the Corporation shall not be so obligated unless such transfer was made in compliance with applicable federal and state securities laws and with any restrictions on transfer contained in the Certificate of Incorporation, these Bylaws or any agreement which has been filed with the Secretary of the Corporation. 5.5. Transfer and Registry Agents. The Corporation may from time to time ---------------------------- maintain one or more transfer offices or agents and registry offices or agents at such place or places as may be determined from time to time by the Board of Directors. 7 5.6. Lost. Stolen or Destroyed Certificates. The Corporation may issue a -------------------------------------- new certificate of stock in place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any certificate or the issuance of such new certificate. 5.7. Registered Stockholders. The Corporation shall be entitled to ----------------------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, vote and be held liable for calls and assessments and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any person other than such registered owner, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 5.8. Dividends, Surplus, Reserves. Subject to the Certificate of ---------------------------- Incorporation and applicable law, the Board of Directors may, in its absolute discretion: 5.8.1. Declare and pay dividends or make other distributions on the outstanding shares of capital stock in such amounts and at such time or times as the Board of Directors deems advisable. 5.8.2. Use and apply any of the surplus of the Corporation in purchasing or acquiring any shares of capital stock of the Corporation, or purchase warrants therefor, in accordance with law, or any of its bonds, debentures, notes, script or other securities or evidences of indebtedness. 5.8.3. Set aside from time to time out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors thinks proper as a reserve or reserves to meet contingencies, for equalizing dividends, for repairing or maintaining any property of the Corporation, or for such other purpose as the Board of Directors shall determine to be in the best interests of the Corporation; and the Board may modify or abolish any such reserve in the manner in which it was created. 5.9. Additional Regulations. The issue, transfer, conversion and ---------------------- registration of shares of stock shall be governed by such other rules and regulations as the Board of Directors may establish from time to time. ARTICLE VI. MISCELLANEOUS. 6.1. Offices. The Corporation may have, in addition to its registered ------- office in the State of Delaware, offices and places of business at such places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or as the business and affairs of the Corporation may require. 6.2. Place of Meetings. All stockholders, directors and committee ----------------- meetings shall be held at such place or places, within or without the State of Delaware, as shall be designated from time to time by the Board of Directors or such committee and stated in the notices thereof. If no such place is so designated, such meetings shall be held at the principal business office of the Corporation. 6.3. Fixing Record Dates. In order that the Corporation may determine ------------------- the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, to express consent to corporate action in writing without a meeting, to receive payment of any dividend or other distribution or allotment of any rights, to exercise any rights in respect of any change, conversion or exchange of stock or to effect any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) 8 nor less than ten (10) days prior to any such action. In the absence of any action by the Board of Directors, the record date shall be at the close of business on the day preceding (i) the date on which a notice of meeting or request for consent is given, or (ii) the date the Board of Directors adopts the resolution declaring a dividend or other distribution or allotment or approving any change, conversion or exchange, as the case may be, shall be the record date. A record date validly fixed for any meeting of stockholders shall be valid for any adjournment of said meeting and shall, at the Board of Directors election, be valid for any reconventions and readjournments of the meeting made no later than ninety (90) days after such record date. 6.4. Means of Giving Notice. Unless otherwise required by these Bylaws, ---------------------- whenever any notice is required to be given under law, the Certificate of Incorporation or these Bylaws, such notice may be given in writing and delivered personally, through the United States mail, by a recognized express delivery service (such as Federal Express) or by means of telegram, telex or facsimile transmission, addressed to such director or stockholder at his address or telex or facsimile transmission number, as the case may be. All notices shall be deemed to be given at the time when the same shall be deposited in the mail or with an express delivery service or when transmitted, as the case may be, addressed or directed to the proper destination as it appears on the records of the Corporation, with postage and fees thereon prepaid. An affidavit of the Secretary or Assistant Secretary or of the transfer agent of the Corporation that the notice has been given shall, in the absence of fraud, be prima facie ----- ----- evidence of the facts stated therein. 6.5. Waiver of Notice. Whenever any notice is required to be given under ---------------- law, the Certificate of Incorporation or these Bylaws, a written waiver of such notice, sighed before or after the date of the noticed meeting or action by the person or persons entitled to said notice, shall be deemed equivalent to such required notice. Neither the business nor the purpose of any meeting need be specified in such a waiver unless otherwise required. All waivers shall be filed with the corporate records. Attendance at a meeting shall constitute a waiver of notice of such meeting, except where a person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 6.6. Contracts and Negotiable Instruments. Except as otherwise provided ------------------------------------ by law or these Bylaws, any contract or other instrument relative to the business of the Corporation may be executed and delivered in the name of the Corporation and on its behalf by the Chairman of the Board or the President; and the Board of Directors may authorize any other officer or agent of the Corporation to enter into any contract or execute and deliver any contract in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances as the Board of Directors may by resolution determine. All bills, notes, checks or other instruments for the payment of money shall be signed or countersigned by such officer, officers, agent or agents and in such manner as are permitted by these Bylaws and/or as, from time to time, may be prescribed by resolution (whether general or special) of the Board of Directors. Unless authorized so to do by these Bylaws or by the Board of Directors, no officer, employee or agent shall have any power or authority to bind the Corporation by any contract or engagement, or to pledge its credit, or to render it liable pecuniarily for any purpose or to any amount. 6.7. Facsimile Signatures. In addition to the provisions for use of -------------------- facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. 6.8. Fiscal Year. The fiscal year of the Corporation shall be ----------- determined, and may be changed, by resolution of the Board of Directors. 6.9. Seal. The seal of the Corporation, if any, shall be in such form as ---- shall from time to time be adopted by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or otherwise reproduced. 9 6.10. Books and Records. The Corporation shall keep correct and complete ----------------- books and records of account and shall keep minutes of the proceedings of its stockholders, Board of Directors and committees and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. 6.11. Reliance Upon Books and Records. Each director, each member of any ------------------------------- committee of the Board of Directors, and each officer of the Corporation shall, in the performance of his duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation, including reports made to the Corporation by any of its officers, by an independent certified public accountant, or by an appraiser selected with reasonable care. 6.12. Form of Records. Any records maintained by the Corporation in the --------------- regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographs, or any other information storage device, provided that the records so kept can be converted into clearly legible written form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records. 6.13. Inspection of Books and Records. Except as otherwise provided by ------------------------------- law, the Certificate of Incorporation, or these Bylaws, the Board of Directors shall determine from time to time whether, and, if allowed, when and under what conditions and regulations, the accounts, books, minutes and other records of the Corporation, or any of them, shall be open to inspection by any persons. 6.14. Indemnification. The Corporation shall have the power and --------------- obligation to indemnify any person who was or is a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, to the extent set forth in the Certificate of Incorporation. 6.15. Insurance. The Corporation may maintain insurance, at its expense, --------- to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 6.16. Surety Bonds. Such officers and agents of the Corporation as the ------------ President or the Board of Directors may direct from time to time shall be bonded for the faithful performance of their duties and for the restoration to the Corporation, in case of their death, resignation, retirement, disqualification or removal from office, of all books, papers, vouchers, money and other property of whatever kind in their possession or under their control belonging to the Corporation, in such amounts and by such surety companies as the President or the Board of Directors may determine. The premiums on such bonds shall be paid by the Corporation, and the bonds so furnished shall be in the custody of the Secretary. 6.17. Interested Directors, Officers and Stockholders. ----------------------------------------------- 6.17.1. Validity. Any contract or other transaction between the -------- Corporation and any of its directors, officers or stockholders (or any corporation or firm in which any of them are directly or indirectly interested) shall be valid for all purposes notwithstanding the presence of such director, officer or stockholder at the meeting authorizing such contract or transaction, or his participation or vote in such meeting or authorization. 10 6.17.2. Disclosure, Approval. The foregoing shall apply, however, -------------------- only if the material facts of the relationship or the interest of each such director, officer or stockholder is known or disclosed to: (1) the Board of Directors and it nevertheless authorizes or ratifies the contract or transaction by a majority of the directors present, each such interested director to be counted in determining whether a quorum is present, but not in calculating the majority necessary to carry the vote; or (2) the stockholders and they nevertheless authorize or ratify the contract or transaction (determined by a majority of the votes cast). 6.17.3. Non-Exclusive. This provision shall not be construed to ------------- invalidate any contract or transaction which would be valid in the absence of this provision. 6.18. Voting of Securities of Other Corporations. The Chairman of the ------------------------------------------ Board, the President, any Vice President or the Secretary may from time to time appoint an attorney or attorneys or an agent or agents for the Corporation to exercise, in the name and on behalf of the Corporation, the powers and rights which the Corporation may have as the holder of stock or other securities in any other corporation to vote or consent in respect of such stock or other securities, and the Chairman of the Board, the President, any Vice President or the Secretary may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and the Chairman of the Board, the President, any Vice President or the Secretary may execute or cause to be executed, in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in order that the Corporation may exercise such powers and rights. 6.19. Amendments. These Bylaws may be altered, amended, repealed or ---------- replaced by the stockholders or the Board of Directors. The fact that the Board of Directors has such power shall not operate to divest or limit the stockholders of the power to alter, amend, repeal or replace the Bylaws. 11 CERTIFICATE ----------- I, James G. Scogin, the undersigned Secretary of LOT$OFF Corporation, do hereby certify that the foregoing is a true and correct copy of the Amended and Restated Bylaws of said Corporation. WITNESS my execution on behalf of the Corporation this the ____ day of ________________, 1997. ------------------------------------------ James G. Scogin, Secretary 12 EX-4.1 6 CERT OF DESIGNATION SERIES A PREF STOCK EXHIBIT 4.1 CERTIFICATE OF DESIGNATIONS in respect of SERIES A PREFERRED STOCK of LOT$OFF CORPORATION ------------------------------ Pursuant to Sections 151 and 303 of the General Corporation Law of the State of Delaware and a Confirmation Order of the United States Bankruptcy Court for the Western District of Texas, San Antonio Division ------------------------------ The undersigned, being President of LOT$OFF Corporation, formerly 50- Off Stores, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, hereby certifies that, pursuant to a Confirmation Order of the United States Bankruptcy Court for the Western District of Texas, San Antonio Division, dated June 3, 1997, relating to the Debtors' Joint Plan of Reorganization, as Amended, dated March 27, 1997 (the "Confirmation Order") and Sections 151 and 303 of the General Corporation Law of the State of Delaware, the Corporation is establishing a series of Preferred Stock as described in the resolution below. The Joint Plan of Reorganization became effective on June ___, 1997. The Corporation filed for bankruptcy on October 9, 1996. Capitalized terms used herein which are not defined herein shall have the meanings ascribed to them in the Debtors' Joint Plan of Reorganization, as Amended (the "Plan"), which is incorporated herein for all relevant purposes. RESOLVED, that, pursuant to the Confirmation Order and Sections 151 and 303 of the General Corporation Law of the State of Delaware, the Corporation hereby establishes a series of Preferred Stock, par value $.01 per share, of the Corporation and fixes the number of shares of such series and the powers, designations, preferences and relative, participating, optional or other rights of such series, and the qualifications, limitations or restrictions thereof as follows: The series of Preferred Stock, par value $.01 per share, of the Corporation shall be, and hereby is, designated "Series A Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting such series shall be ten million (10,000,000). The relative rights and preferences of the Series A Preferred Stock shall be as follows: SECTION A. DIVIDENDS AND DISTRIBUTIONS (1) Amount; Due Dates. The holders of the Series A Preferred Stock, in preference to Common Stock, Series B Preferred Stock (originally issued to holders of allowed general unsecured claims pursuant to the Plan and the Confirmation Order) and Page 1 other junior stock, shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor and subject to the further limitations set out herein, cash dividends at the per annum rate of 5.50% of the Series A Liquidation Preference (as defined in Section C hereof), all such dividends due quarterly in arrears as of the last day of each March, June, September and December of each year, the first dividend being due on the first such date to occur which is at least 90 days after the Effective Date (as defined in the Plan but generally meaning the effective date of the Plan). Each date on which a dividend is due is hereinafter called a "Dividend Date," and each quarterly period ending with a Dividend Date is hereinafter referred to as a "Dividend Period." If declared by the Board of Directors (with dividends, if declared, to be declared on a Dividend Date), dividends shall be paid fifteen calendar days after the Dividend Date, provided, however, that if such date on which a dividend is to be paid is a Saturday, Sunday or legal holiday, such dividend shall be paid on the next following business day to the holders of record on the Dividend Date. Dividends on the Series A Preferred Stock shall be paid only out of funds of the Corporation legally available therefor. (2) Dividends or Redemption Regarding Other Classes or Series. As to each Dividend Period, dividends shall be payable on account of the Series A Preferred Stock before any sum or sums shall be paid or set aside for the purchase or redemption of, or payment of dividends on, Common Stock or any class or series of stock ranking junior to the Series A Preferred Stock as to dividends or distribution of assets, except to the extent of the Series B Preferred Stock Lien (as defined in the Plan but described generally as a Lien , granted to holders of Series B Preferred Stock pursuant to the Plan and the Confirmation Order, securing the Corporation's obligation to pay the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up) and the Class 7 Lien (as defined in the Plan but described generally as a Lien, granted to holders of allowed general unsecured claims pursuant to the Plan and Confirmation Order, securing the Corporation's obligation to issue Series A Preferred Stock and to distribute Excess Net Lawsuits' Proceeds to such holder when required pursuant to the terms and conditions of the Plan) upon the Net Lawsuits' Proceeds (as defined in the Plan but described generally as proceeds derived from certain pending lawsuits brought by the Corporation net of certain contingency and other fees and expenses). (3) Dividends Cumulative. Dividends upon the Series A Preferred Stock shall be cumulative. Accumulations of dividends will not bear interest. SECTION B. REDEMPTION OF SERIES A PREFERRED STOCK. Subject to restrictions imposed by Delaware law, the Corporation may, at its option, redeem the shares of the Series A Preferred Stock in whole or in part, at any time, in exchange for the payment of the Series A Liquidation Preference (as defined in Section C hereof); provided, however, at the time of providing the notice of redemption the Common Stock must have closed at a price of at least $3.00 per share for at least five consecutive days. Redemption shall be accomplished using the procedures set forth below: Page 2 (1) Notice Procedure. The Corporation shall give notice to each holder of record (the "Holder") by certified mail, return receipt requested, at least 20 days in advance of the date set forth in such notice as the date on which such redemption is to be effected. The shares shall be redeemed upon payment by the Corporation to Holders of the Series A Liquidation Preference, together with the amount of any dividends accrued and unpaid thereon, as of the redemption date. The Corporation shall be required to redeem pro rata, based on the number of shares of Series A Preferred Stock held by each Holder in relation to the number of shares of Series A Preferred Stock issued and outstanding as of the record date for redemption, at any time it elects to redeem the Series A Preferred Stock in part. Any redemptions hereunder shall be subject to restrictions imposed by Delaware law regarding the circumstances under which such a redemption may be effected. (2) Payment Procedures. Any notice mailed by the Corporation shall contain the information required by Delaware law and shall be mailed to each Holder at its address, certified mail, return receipt requested, as the same shall appear on the books of the Corporation. If fewer than all the outstanding shares of Series A Preferred Stock are to be redeemed, the redemption shall be made pro rata as set forth in Section B.(1) hereof. From and after the date fixed in any notice from the Corporation as the date of redemption, and after all amounts necessary to effect such redemption have been set aside for such purpose, all rights of each Holder thereof as a stockholder of the Corporation with respect to the shares redeemed, except the right to receive the redemption price and any accrued and unpaid dividends, shall cease and terminate. (3) Delivery of Certificates. Each Holder shall be entitled to receive the redemption price plus any accrued and unpaid dividends upon actual delivery to the Corporation or to such other entity as may be designated by the notice referred to in Subsection (1) of this Section B of certificates for the number of shares to be redeemed, duly endorsed in blank or accompanied by proper instruments of assignment and transfer duly endorsed in blank. Series A Preferred Stock redeemed pursuant to the provisions of this Section B may be held in the treasury of the Corporation or retired and canceled and given the status of authorized and unissued Series A Preferred Stock. (4) Other Redemption Matters. The Series A Preferred Shares are not mandatorily redeemable by the Corporation and shall not have the benefit of any sinking fund for the redemption or purchase of such shares. The Series A Preferred Shares are not redeemable at the option of the Holder. SECTION C. PRIORITY OF THE SERIES A PREFERRED STOCK IN THE EVENT OF DISSOLUTION. The Series A Preferred Stock shall have preference over the Series B Preferred Stock, the Common Stock and any other class or series of stock ranking junior to the Series A Preferred Stock as to the distribution of assets in the event of any liquidation, dissolution or winding up of the Corporation and, in that event, subject to the provisions of applicable law, each Holder of Series A Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, $5.00 per share of Series A Preferred Stock and any accrued and unpaid dividends (the "Series A Liquidation Preference"). Upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full on any other securities which are Page 3 senior as to distribution of assets to Series A Preferred Stock, and after payment shall have been made in full on the Series A Preferred Stock, as provided in this Section C, but not prior thereto, the holders of all the remaining capital stock including Series B Preferred Stock, Common Stock or any other series or class of stock ranking junior to the Series A Preferred Stock as to distribution of assets shall, subject to the respective terms and provisions of the Restated Certificate of Incorporation of the Corporation, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Holders of Series A Preferred Stock shall not be entitled to share therein. The merger or consolidation of the Corporation with another corporation and/or the sale, lease, pledge or mortgage of all or substantially all of the assets of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation for the purpose of this Section C. Notwithstanding anything herein to the contrary, the Series A Liquidation Preference shall in all things be junior and subordinate to both the Series B Preferred Stock Lien and the Class 7 Lien as to the Net Lawsuits' Proceeds. SECTION D. RIGHTS OF CONVERSION INTO SHARES OF COMMON STOCK OF THE CORPORATION. (1) General. Subject to the terms hereof, any share or shares of Series A Preferred Stock may be converted, provided that such shares have not been redeemed, on or after the date of issue at the option of each Holder of Series A Preferred Stock, into fully paid and nonassessable shares of Common Stock. Each share of Series A Preferred Stock shall be convertible into Common Stock by surrender to the Corporation of the certificate representing such shares of Series A Preferred Stock to be converted by the Holder and by giving written notice to the Corporation of the Holder's election to convert. The Corporation shall, as soon as practicable after receipt of such written notice and the proper surrender to the Corporation of the certificate or certificates, duly endorsed, representing shares of Series A Preferred Stock to be converted in accordance with the above provisions, issue and deliver for the benefit of the Holder at the office of the Corporation's duly appointed transfer agent (the "Transfer Agent") to the Holder for whose account such shares of Series A Preferred Stock were so surrendered or to such Holder's nominee or nominees, certificates for the number of shares of Common Stock to which the Holder shall be entitled. The certificates of Common Stock of the Corporation issued upon conversion shall bear such legends, if any, as may be required by state or federal laws. Such conversion shall be deemed to have been effective immediately prior to the close of business on the date on which the Corporation shall have received both such written notice and the properly surrendered certificates for shares of Series A Preferred Stock to be converted (the "Conversion Date"), and at such time the rights of the Holder with respect to the Series A Preferred Stock so surrendered for conversion shall cease and such Holder or the person or persons entitled to receive the shares of Common Stock issuable upon the conversion of such shares of Series A Preferred Stock shall be deemed to be, and shall be treated for all purposes as, the record Holder or Holders of such Common Stock on the Conversion Date. Page 4 (2) Conversion Rate. Each share of Series A Preferred Stock may be converted, subject to the terms and provisions of this Section D, into two shares of Common Stock, which is a price equal to one share of Common Stock for each $2.50 of Series A Liquidation Preference or, in case an adjustment of such rate has taken place pursuant to the provisions hereof, then at the Series A Conversion Rate as last adjusted (such rate or adjusted rate shall be expressed as the number of shares of Common Stock to be acquired upon conversion of one share of Series A Preferred Stock and shall be referred to herein as the "Series A Conversion Rate"). (3) Dividends. Shares of Series A Preferred Stock, if any, shall be entitled to all dividends on account of Series A Preferred Stock declared prior to the Conversion Date at the rate set forth herein and remaining unpaid. (4) Cancellation. Series A Preferred Stock converted into Common Stock shall be retired and canceled by the Corporation and given the status of authorized and unissued Series A Preferred Stock. (5) Reservation of Shares. The Corporation shall, at all times during which shares of Series A Preferred Stock may be converted into Common Stock, reserve and keep available, out of any Common Stock held as treasury stock or out of its authorized and unissued Common Stock, or both, solely for the purpose of delivery upon conversion of the shares of Series A Preferred Stock as herein provided, such number of shares of Common Stock as shall then be sufficient to effect the conversion of all shares of Series A Preferred Stock from time to time outstanding and shall take such action as may from time to time be necessary to ensure that such shares of Common Stock will, when issued upon conversion of Series A Preferred Stock, be fully paid and nonassessable. (6) Adjustment of Conversion Rate; Notice Rights. The Series A Conversion Rate provided in Subsection (2) of this Section D, in respect of Series A Preferred Stock, shall be subject to adjustment from time to time and the Holders thereof shall have certain rights as follows: (a) While any shares of Series A Preferred Stock shall be outstanding, in case the Corporation shall (i) subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock; (ii) combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock; (iii) issue, by reclassification of its shares of Common Stock, any shares of the Corporation; (iv) make a distribution on its Common Stock in shares of its capital stock other than Common Stock, or (v) pay a dividend or make a distribution on its Common Stock in shares of its Common Stock, the Series A Conversion Rate in effect immediately prior thereto shall be adjusted so that each Holder shall be entitled to receive upon conversion the number of shares of capital stock which it would have owned or been entitled to receive after the happening of any of the events described above, had such shares of Series A Preferred Stock been converted immediately prior to the happening of such event, such adjustment to become effective immediately after the opening of business on the day following the day upon which such event becomes effective. (b) The Corporation shall give to Holders of Series A Preferred Stock twenty (20) days advance notice (in advance of the record date, effective date or date of closing of stock transfer books) of any merger or consolidation with any other corporation, where the Corporation is not the surviving corporation. Page 5 (c) The Corporation will not, by amendment of its Restated Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but at all times in good faith will assist in the carrying out of all the provisions of this Section D and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of each Holder against impairment. (d) No adjustment in the Series A Conversion Rate shall be required, unless such adjustment would require an increase or decrease of at least ten percent (10%) in the Series A Conversion Rate, provided that all adjustments which do not meet this minimum requirement shall be cumulated and the adjustment will be made when the cumulated total is sufficient to require an adjustment. All calculations made pursuant to this subsection (d) of this Section D.(6) shall be made to the nearest one hundredth (l/lOOth) of a share of Common Stock. (7) Statement to Transfer Agent. Whenever the Series A Conversion Rate shall be adjusted pursuant to the provisions of this Section D, the Corporation shall forthwith maintain at its office and, if applicable, file with the Transfer Agent for shares of Series A Preferred Stock and for shares of Common Stock, a statement signed by the President or a Vice President of the Corporation and by its Treasurer or an Assistant Treasurer, stating the adjusted Series A Conversion Rate and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment, and stating the facts on which the calculation is based. Each adjustment shall remain in effect until a subsequent adjustment hereunder is required. SECTION E. FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issued upon any redemption or conversion of shares of Series A Preferred Stock but, in lieu thereof, there shall be paid an amount in cash equal to the same fraction of the current market price of a whole share of Common Stock on the day preceding the day of redemption or conversion. SECTION F. VOTING RIGHTS OF SERIES A PREFERRED STOCK. Holders of Series A Preferred Stock shall have no voting rights except as provided below and as required by the Delaware General Corporation Law. Holders of Series A Preferred Stock shall be entitled to vote alongside the Common Stock on all matters to be voted upon by holders of Common Stock from and after the date that the Corporation fails to pay any three consecutive dividends upon the Series A Preferred Stock; provided, however, that, for purposes of voting, each share of Series A Preferred Stock shall be entitled to a number of votes equal to the then applicable Series A Conversion Rate. Such activation of voting rights shall be the only penalty or remedy for any failure of the Corporation to pay any dividend upon the Series A Preferred Stock. Page 6 IN TESTIMONY WHEREOF, LOT$OFF Corporation has caused this Statement to be signed by its President and its Secretary this day of ---- June, 1997. LOT$OFF CORPORATION By: ------------------------------------- Charles J. Fuhrmann II President ATTEST: ----------------------------------- James G. Scogin Secretary Page 7 EX-4.2 7 CERT OF DESIGNATION SERIES B PREF STOCK EXHIBIT 4.2 CERTIFICATE OF DESIGNATIONS in respect of SERIES B PREFERRED STOCK of LOT$OFF CORPORATION ______________________________ Pursuant to Sections 151 and 303 of the General Corporation Law of the State of Delaware and a Confirmation Order of the United States Bankruptcy Court for the Western District of Texas San Antonio Division ______________________________ The undersigned, being President of LOT$OFF Corporation, formerly 50- Off Stores, Inc. (the "Corporation"), a corporation organized and existing under the General Corporation Law of the State of Delaware, hereby certifies that, pursuant to a Confirmation Order of the United States Bankruptcy Court for the Western District of Texas, San Antonio Division, dated June 3, 1997, relating to the Debtors' Joint Plan of Reorganization, as Amended, dated March 27, 1997 (the "Confirmation Order") and Sections 151 and 303 of the General Corporation Law of the State of Delaware, the Corporation is establishing a series of Preferred Stock as described in the resolution below. The Joint Plan of Reorganization became effective on June ___, 1997. The Corporation filed for bankruptcy on October 9, 1996. Capitalized terms used herein which are not defined herein shall have the meanings ascribed to them in the Debtors' Joint Plan of Reorganization, as Amended (the "Plan"), which is incorporated herein for all relevant purposes. RESOLVED, that, pursuant to the Confirmation Order and Sections 151 and 303 of the General Corporation Law of the State of Delaware, the Corporation hereby establishes a series of Preferred Stock, par value $.01 per share, of the Corporation and fixes the number of shares of such series and the powers, designations, preferences and relative, participating, optional or other rights of such series, and the qualifications, limitations or restrictions thereof as follows: The series of Preferred Stock, par value $.01 per share, of the Corporation shall be, and hereby is, designated "Series B Preferred Stock" (the "Series B Preferred Stock"), and the number of shares constituting such series shall be one million (1,000,000). The relative rights and preferences of the Series B Preferred Stock shall be as follows: 1 Section A. Dividends and Distributions Holders of Series B Preferred Stock shall participate in any cash dividends paid to holders of Common Stock as though each share of Series B Preferred Stock is equal to the then applicable Series B Conversion Rate. Section B. Redemption of Series B Preferred Stock. Subject to restrictions imposed by Delaware law, the Corporation may, at its option, redeem the shares of the Series B Preferred Stock in whole or in part, at any time after the Disposition of the Lawsuits (as defined in the Plan but described generally as the rendering of Final Orders with regard to certain pending lawsuits brought by the Corporation), in exchange for the payment of the Series B Liquidation Preference (as defined in Section C hereof). Redemption shall be accomplished using the procedures set forth below: (1) Notice Procedure. The Corporation shall give notice to each holder of record (the "Holder") by certified mail, return receipt requested, at least 20 days in advance of the date set forth in such notice as the date on which such redemption is to be effected. The shares shall be redeemed upon payment by the Corporation to Holders of the Series B Liquidation Preference, together with the amount of any dividends accrued and unpaid thereon, as of the redemption date. The Corporation shall be required to redeem pro rata, based on the number of shares of Series B Preferred Stock held by each Holder in relation to the number of shares of Series B Preferred Stock issued and outstanding as of the record date for redemption, at any time it elects to redeem the Series B Preferred Stock in part. Any redemptions hereunder shall be subject to restrictions imposed by Delaware law regarding the circumstances under which such a redemption may be effected. (2) Payment Procedures. Any notice mailed by the Corporation shall contain the information required by Delaware law and shall be mailed to each Holder at its address, certified mail, return receipt requested, as the same shall appear on the books of the Corporation. If fewer than all the outstanding shares of Series B Preferred Stock are to be redeemed, the redemption shall be made pro rata as set forth in Section B.(1) hereof. From and after the date fixed in any notice from the Corporation as the date of redemption, and after all amounts necessary to effect such redemption have been set aside for such purpose, all rights of each Holder thereof as a stockholder of the Corporation with respect to the shares redeemed, except the right to receive the redemption price and any accrued and unpaid dividends, shall cease and terminate. (3) Delivery of Certificates. Each Holder shall be entitled to receive the redemption price plus any accrued and unpaid dividends upon actual delivery to the Corporation or to such other entity as may be designated by the notice referred to in Subsection (1) of this Section B of certificates for the number of shares to be redeemed, duly endorsed in blank or accompanied by proper instruments of assignment and transfer duly endorsed in blank. Series B Preferred Stock redeemed pursuant to the provisions of this Section B may be held in the treasury of the Corporation or retired and canceled and given the status of authorized and unissued Series B Preferred Stock. 2 (4) Other Redemption Matters. The Series B Preferred Shares are not mandatorily redeemable by the Corporation and shall not have the benefit of any sinking fund for the redemption or purchase of such shares. The Series B Preferred Shares are not redeemable at the option of the Holder. Section C. Priority of the Series B Preferred Stock in the Event of Dissolution. (1) Lien on Net Lawsuits' Proceeds. The Holders of the Series B Preferred Stock shall have a Lien on the Net Lawsuits' Proceeds (as defined in the Plan but described generally as proceeds derived from certain pending lawsuits brought by the Corporation net of certain contingency and other fees and expenses) subject to the terms and conditions of the Plan (the "Series B Preferred Stock Lien"). Such Series B Preferred Stock Lien shall be a full assignment and security interest in and upon the Net Lawsuits' Proceeds securing the Corporation's obligation to pay the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up, which Lien shall be junior in right and priority to: (A) any and all contingent fee interests held by counsel prosecuting such Lawsuits on behalf of the Debtors and the Reorganized Debtors, including such contingent fee interest as secures the reimbursement of all expenses owing to such counsel; (B) the reimbursement of the Debtors and the Reorganized Debtors of all expenses directly relating to the prosecution of the Lawsuits paid by the Debtors or the Reorganized Debtors after the Petition Date (October 9, 1996), including after confirmation or after any conversion of the Chapter 11 Cases to Chapter 7; (C) the Class 7 Agent's (with Class 7 generally referring to allowed general unsecured claims) fees and expenses and the fees and expenses of any Professional Persons hired by the Class 7 Agent; (D) the Chapter 11 Professional Fee Lawsuit Carve-Out; and (E) the Liens and security interest of the Senior Secured Exit Financing lender or any successor thereto. The Series B Preferred Stock Lien shall be senior to the Class 7 Lien (as defined in the Plan but described generally as a Lien granted to holders of allowed general unsecured claims pursuant to the Plan and Confirmation Order, securing the Corporation's obligation to issue Series A Preferred Stock and to distribute Excess Net Lawsuits' Proceeds to such holder when required pursuant to the terms and conditions of the Plan). Such Series B Preferred Stock Lien shall be enforceable up to the full amount of the Series B Liquidation Preference in the event of any liquidation, dissolution or winding up of the Corporation. Such Series B Preferred Stock Lien shall be deemed satisfied and released as to any portion of the Net Lawsuits' Proceeds for which Series A Conversion Rights (or fractions thereof) are issued, including Series A Conversion Rights (or fractions thereof) which are issued and held in the Contested Claims Escrow. (2) Other Preference. The Series B Preferred Stock shall have preference over the Common Stock and any other class or series of stock ranking junior to the Series B Preferred Stock as to the distribution of assets in the event of any liquidation, dissolution or winding up of the Corporation and, in that event, subject to the provisions of applicable law, each Holder of Series B Preferred Stock shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, $5.00 per share of Series B Preferred Stock and any accrued but unpaid dividends (the "Series B Liquidation Preference"). Upon any liquidation, dissolution or winding up of the Corporation, after payment shall have been made in full on any other securities which are 3 senior as to distribution of assets to Series B Preferred Stock, and after payment shall have been made in full on the Series B Preferred Stock, as provided in this Section C, but not prior thereto, the holders of all the remaining capital stock including Common Stock or any other series or class of stock ranking junior to the Series B Preferred Stock as to distribution of assets shall, subject to the respective terms and provisions of the Restated Certificate of Incorporation of the Corporation, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the Holders of Series B Preferred Stock shall not be entitled to share therein. The merger or consolidation of the Corporation with another corporation and/or the sale, lease, pledge or mortgage of all or substantially all of the assets of the Corporation shall not be deemed to be a liquidation, dissolution or winding up of the Corporation for the purpose of this Section C. Section D. Rights of Conversion into Shares of Common Stock of the Corporation (1) General. Subject to the terms hereof, any share or shares of Series B Preferred Stock may be converted, provided that such shares have not been redeemed, on or after the date of issue at the option of each Holder of Series B Preferred Stock, into fully paid and nonassessable shares of Common Stock. Each share of Series B Preferred Stock shall be convertible into Common Stock by surrender to the corporation of the certificate representing such shares of Series B Preferred Stock to be converted by the Holder and by giving written notice to the Corporation of the Holder's election to convert. The Corporation shall, as soon as practicable after receipt of such written notice and the proper surrender to the Corporation of the certificate or certificates, duly endorsed, representing shares of Series B Preferred Stock to be converted in accordance with the above provisions, issue and deliver for the benefit of the Holder at the office of the Corporation's duly appointed transfer agent (the "Transfer Agent") to the Holder for whose account such shares of Series B Preferred Stock were so surrendered or to such Holder's nominee or nominees, certificates for the number of shares of Common Stock to which the Holder shall be entitled. The certificates of Common Stock of the Corporation issued upon conversion shall bear such legends, if any, as may be required by state or federal laws. Such conversion shall be deemed to have been effective immediately prior to the close of business on the date on which the Corporation shall have received both such written notice and the properly surrendered certificates for shares of Series B Preferred Stock to be converted (the "Conversion Date"), and at such time the rights of the Holder with respect to the Series B Preferred Stock so surrendered for conversion shall cease and such Holder or the person or persons entitled to receive the shares of Common Stock issuable upon the conversion of such shares of Series B Preferred Stock shall be deemed to be, and shall be treated for all purposes as, the record Holder or Holders of such Common Stock on the Conversion Date. (2) Conversion Rate. Each share of Series B Preferred Stock may be converted, subject to the terms and provisions of this Section D, into two shares of Common Stock, which is a price equal to one share of Common Stock for each $2.50 of Series B Liquidation Preference or, in case an adjustment of such rate has taken place pursuant to the provisions hereof, then at the Series B Conversion Rate as last adjusted (such rate or adjusted rate shall be expressed as the number of shares of Common Stock 4 to be acquired upon conversion of one share of Series B Preferred Stock and shall be referred to herein as the "Series B Conversion Rate"). (3) Dividends. Shares of Series B Preferred Stock, if any, shall be entitled to all dividends on account of Series B Preferred Stock (as set forth in Section A hereof) declared and due prior to the Conversion Date and remaining unpaid. (4) Cancellation. Series B Preferred Stock converted into Common Stock shall be retired and canceled by the Corporation and given the status of authorized and unissued Series B Preferred Stock. (5) Reservation of Shares. The Corporation shall, at all times during which shares of Series B Preferred Stock may be converted into Common Stock, reserve and keep available, out of any Common Stock held as treasury stock or out of its authorized and unissued Common Stock, or both, solely for the purpose of delivery upon conversion of the shares of Series B Preferred Stock as herein provided, such number of shares of Common Stock as shall then be sufficient to effect the conversion of all shares of Series B Preferred Stock from time to time outstanding, and shall take such action as may from time to time be necessary to ensure that such shares of Common Stock will, when issued upon conversion of Series B Preferred Stock, be fully paid and nonassessable. (6) Adjustment of Conversion Rate; Notice Rights. The Series B Conversion Rate provided in Subsection (2) of this Section D, in respect of Series B Preferred Stock, shall be subject to adjustment from time to time and the Holders thereof shall have certain rights as follows: (a) While any shares of Series B Preferred Stock shall be outstanding, in case the Corporation shall (i) subdivide the outstanding shares of Common Stock into a greater number of shares of Common Stock; (ii) combine the outstanding shares of Common Stock into a smaller number of shares of Common Stock; (iii) issue, by reclassification of its shares of Common Stock, any shares of the Corporation; (iv) make a distribution on its Common Stock in shares of its capital stock other than Common Stock; or (v) pay a dividend or make a distribution on its Common Stock in shares of its Common Stock, the Series B Conversion Rate in effect immediately prior thereto shall be adjusted so that each Holder shall be entitled to receive upon conversion the number of shares of capital stock which it would have owned or been entitled to receive after the happening of any of the events described above, had such shares of Series B Preferred Stock been converted immediately prior to the happening of such event, such adjustment to become effective immediately after the opening of business on the day following the day upon which such event becomes effective. (b) The Corporation shall give to Holders of Series B Preferred Stock twenty (20) days advance notice (in advance of the record date, effective date or date of closing of stock transfer books) of any merger or consolidation with any other corporation, where the Corporation is not the surviving corporation. (c) The Corporation will not, by amendment of its Restated Certificate of Incorporation or through any reorganization, transfer of assets, merger, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or 5 performance of any of the terms to be observed or performed hereunder by the Corporation, but at all times in good faith will assist in the carrying out of all the provisions of this Section D and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of each Holder against impairment. (d) No adjustment in the Series B Conversion Rate shall be required, unless such adjustment would require an increase or decrease of at least ten percent (10%) in the Series B Conversion Rate, provided that all adjustments which do not meet this minimum requirement shall be cumulated and the adjustment will be made when the cumulated total is sufficient to require an adjustment. All calculations made pursuant to this subsection (d) of this Section D.(6) shall be made to the nearest one hundredth (l/lOOth) of a share of Common Stock. (7) Statement to Transfer Agent. Whenever the Series B Conversion Rate shall be adjusted pursuant to the provisions of this Section D, the Corporation shall forthwith maintain at its office and, if applicable, file with the Transfer Agent for shares of Series B Preferred Stock and for shares of Common Stock, a statement signed by the President or a Vice President of the Corporation and by its Treasurer or an Assistant Treasurer, stating the adjusted Series B Conversion Rate and setting forth in reasonable detail the method of calculation and the facts requiring such adjustment, and stating the facts on which the calculation is based. Each adjustment shall remain in effect until a subsequent adjustment hereunder is required. Section E. Rights of Conversion into Shares of Series A Preferred Stock of the Corporation. (8) General. Subject to the terms hereof, any share or shares of Series B Preferred Stock may be converted, provided such shares have not been redeemed, on or after such time as such share or shares of Series B Preferred Stock is or are deemed fully convertible, into fully paid and nonassessable shares of Series A Preferred Stock. A share of Series B Preferred Stock shall be deemed fully convertible at such time as a full Series A Conversion Right with respect to such share of Series B Preferred Stock has been deemed distributed by the Corporation. One Series A Conversion Right shall be issued for each $5.00 of Net Lawsuits' Proceeds received by the Corporation. Series A Conversion Rights shall be deemed distributed as and when sufficient Net Lawsuits' Proceeds are received by the Corporation to warrant an effective distribution, in the Corporation's discretion; provided, however, an effective distribution shall be made upon receipt of $250,000 in Net Lawsuits' Proceeds for which no previous Series A Conversion Rights have been issued. Each distribution shall be made on a pro rata basis to Holders on the record date for the distribution. Upon the effective distribution of 798,210 Series A Conversion Rights, no further Series A Conversion Rights shall be issued. Once deemed fully convertible in accordance with the foregoing and subject to the terms and provisions of the Plan, each share of Series B Preferred Stock shall be convertible into Series A Preferred Stock by surrender to the Corporation of the certificate representing such shares of Series B Preferred Stock to be converted by the Holder and by giving written notice to the Corporation of the Holder's election to convert. 6 The Corporation shall, as soon as practicable after receipt of such written notice and the proper surrender to the Corporation of the certificate or certificates, duly endorsed, representing shares of Series B Preferred Stock to be converted in accordance with the above provisions, issue and deliver for the benefit of the Holder at the office of the Corporation's duly appointed transfer agent (the "Transfer Agent") to the Holder for whose account such shares of Series B Preferred Stock were so surrendered or to such Holder's nominee or nominees, certificates for the number of shares of Series A Preferred Stock to which the Holder shall be entitled. The certificates of Series A Preferred Stock of the Corporation issued upon conversion shall bear such legends, if any, as may be required by state or federal laws. Such conversion shall be deemed to have been effective immediately prior to the close of business on the date on which the Corporation shall have received both such written notice and the properly surrendered certificates for shares of Series B Preferred Stock to be converted (the "Conversion Date"), and at such time the rights of the Holder with respect to the Series B Preferred Stock so surrendered for conversion shall cease and such Holder or the person or persons entitled to receive the shares of Series A Preferred Stock issuable upon the conversion of such shares of Series B Preferred Stock shall be deemed to be, and shall be treated for all purposes as, the record Holder or Holders of such Series A Preferred Stock on the Conversion Date. (2) Conversion Rate. Each share of Series B Preferred Stock may be converted, subject to the terms and provisions of this Section E and the Plan, into one share of Series A Preferred Stock. (3) Dividends. Shares of Series B Preferred Stock, if any, shall be entitled to all dividends on account of Series B Preferred Stock (as set forth in Section A hereof) declared and due prior to the Conversion Date and remaining unpaid. (4) Cancellation. Series B Preferred Stock converted into Series A Preferred Stock shall be retired and canceled by the Corporation and given the status of authorized and unissued Series B Preferred Stock. (5) Reservation of Shares. The Corporation shall, at all times during which shares of Series B Preferred Stock may be converted into Series A Preferred Stock, reserve and keep available, out of any Series A Preferred Stock held as treasury stock or out of its authorized and unissued Series A Preferred Stock, or both, solely for the purpose of delivery upon conversion of the shares of Series B Preferred Stock as herein provided, such number of shares of Series A Preferred Stock as shall then be sufficient to effect the conversion of all shares of Series B Preferred Stock from time to time outstanding, and shall take such action as may from time to time be necessary to ensure that such shares of Series A Preferred Stock will, when issued upon conversion of Series B Preferred Stock, be fully paid and nonassessable. Section F. Fractional Shares. No fractional shares of Common Stock or scrip representing fractional shares of Common Stock shall be issued upon any redemption or conversion of shares of Series B Preferred Stock but, in lieu thereof, there shall be paid an amount in cash equal to the same fraction of the current market price of a whole share of Common Stock on the day preceding the day of redemption or conversion. 7 Section G. Voting Rights of Series B Preferred Stock. Holders of Series B Preferred Stock shall have no voting rights except as provided below and as required under the Delaware General Corporation Law. Holders of Series B Preferred Stock shall be entitled to vote alongside the Common Stock on all matters to be voted upon by holders of Common Stock from and after the Disposition of the Lawsuits; provided, however, that for purposes of voting, each share of Series B Preferred Stock shall be entitled to a number of votes equal to the then applicable Series B Conversion Rate. IN TESTIMONY WHEREOF, LOT$OFF Corporation has caused this Statement to be signed by its President and its Secretary this ____ day of June, 1997. LOT$OFF CORPORATION By: ---------------------------------------- Charles J. Fuhrmann II President ATTEST: ----------------------------- James G. Scogin Secretary 8 EX-4.3 8 ESCROW AGREEMENT EXHIBIT 4.3 ESCROW AGREEMENT THIS ESCROW AGREEMENT (this "Agreement") is entered into as of the 25th day of March, 1997, by and between 50-OFF STORES, INC., a Texas corporation ("ISSUER") and BANK ONE, TEXAS, NA ("ESCROW AGENT"). RECITALS: A. Issuer proposes to offer for sale to certain holders of Rights an aggregate of 122,009 units (the "UNITS") at a price of $100 per Unit, payable at the time of subscribing for a Unit. Each Unit represents 20 shares of Series A Preferred Stock and 20 shares of Common Stock, both in Reorganized 50-OFF, as such stock may be issued pursuant to Issuer's Plan of Reorganization, as Amended, dated March 27, 1997 (the "PLAN," which term shall include any amendments or modifications thereto), filed in its bankruptcy case, pending in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (the "BANKRUPTCY COURT"), administered under case number 96- 54430-C (the "BANKRUPTCY CASE"). If successful, the payment of $3,050,000 for at least 30,500 Units will be paid into the escrow created by this Agreement. B. Issuer intends to allow holders of Rights issued pursuant to the Plan to purchase the Units, all as described more fully in the Plan. C. Issuer desires to establish an escrow account in which funds received from subscribers would be deposited pending completion of the Escrow Period as defined below). BANK ONE, TEXAS, NA agrees to serve as Escrow Agent in accordance with the terms and conditions set forth herein. AGREEMENT: NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Issuer hereby appoints BANK ONE, TEXAS, NA as Escrow Agent and Escrow Agent shall establish an escrow account (the "ESCROW ACCOUNT") on its books styled "50-OFF Stores, Inc., Rights Offering Escrow Account." Commencing upon the execution of this Agreement, Escrow Agent shall act as Escrow Agent and hereby agrees to receive and disburse the proceeds from the offering of the Units in accordance with the terms herewith. Issuer agrees to notify the Escrow Agent promptly of the closing of the offering and sale of the Units. 2. Issuer shall cause all checks received from subscribers for Units to be promptly deposited into the Escrow Account. Subscribers shall forward checks to Escrow Agent made payable to the order of the 50-OFF Stores, Inc., Rights Offering Escrow Account. Subject to the provisions of paragraph 11 hereof, any checks that are received by Escrow Agent that are not made payable to the 50-OFF Stores, Inc., Rights Offering Escrow Account shall be returned to the subscriber which forwarded such check. Escrow Agent shall furnish to the Issuer at the time of each deposit of the above-mentioned funds a list containing the name of each subscriber, the subscriber's address, the number of Units purchased, and the amount of the check being delivered to the Escrow Agent. Prior to the receipt of the Minimum (as described below) and prior to the Bankruptcy Court entering an order confirming the Plan, the Issuer is aware and understands that it is not entitled to any proceeds from subscriptions deposited into the Escrow Account and no amounts deposited in the Escrow Account during the Escrow Period shall become the property of the Issuer or any other entity, or be subject to the debts of the Issuer or any other entity. 3. The Escrow Period shall commence on the date hereof and shall terminate ten (10) business days following the earlier to occur of the following dates: (a) The later of both of the following two events to occur: (i) the date upon which Escrow Agent confirms upon written request of the Issuer that it has received into the Escrow Account and collected gross subscription proceeds from the sale of 30,500 Units aggregating $3,050,000 in deposited funds (the "Minimum"), and (ii) the Bankruptcy Court entering an order confirming the Plan; or (b) The "Cessation Date," which for the purposes of this Agreement shall be June 30, 1997, unless (i) Issuer elects to continue to offer the Units for sale until some later date, as permitted by the Bankruptcy Court, and (ii) Issuer notifies Escrow Agent in writing no later than June 20, 1997, of such extension specifying the extended Cessation Date; or (c) The date upon which a determination is made by the Issuer to terminate the Offering prior to the sale of the Minimum, as communicated to Escrow Agent in writing. Notwithstanding anything to the contrary contained herein, the Cessation Date is intended to signify the date of the cessation of the Offering and not the termination of the Escrow Period of this Agreement; and upon the occurrence of any of the events described in (a), (b) or (c) above, the Escrow Period shall continue for such ten (10) business-day period solely for the limited purposes of collecting subscribers' checks that have been deposited prior to such event and disbursing funds from the Escrow Account as provided herein. Escrow Agent will not accept deposits of the subscribers' checks after notice that any of the events described in subparagraphs (a), (b) and (c) has occurred. 4. The Escrow Agent will deposit the subscribers' checks for collection and credit the proceeds to the Escrow Account to be held by it under the terms of this Agreement. Notwithstanding anything to the contrary contained herein, Escrow Agent is under no duty or responsibility to enforce collection of any checks delivered to Escrow Agent hereunder. The Escrow Agent hereby is authorized to forward each check for collection and deposit the proceeds Page 2 in the Escrow Account. As an alternative, the Escrow Agent may telephone the bank on which the check is drawn to confirm that the check has been paid. Additionally, to insure that such funds have cleared normal banking channels for collection, Escrow Agent is authorized to hold funds to be released after the time period that national banks may hold funds deposited into their accounts to verify funds. Issuer shall immediately reimburse Escrow Agent any monies paid to it if thereafter the subscriber's check is returned unpaid. Any item returned unpaid to the Escrow Agent on its first presentation for payment may be returned to the subscriber and need not be again presented by the Escrow Agent for collection. Issuer agrees to reimburse Escrow Agent for the cost incurred with any returned check. For purposes of this Agreement, the term "collected funds" or the term "collected" when referring to the proceeds of subscribers' checks shall mean all funds received by Escrow Agent that have cleared normal banking channels and are in the form of cash. 5. If prior to the Cessation Date, subscriber's checks in an amount of at least the Minimum have been deposited in the Escrow Account, upon request from Issuer, Escrow Agent will confirm the amounts collected by it from subscriber's checks. If such amount is at least equal to the Minimum and if the Bankruptcy Court has entered an order confirming the Plan, the Issuer may send Escrow Agent a written notice providing a list of all accepted subscribers, specifying the total amount of their subscription to be remitted to Issuer, and containing a request to terminate the Escrow Period pursuant to paragraph 3(a) and remit such amount, less any fees or other amounts then owing from Issuer to Escrow Agent hereunder, to the Issuer as promptly as possible, but in no event later than ten (10) business days after such termination, by issuing its bank check payable to the Issuer or by depositing such amount directly into the account of Issuer maintained with BANK ONE, TEXAS, NA, as designated in writing by Issuer to Escrow Agent. The Escrow Period shall not terminate upon receipt by Escrow Agent of such notice, but shall continue for such (10) business-day period solely for the limited purposes of collecting subscribers' checks that have been deposited prior to Escrow Agent's receipt of such notice and disbursing funds from the Escrow Account as provided herein. Escrow Agent will not accept deposits of subscriber's checks after receipt of such notice. If, on the Cessation Date, the Minimum Amount has not been deposited with the Escrow Agent and collected, or if Issuer notifies the Escrow Agent in writing that Issuer elects to terminate the Offering as provided in paragraph 3(c) above, the Escrow Agent shall then issue and mail its bank checks to the subscribers in the amount of the subscribers' respective checks, without deduction, penalty or expense to the subscriber, and shall, for this purpose, be authorized to rely upon the names and addresses of subscribers furnished it as contemplated above. No subscriber shall be paid interest with respect to such deposited funds. The purchase money returned to each subscriber shall be free and clear of any and all claims of the Issuer and any of its creditors. For each subscription for which the Escrow Agent has not collected funds but has submitted the subscriber's check for collection, the Escrow Agent shall promptly issue a check to such subscriber in the amount of the collected funds from such subscriber's check after the Escrow Agent has collected such funds. If Escrow Agent has not yet submitted such subscriber's Page 3 check for collection, the Escrow Agent shall promptly remit the subscriber's check directly to such subscriber. At such time as Escrow Agent shall have made the payments and remittances provided in the Agreement, the Escrow Agent shall be completely discharged and released of any and all further liabilities and responsibilities hereunder. 6. Notwithstanding the provisions of paragraph 12, as consideration for its agreement to act as Escrow Agent as herein described, Issuer agrees to pay the Escrow Agent an administration fee of $3,750 upon execution of this Agreement, plus the fees described on the attached fee schedule. Further, Issuer agrees to pay all disbursements and advances incurred or made by the Escrow Agent in performance of its duties hereunder, including reasonable fees, expenses and disbursements of its counsel, all in accordance with the attached fee schedule or the other provisions of this Agreement. No such fees or reimbursements shall be paid out of or chargeable to the funds on deposit in the Escrow Account until such time as the Minimum has been collected and the Bankruptcy Court enters an order confirming the Plan. Any dispute regarding the reasonableness of the Escrow Agent's fees and expenses will be determined by the Bankruptcy Court; the Escrow Agent consents to the Bankruptcy Court exercising jurisdiction over any such dispute. If the Issuer rejects any subscription for which Escrow Agent has already collected funds, the Escrow Agent shall promptly issue a refund check to the rejected subscriber in the amount of the subscriber's check. If the Issuer rejects any subscription for which the Escrow Agent has not yet collected funds but has submitted the subscriber's check for collection, the Escrow Agent shall promptly issue a check in the amount of the collected funds from the subscriber's check to the rejected subscriber after the Escrow Agent has cleared such funds. If Escrow Agent has not yet submitted a rejected subscriber's check for collection, the Escrow Agent shall promptly remit the subscriber's check directly to the subscriber. 7. This Agreement shall automatically terminate upon the earlier of (i) twenty (20) days after the Cessation Date or (ii) twenty (20) days after the date upon which the Escrow Agent has delivered the final portion of Escrow Account funds pursuant to the terms of this Agreement. 8. Escrow Agent reserves the right to resign hereunder, upon ten (10) days prior written notice to Issuer. In the event of said resignation, and prior to the effective date thereof, Issuer, by written notice to Escrow Agent, shall designate a successor escrow agent to assume the responsibilities of Escrow Agent under this Agreement, and Escrow Agent immediately shall deliver any undisbursed Escrow Account funds to such successor escrow agent. If Issuer shall fail to designate such a successor escrow agent within such time period, the Escrow Agent may deliver any undisbursed funds into the registry of the Bankruptcy Court. 9. The parties hereto agree that the following provisions shall control with respect to the rights, duties, liabilities, privileges and immunities of the Escrow Agent: Page 4 a. Subject to the provisions of paragraph 12 hereof, the Escrow Agent shall have no responsibility except for the safekeeping and delivery of the amounts deposited in the Escrow Account in accordance with this Agreement. The Escrow Agent shall not be liable for any act done or omitted to be done under this Agreement or in connection with the amounts deposited in the Escrow Account, except as a result of the Escrow Agent's gross negligence or willful misconduct. The Escrow Agent is not a party to nor is it bound by, nor need it give consideration to the terms of provisions of, even though it may have knowledge of (i) any agreement or undertaking by, between or among the Issuer and any other party, except this Agreement, (ii) any agreement or undertaking that may be evidenced by this Agreement, (iii) any other agreements that may now or in the future be deposited with the Escrow Agent in connection with this Agreement. The Escrow Agent is not a party to, is not responsible for, and makes no representation with respect to the offer, sale or distribution of the Units including, but not limited to, matters set forth in any offering documents prepared and distributed in connection with the offer, sale and distribution of the Units. Except with regard for actions for gross negligence or in willful misconduct of the Escrow Agent's duties, the Issuer covenants that it will not commence any action against the Escrow Agent at law, in equity, or otherwise as a result of any action taken or thing done by the Escrow Agent pursuant to this Agreement, or for any disbursement made as authorized herein upon failure of the Issuer to give the notice within the times herein prescribed. The Escrow Agent has no duty to determine or inquire into any happening or occurrence of or of any performance or failure of performance of the Issuer or of any other party with respect to agreements or arrangements with any other party. If any question, dispute or disagreement arises among the parties hereto and/or any other party with respect to the funds deposited in the Escrow Account or the proper interpretation of this Agreement, the Escrow Agent shall not be required to act and shall not be held liable for refusal to act until the question or dispute is settled, and the Escrow Agent has the absolute right at its discretion to do either or both of the following: (i) withhold and/or stop all further performance under this Agreement until the Escrow Agent is satisfied, by receipt of a written document in form and substance satisfactory to the Escrow Agent and executed and binding upon all interested parties hereto (who may include the subscribers), that the question, dispute, or disagreement had been resolved; or (ii) file a suit in interpleader and obtain by final judgment, rendered by the Bankruptcy Court, an order binding all parties interested in the matter. In any such suit, or should the Escrow Agent become involved in litigation in any manner whatsoever on account of this Agreement or the Escrow Page 5 Account, the Escrow Agent shall be entitled to recover from the Issuer its attorneys' fees and costs. The Escrow Agent shall never be required to post a bond in connection with any services hereunder. The Escrow Agent may consult with counsel of its own choice and shall have full and complete authorization and protection for and shall not be liable for any action taken or suffered by it hereunder in good faith and believed by it to be authorized hereby, nor for action taken or omitted by it in accordance with the advice of such counsel (who shall not be counsel for the Issuer). b. The Escrow Agent shall be obligated only for the performance of such duties are specifically set forth in this Agreement and may rely and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed or presented by the proper party or parties and to take statements made therein as authorized and correct without any affirmative duty of investigation. c. The Issuer hereby agrees to indemnify the Escrow Agent for, and to hold it harmless against, any loss, liability, or expense (including, without limitation, all legal expenses incurred in enforcing any of the provisions of this Agreement or otherwise in connection herewith) incurred without gross negligence or willful misconduct on the part of the Escrow Agent, arising out of or in connection with its entering into this Agreement and carrying out its duties hereunder, including the costs and expenses of defending itself against any claim of liability hereunder or arising out of or in connection with the sale of the Units. This covenant shall survive the termination of this Agreement. d. The Escrow Agent shall not be bound by any modification, amendment, termination, cancellation, rescission or supersession of this Agreement unless the same shall be in writing and signed by all of the other parties hereto and, if its duties as Escrow Agent hereunder are affected thereby, unless it shall have given prior written consent thereto. 10. Notices required to be sent hereunder shall be delivered by hand, sent by an express mail service or sent via United States mail, postage prepaid, certified, return receipt requested, to the following address: If to Issuer: Charles J. Fuhrmann II 50-OFF Stores, Inc. 8750 Tesoro Drive San Antonio, Texas 78217 (210)804-4980 Page 6 with a copy to: Samuel M. Stricklin, Esq. Sheinfeld, Maley & Kay, P.C. 1700 Pacific Avenue, Suite 4400 Dallas, Texas 75201-4618 (214) 953-0700 If to Escrow Agent: BANK ONE, TEXAS, NA Corporate Trust Department 500 Throckmorton Street, Suite 704 Fort Worth, Texas 76102 (817) 884-4415 / (817) 884-4417 No notice to the Escrow Agent or Issuer shall be deemed to be delivered until actually received by the Escrow Agent. From time to time any party hereto may designate an address other than the address listed above by giving the other parties hereto not less than five (5) days advance notice of such change in address in accordance with the provisions hereof. 11. Notwithstanding any provision herein to the contrary, prior to the Cessation Date the Escrow Agent shall not refuse any subscription or return any check (even if such check has been presented for payment and dishonored or even if such check is payable to the wrong payee) without the advance written approval of the Issuer. This provision is intended to allow the Issuer the opportunity to waive or seek to cure any defects in any subscription. 12. Pending distribution in accordance with the provisions of paragraph 5 hereof, all collected and available funds held by the Escrow Agent pursuant to this Escrow Agreement shall be invested at the written direction of the Issuer in direct obligations of the United States of America issued in the name of "Bank One, Texas, NA, as Escrow Agent for the benefit of the Subscribers described in that Escrow Agreement dated March 25, 1997 by and between Escrow Agent and 50-OFF Stores, Inc." for the payment of which the full faith and credit of the United States of America is pledged (such obligations shall be limited to Treasury Bills, Treasury Bonds and Treasury Notes). Issuer acknowledges that the Escrow Agent will not be required to invest funds below the authorized minimum denominations; provided, however, that in all events, funds held by the Escrow Agent which are not so invested shall not exceed $100,000 in the aggregate at any time. The method of investment of such funds shall be subject to Bankruptcy Court approval, which the Issuer will seek on an expedited basis. Interest earned on funds held in escrow, if any, shall be credited against the fees of the Escrow Agent. Additional interest, if any, shall be remitted to the Issuer to assist in covering the costs of the Rights Offering. 13. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Texas and the laws of the United States applicable to transactions in Texas. Page 7 EXECUTED on the date first written above. 50-OFF STORES, INC. (Issuer) BANK ONE, TEXAS, NA (Escrow Agent) By: /s/ CHARLES J. FUHRMANN II By: /s/ Bank One, Texas, N.A. --------------------------------- --------------------------------- Charles J. Fuhrmann II Name: President ------------------------------- Title: ------------------------------ Page 8 EX-4.4 9 SUBSCRIPTION EXERCISE FORM & INSTRUCTION EXHIBIT 4.4 50-OFF STORES, INC. SUBSCRIPTION EXERCISE FORM The following instructions relate to a rights offering (the "OFFERING") being effected by 50-OFF Stores, Inc., a Delaware corporation (the "COMPANY"), with respect to Units of the Company and related shares of Common Stock, $.01 par value (the "COMMON STOCK") and Series A Preferred Stock, $.01 par value (the "PREFERRED STOCK") of the Company, as described below and in the Disclosure Statement (the "DISCLOSURE STATEMENT") with Respect to Debtors' Joint Plan of Reorganization, as Amended, dated March 27, 1997 (the "PLAN"). Capitalized terms used herein without definition shall have the meaning set forth in the Plan. THE OFFERING Basic Subscription Privilege. The Company is offering up to 122,009 Units ---------------------------- (the "TOTAL MAXIMUM") and not less than 30,500 Units (the "TOTAL MINIMUM") (with each Unit representing 20 shares of Common Stock and 20 shares of Series A Preferred Stock) to current holders of Common Stock as of March 21, 1997 (the "RECORD DATE") pursuant to Basic Subscription Privileges. The Basic Subscription Privilege entitles each current holder to purchase one Unit for each share of Common Stock held on the Record Date at the Subscription Price of $100.00 per Unit (the "SUBSCRIPTION PRICE"), subject to the Total Maximum and Total Minimum. The Oversubscription Privilege. Each current holder may exercise the ------------------------------ Oversubscription Privilege to subscribe for additional Units that are otherwise unsubscribed. Allocation Upon Oversubscription. In the event of an oversubscription of -------------------------------- the Units, each subscriber shall receive one Unit for each 100 shares of Common Stock held on the record date. Thereafter, any remaining Units will be divided pro rata among subscribers based upon the number of Units requested and not provided. Subscribers will be refunded, promptly after the Expiration Date, any portion of the subscription price, without interest, to the extent their subscriptions are not filled pursuant to the Basic Subscription Privilege or Oversubscription Privilege. There can be no assurance that any Units will be available to satisfy in whole or in part any holder's Basic Subscription Privilege or Oversubscription Privilege. TO EXERCISE THE OVERSUBSCRIPTION PRIVILEGE PROPERLY, THE SUBSCRIPTION EXERCISE FORM MUST BE COMPLETED, AND PAYMENT IN FULL OF THE AGGREGATE SUBSCRIPTION PRICE FOR THE ADDITIONAL UNITS MUST ACCOMPANY THE EXERCISE FORM. The Offering will expire at 5:00 p.m., Central Standard Time, on May 20, 1997 (the "EXPIRATION DATE"), unless extended at the discretion of the Company. YOUR SUBSCRIPTION EXERCISE FORM MUST BE RECEIVED BY THE ESCROW AGENT AT OR BEFORE 5:00 P.M., CENTRAL STANDARD TIME, ON MAY 20, 1997. 1. SUBSCRIPTION PRICE. To subscribe for Units in the Offering, complete the Subscription Exercise Form. Send your properly completed and executed Subscription Exercise Form, together with payment in full of the Subscription Price for each Unit subscribed for, to BANK ONE TEXAS, N.A., as Escrow Agent (the "ESCROW AGENT"). Payment of the Subscription Price must be made for the full number of Units being subscribed for (a) in U.S. dollars by check or bank draft, payable to "50-OFF STORES, INC. RIGHTS OFFERING ESCROW ACCOUNT" as Escrow Agent, or (b) by wire transfer of funds in U.S. dollars to the account maintained by the Escrow Agent for such purpose, at BANK ONE, TEXAS, N.A.; ABA NO. 0440-000-37; ACCOUNT NO. 833692200; RE: 50-OFF STORES ESCROW; ATTN: MS. TINA VANCE. Holders who hold Common Stock for the account of others, such as brokers, trustees or depositories for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Subscription Rights. If such beneficial owner so instructs, the record holder of such Subscription Right should complete the Exercise Forms and submit them to the Escrow Agent with the proper payment. In addition, beneficial owners of Common Stock held through such a nominee holder should contact the holder and request the holder to effect transactions in accordance with the beneficial owners' instructions. The address and telephone number of the Escrow Agent are as follows: BANK ONE TEXAS, N.A. 500 THROCKMORTON STREET, SUITE 704 FORT WORTH, TEXAS 76102 ATTN: LEEANN KELSEY (817) 884-4422 2. ISSUANCE AND DELIVERY OF STOCK CERTIFICATES, ETC. Issuances and deliveries of stock certificates will be made to record holders of Common Stock at the address shown on the face of the Subscription Exercise Form unless instructions for special delivery to the contrary are specified in the Subscription Exercise Form. 3. SIGNATURES. a. Signatures by Registered Holder. The signature on the Subscription Exercise Form must correspond with the name of the registered current holder of Common Stock exactly as it appears on the face of the Subscription Exercise Form without any alteration or change whatsoever. Persons who sign the Subscription Exercise Form in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by the Company in its sole and absolute discretion, must present to the Company satisfactory evidence of their authority to so act. b. Signature Guarantees. All subscribers who specify special delivery instructions pursuant to the Subscription Exercise Form must have their signatures guaranteed with a medallion guarantee by an eligible guarantor institution pursuant to Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended. 4. METHOD OF DELIVERY. The method of delivery of Subscription Exercise Forms and payment of the Subscription Price to the Escrow Agent will be at the election and risk of subscribers, but, if sent by mail, it is recommended that a sufficient number of days be allowed to ensure delivery to the Escrow Agent prior to 5:00 p.m., Central Standard Time, on May 20, 1997. 5. IRREGULARITIES. All questions concerning the timeliness, validity, form and eligibility of Subscription Exercise Forms received or any exercise of Subscription Rights will be determined by the Company, whose determinations will be final and binding. The Company, in its sole discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the proposed subscription for Units. Subscription Exercise Forms will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines, in its sole discretion. Neither the Company nor the Escrow Agent will be under any duty to give notifications of any defect or irregularity in connection with the submission of Subscription Exercise Forms or incur any liability for failure to give such notifications. 50-OFF STORES, INC. SUBSCRIPTION EXERCISE FORM FOR RIGHTS OFFERING ---------------------------------------------- NOTICE: USE THIS FORM TO EXERCISE YOUR RIGHT TO PURCHASE UNITS PURSUANT TO THE THE 50-OFF STORES, INC. RIGHTS OFFERING Name of Record holder of Stock and number of shares held (number of shares in upper right hand corner of mail label): - ---------------------------------------------- | | | | | | | | - ---------------------------------------------- -------------------------------------------------- TERMS AND CONDITIONS -------------------- THE TERMS AND CONDITIONS OF THE OFFERING ARE SET FORTH IN DEBTORS' JOINT PLAN OF REORGANIZATION, AS AMENDED, DATED MARCH 27, 1997 (THE "PLAN") FILED BY 50-OFF STORES, INC. (THE "COMPANY") AND ITS SIGNIFICANT SUBSIDIARIES IN THEIR CHAPTER 11 BANKRUPTCY CASES PENDING BEFORE THE UNITED STATES BANKRUPTCY COURT IN THE WESTERN DISTRICT OF TEXAS, SAN ANTONIO DIVISION (THE "COURT"), JOINTLY ADMINISTERED UNDER CASE NUMBER 96-54430-C. THE TERMS OF SUCH PLAN, TOGETHER WITH ALL OF ITS EXHIBITS AND THE INSTRUCTIONS ACCOMPANYING THIS FORM, ARE INCORPORATED HEREIN BY REFERENCE. TERMS USED HEREIN SHALL HAVE THE MEANINGS ASSIGNED TO THEM IN THE PLAN. MATERIAL INFORMATION REGARDING THE RIGHTS OFFERING IS CONTAINED WITHIN THE COMPANY'S DISCLOSURE STATEMENT WITH RESPECT TO THE DEBTORS' JOINT PLAN OF REORGANIZATION, AS AMENDED, DATED MARCH 27, 1997, (THE "DISCLOSURE STATEMENT"). THE PLAN IS ATTACHED TO THE DISCLOSURE STATEMENT AS EXHIBIT "A." AN ESCROW AGREEMENT WITH REGARD TO THE RIGHTS OFFERING IS ATTACHED AND INCORPORATED INTO THE PLAN AS EXHIBIT "E." YOU ARE ADVISED TO READ THE SUBSCRIPTION INSTRUCTIONS, THE PLAN AND THE DISCLOSURE STATEMENT AND EACH OF THEIR RESPECTIVE EXHIBITS THOROUGHLY. BY SIGNING THIS FORM YOU ARE ACKNOWLEDGING RECEIPT OF ALL SUCH DOCUMENTS. THIS FORM MUST BE RECEIVED BY THE ESCROW AGENT AT THE ADDRESS ON THE ==================================================================== REVERSE SIDE OF THIS FORM WITH PAYMENT IN FULL BY 5:00 P.M., CENTRAL STANDARD ============================================================================= TIME, ON MAY 20, 1997 (THE "EXPIRATION DATE"), ============================================= unless the Expiration Deadline is extended in the sole discretion of the Company. Any Rights not exercised prior to the Expiration Date will expire. The person that signs the reverse side of this form certifies (i) that he/she was the holder of the number of shares of common stock of 50-OFF Stores, Inc. as reflected on the mailing label above on March 27, 1997, or (ii) that the he/she has made the appropriate handwritten changes to the information within such mailing label to make the information within the mailing label accurate. YOU MUST COMPLETE BOTH SIDES OF THIS FORM TO PURCHASE UNITS. ____________ The undersigned hereby elects to purchase the following number of Units at $100.00 per Unit (a Unit is comprised of 20 shares of Series A Preferred Stock and 20 shares of New Common Stock). ----------------- The undersigned hereby tenders payment in full for such Units in the following amount (such amount being the number of Units subscribed for multiplied by $100.00). $ ---------------- Make payments by check payable to: "50-OFF STORES, INC. RIGHTS OFFERING ESCROW ACCOUNT" If you desire to wire transfer your payment instead of paying by check, the necessary wiring information is set forth in the attached instructions. This completed form and the full purchase price must be provided to the Escrow Agent on or before May 20, 1997 in accordance with the Rights Offering Instructions provided to the undersigned. The undersigned understands that the number of Units sold may be limited in the manner described within the Plan if there is an oversubscription of Units. The undersigned instructs the Company to register the Series A Preferred Stock and the New Common Stock in the name of (please print)(if blank, name on mailing label on reverse side will be used): . ---------------------- The undersigned instructs the Company to send Series A Preferred Stock and the New Common Stock to the following address)(if blank, name on mailing label on reverse side will be used): - ------------------------------------------------------------------------------- . - ------------------------------------------------------------------------------ Date: Please insert social security ------------------------------ number or other identifying number: ----------------------------------- Signature: ----------------------------------------- Name (typed or printed): ----------------------------------------- Phone: ( ) --- ----------------------------------- ------------------------------------------------------------------ | Return completed form with purchase price to the Escrow Agent: | | BANK ONE TEXAS, N.A. | | 500 THROCKMORTON STREET, SUITE 704 | | FORT WORTH, TEXAS 76102 | | ATTN: LEEANN KELSEY | ------------------------------------------------------------------ Signature Guaranteed by: - ------------------------------------- A signature guarantee is needed only if (i) shares are to be registered in a name other than the name of current registered owner of common stock (i.e., the name on the mailing label) or (ii) shares are to be delivered to an address other than the registered holder's address (i.e., the address on the mailing label). All subscribers who specify such special delivery instructions must have their signatures guaranteed with a medallion guarantee by an eligible guarantor institution pursuant to Rule 17Ad-15 promulgated under the Securities Exchange Act of 1934, as amended. Provide name, name of firm, address and phone number of party guaranteeing signature: - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EX-5.1 10 OPINION OF SHEINFELD, MALEY & KAY, P.C. [LETTERHEAD OF SHEINFELD, MALEY & KAY] EXHIBIT 5.1 June 10, 1997 50-OFF Stores, Inc. 8750 Tesoro Drive San Antonio, Texas 78217 Gentlemen: We have acted as bankruptcy counsel for 50-OFF Stores, Inc., a Delaware corporation (the "Company") as the debtor in proceedings under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. (S) 101 et seq., currently pending in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (the "Bankruptcy Court"), and in connection with the confirmation of the Company's Joint Plan of Reorganization, as Amended and Modified, by the Bankruptcy COurt ("Plan of Reorganization"). As bankruptcy counsel, our opinion has been requested as to certain matters in connection with the registration under the Securities Act of 1933, as amended, of (i) 12,200,915 Rights to purchase Units (the "Rights"), (ii) 122,009 Units (the "Units"), with each Unit representing 20 shares of Common Stock and 20 shares of Series A Preferred Stock, (iii) 7,320,540 shares of the Company's Common Stock, $.01 par value (the "Common Stock") representing (a) 2,440,180 shares of Common Stock issuable in connection with the Units, and (b) 4,880,360 shares of Common Stock issuable upon conversion of the Series A Preferred Stock, and (iv) 2,440,180 shares of the Company's Series A Preferred Stock, $.01 par value (the "Series A Preferred Stock"), issuable in connection with the Units, to be offered upon the terms and subject to the conditions set forth in the Registration Statement on Form S-1 (the "Registration Statement, as amended at the time it becomes effective, being herein called the "Registration Statement") relating thereto filed with the Securities and Exchange Commission. We have examined such of the Company's records, including the Plan of Reorganization, the Order Confirming Debtor's Joint Plan of Reorganization as Amended and Modified, the Company's Restated Certificate of Incorporation, Bylaws, Certificate of Designations with respect to the Company's Series A Preferred Stock, Certificate of Designations with respect to the Company's Series B Preferred Stock, and such other documents and have made such examinations of law as we have deemed relevant. Based upon the foregoing and subject to the assumptions and qualifications set forth herein, we are of the opinion that: 1. The Company's Plan of Reorganization has been confirmed by order of the Bankruptcy Court, and such Plan was confirmed in accordance with applicable law and is 50-OFF Stores, Inc. June 9, 1997 Page 2 enforceable in accordance with its terms. Each requirement of Section 303 of the Delaware General Corporation Law (excluding the actual filing of documents with the Delaware Secretary of State) necessary to effectuate the Corporate Actions (as defined in paragraph 2 below) without approval of the Company's board of directors and/or stockholders has been met. Such requirements include, without limitation, the matters referenced in subparagraphs 2(a) and 2(b) below. 2. With respect to (i) the filing of the Registration Statement and the effectuation of the offering contemplated thereby, (ii) the increase in authorized shares, (iii) the creation, establishment, and authorization of the Series A Preferred Stock and Series B Preferred Stock and the preparation and filing with the State of Delaware of the Series A Preferred Stock Certificate of Designations and the Series B Preferred Stock Certificate of Designations, (iv) the authorization of the Rights and Units, (v) the restatement and amendment of the Certificate of Incorporation and Bylaws and the preparation and filing with the State of Delaware of the Restated Certificate of Incorporation, (vi) the reconstitution of the board of directors, and (vii) the registration, offer, sale, and issuance of the Rights, Units, Common Stock and Series A Preferred Stock, (with the actions set forth in (i) through (vii) collectively called the "Corporate Actions"); the Bankruptcy Court has by order or decree: (a) Authorized the Company to take each Corporate Action, without approval of the Company's board of directors or stockholders. (b) Authorized and designated Charles Fuhrmann to effect each Corporate Action on behalf of the Company and to take any and all action related thereto or in furtherance thereof, including, without limitation, the execution and acknowledgment of any and all documents and instruments contemplated by the Corporate Actions. The opinions expressed herein concern and are limited to the laws of the State of Texas and the State of Delaware, as currently in effect, and the federal laws of the United States of America, as currently in effect. This opinion is limited to the matters expressly set forth in this letter, as limited herein as of the date of this letter, and no opinion is implied or may be inferred beyond the matters expressly stated. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Opinion" in the Prospectus included as part of the Registration Statement. In giving this consent, we do not thereby admit that we are 50-OFF Stores, Inc. June 9, 1997 Page 3 within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. SHEINFELD, MALEY & KAY, P.C. /s/ LEE POLSON ------------------------------------ Lee Polson, Counsel EX-5.2 11 OPINION OF AKIN, GUMP, STRAUSS, HAUER & FELD LLP EXHIBIT 5.2 [AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. Letterhead] June ___, 1997 50-OFF Stores, Inc. 8750 Tesoro Drive San Antonio, Texas 78217 Gentlemen: We have acted as counsel for 50-OFF Stores, Inc., a Delaware corporation (the "Company") in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), of (i) 12,200,915 Rights to purchase Units (the "Rights"), (ii) 122,009 Units (the "Units"), with each Unit representing 20 shares of Common Stock and 20 shares of Series A Preferred Stock, (iii) 7,320,540 shares of the Company's Common Stock, $.01 par value (the "Common Stock") representing (a) 2,440,180 shares of Common Stock issuable in connection with the Units (the "Unit Common Stock"), and (b) 4,880,360 shares of Common Stock issuable upon conversion of the Series A Preferred Stock (the "Conversion Common Stock"), and (iv) 2,440,180 shares of the Company's Series A Preferred Stock, $.01 par value, issuable in connection with the Units (the "Preferred Stock"), to be offered upon the terms and subject to the conditions set forth in the Registration Statement on Form S-1 (the Registration Statement, as amended at the time it becomes effective, being herein referred to as the "Registration Statement") relating thereto filed with the Securities and Exchange Commission. In connection therewith, we have examined originals or copies certified or otherwise identified to our satisfaction of such documents and instruments as we have deemed necessary or appropriate for the expression of the opinions contained herein. We have assumed the authenticity and completeness of all records, certificates and other instruments submitted to us as originals, the conformity to original documents of all records, certificates and other instruments submitted to us as copies, the authenticity and completeness of the originals of those records, certificates and other instruments submitted to us as copies and the correctness of all statements of fact contained in all records, certificates and other instruments that we have examined. Based on the foregoing, and having regard for such legal considerations as we have deemed relevant, we are of the opinion (i) that upon the effective date of the Company's Joint Plan of Reorganization, as amended (the "Plan"), the Rights and the Units will be duly and validly authorized, and (ii) that upon the effective date of the Plan and the concurrent filing with the Delaware Secretary of State of the Company's Restated Certificate of Incorporation and Certificate of Designations with respect to Series A Preferred Stock, the Common Stock and the Preferred Stock will be duly and validly authorized, and, (a) assuming the Plan has become effective and the filings referred to in (ii) above have been effected, when issued, delivered, and paid for in accordance with the terms of the Registration Statement, the Unit Common Stock and Preferred Stock will be duly and validly issued, fully paid and nonassessable and, (b) assuming the Plan has become effective and the filings referred to in (ii) above have been effected, when issued and delivered upon due conversion in accordance with the terms of the Registration Statement, the Conversion Common Stock will be duly and validly issued, fully paid and nonassessable. In connection with the opinions expressed herein we have relied upon the opinion rendered by Sheinfeld, Maley & Kay, P.C., bankruptcy counsel to the Company, which opinion has been filed as an exhibit 50-OFF Stores, Inc. June , 1997 -- Page 2 - ----------------------- to the Registration Statement. Such opinion addresses matters pertaining to Section 303 of the Delaware General Corporation Law (the "Delaware Statute"). If complied with, the Delaware Statute permits certain corporate actions to be taken in connection with a plan of reorganization, without Board of Director or stockholder approval, including, as applicable to the opinions expressed herein, actions to increase authorized shares, to create and establish a series of preferred stock, to amend and restate a certificate of incorporation, to reconstitute a board of directors, and to authorize the issuance of securities. In conclusion, we have assumed for purposes of the opinions expressed herein, in reliance upon the above referenced opinion of bankruptcy counsel, that no approval of the Company's Board of Directors of stockholders is required to (i) increase the authorized shares of the Company, (ii) amend and restate the Company's Certificate of Incorporation, (iii) create and establish the Series A Preferred Stock, (iv) register, offer, sell and issue the Rights, Units, Common Stock and Preferred Stock, and (v) reconstitute the Company's Board of Directors and that the effectuation of all of the foregoing matters was properly authorized by the order confirming the Company's Plan entered by the United States Bankruptcy Court for the Western District of Texas. We have further assumed that the Company's Plan has been confirmed in accordance with applicable laws and is enforceable in accordance with its terms, and that the Delaware Statute is available to the Company for the purposes stated therein. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the caption "Legal Opinion" in the Prospectus included as part of the Registration Statement. Very truly yours, /s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. ------------------------------------------------ Akin, Gump, Strauss, Hauer & Feld, L.L.P. EX-10.1 12 STOCK OPTION PLAN EXHIBIT 10.1 STOCK OPTION PLAN OF LOT$OFF CORPORATION A. PURPOSE. The purpose of this Plan is to promote the interest of ------- LOT$OFF CORPORATION (the "Company") and its stockholders by providing an effective means to attract, retain and increase the commitment of certain individuals and to provide such individuals with additional incentive to contribute to the success of the Company. 2. ELIGIBILITY. Options may be granted under the Plan to officers and ----------- other key employees and directors of the Company, or of any parent or subsidiary of the Company. The Board of Directors or the Committee (defined below), as the case may be, shall select from such eligible class the individuals to whom Options shall be granted from time to time. 3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the -------------------------- Board of Directors or, if determined by the Board of Directors, by a Committee consisting of two or more "non-employee directors," as such term is defined in Rule 16b-3(b)(3) under the Securities and Exchange Act of 1934, as amended (the "Committee"). A quorum of any such Committee shall consist of a majority of the members of such Committee, or as may be otherwise provided in the Company's bylaws. The Committee, if any, shall hold meetings at such times and places and conduct its business at such meetings as it may determine, subject to any express provisions of the Company's bylaws. Acts of a majority of the Committee members attending a meeting at which a quorum is present, or such acts as are reduced to or approved in writing by the majority of the members of the Committee, shall be the valid acts of the Committee. The Board of Directors or the Committee, as the case may be, shall from time to time in its discretion determine which individuals shall be granted Options, the amount of shares covered by such Options, and certain other specific terms and conditions of such Options subject to the terms and conditions contained herein, including those concerning director Options as set forth in Section 5(F). The Board of Directors or the Committee, as the case may be, shall have the sole authority and power, subject to the express provisions and conditions hereof, to construe this Plan and the Options granted hereunder, and to adopt, prescribe, amend, and rescind rules and regulations relating to this Plan, and to make all determinations necessary or advisable for administering this Plan. The interpretation by the Committee of any provision of this Plan with respect to any incentive stock option granted hereunder shall be in accordance with Section 422 of the Internal Revenue Code of 1986 and the Regulations issued thereunder, as such Section 422 or Regulations may be amended from time to time, in order that the incentive stock options granted hereunder ("Incentive Stock Options") shall constitute "incentive stock options" within the meaning of Section 422. Options granted under the Plan which are not intended to be Incentive Stock Options are referred to herein as "Nonqualified Stock Options." The term "Options" as used herein shall refer to Incentive Stock Options and Nonqualified Stock Options, either collectively or without distinction. The interpretation and construction by the Board of Directors or the Committee, as the case may be, of any provisions of the Plan or of any Option granted hereunder shall be final and conclusive. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted hereunder. 4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 6, -------------------------- the number of shares subject to Options granted hereunder shall not exceed Eight Hundred Thousand (800,000) shares of the Company's authorized but unissued or reacquired common stock (the "Common Stock"). Such number of shares shall be subject to adjustment from time to time as provided in Section 6. Shares that by reason of the expiration, termination, cancellation or surrender of an Option are no longer subject to purchase pursuant to an Option granted under the Plan (other than by reason of exercise of such Option) may be reoptioned hereunder. 5. TERMS AND CONDITIONS. -------------------- (A) Option Price. Each Option shall state the number of shares that ------------ may be purchased 1 thereunder, shall expressly designate such Option as an Incentive Stock Option or a Nonqualified Stock Option, and shall state the option price per share (the "Option Price") which shall be paid in the manner specified in this Section 5(A) in order to exercise such Option, which Option Price shall not be less than one hundred percent (100%) of the fair market value of a share on the day the Option is granted with respect to any Incentive Stock Option granted hereunder, and not less than eighty-five percent (85%) of the fair market value of a share on the day the Option is granted with respect to any Nonqualified Stock Option. For purposes of the Plan, the fair market value per share of the Company's Common Stock on any date shall be deemed to be the average closing price over a five-business day period on the principal national securities exchange on which the Company's Common Stock is then listed or admitted to trading, if the Company's Common Stock is then listed or admitted to trading on any national securities exchange. The closing price shall be the last reported sale price regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, as reported by said exchange. If the Company's Common Stock is not then so listed on a national securities exchange, the fair market value per share of the Company's Common Stock on any date shall be deemed to be the average closing price (the last reported sale price regular way) over a five-business day period in the over- the-counter market as reported by the NASDAQ National Market, if the closing price is then reported on the NASDAQ National Market, or, if the closing price is not then reported by the NASDAQ National Market, shall be deemed to be the average over such five-business day period of the mean of the highest closing bid and lowest closing asked price each day in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if the Company's Common Stock is not then quoted by NASDAQ, as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. If no member of the National Association of Securities Dealers, Inc. furnishes quotes with respect to the Common Stock of the Company, such fair market value shall be determined by resolution of the Company's Board of Directors. Notwithstanding the foregoing provisions of this Section 5(A), if the Board of Directors shall at any time determine that it is impracticable to apply the foregoing methods of determining fair market value, the Board of Directors is empowered to adopt other reasonable methods for such purpose. The Board or the Committee may, if it deems it appropriate, engage the services of an independent qualified expert or experts to appraise the value of the Common Stock. Options under the Plan may be exercised by payment of the exercise price in cash, by delivery of the equivalent fair market value of Common Stock or by a "cashless exercise" procedure in which an Optionee is permitted to exercise an Option by arranging with the Company and his or her broker to deliver the appropriate exercise price from the concurrent market sale of the acquired shares, or a combination of the foregoing. An employee's withholding tax due upon exercise of a Nonqualified Stock Option may be satisfied either by a cash payment or the retention from the exercise of a number of shares of Common Stock with a fair market value equal to the required withholding tax, as the Optionee and Board or Committee may agree. In addition, with respect to the exercise of any Nonqualified Stock Option, the Board or the Committee shall advise the Optionee, upon receipt of notice of intent to exercise such Option, of the income tax withholding consequences to such Optionee of such exercise, the amount of the appropriate withholding tax and any other payments due by reason thereof. Such Optionee must satisfy all of the preceding payment requirements in order to receive Common Stock upon exercise of such Option. (B) OPTION PERIOD. Any Options granted pursuant to this Plan must be ------------- granted within five (5) years from the Effective Date (defined as the date upon which the Company's Joint Plan of Reorganization is deemed effective). Each Option shall state the date upon which it is granted. Each Option shall be exercisable during such period as is provided under the terms of the Option, but in no event shall an Option be exercisable after the expiration of five (5) years from the date of grant. Except in the case of death or disability, Incentive Stock Options may be exercised within three months (or for such shorter period as may be specified in the particular Option) after termination of employment provided such Options were exercisable at the date of termination, and Nonqualified Stock Options may be exercised after termination of employment and/or other service to the Company for such period as may be specified in the particular Option provided such Options were exercisable at the date of termination. In the event of 2 the death or disability of an Optionee, Incentive Stock Options exercisable at the date of death or disability may be exercised for such period thereafter as may be specified in the particular Option not to exceed one (1) year thereafter and Nonqualified Stock Options exercisable at the date of death or disability may be exercised for such period thereafter as may be specified in the particular Option. (C) ASSIGNABILITY. An Option granted pursuant to this Plan shall be ------------- exercisable during his or her lifetime only by the Optionee and shall not be assignable or transferable by such person (unless otherwise provided in the particular Option). (C) LIMIT ON 10% SHAREHOLDERS. No Incentive Stock Option may be ------------------------- granted under this Plan to any individual who would, immediately after the grant of such Incentive Stock Option directly or indirectly own more than ten percent (10%) of the total combined voting power of all classes of stock of the Company unless such Incentive Stock Option is granted at an Option Price not less than one hundred ten percent (110%) of the fair market value on the date the Incentive Stock Option is granted. (D) LIMITS ON OPTIONS. An individual may be granted one or more ----------------- Options, provided that the aggregate fair market value (determined as of the time the Option is granted) of Common Stock for which an individual may be granted Incentive Stock Options that are first exercisable in any calendar year (under all stock option plans of the Company and any parent or subsidiary corporations, if any) may not exceed $100,000. (F) DIRECTOR OPTIONS. Each director of the Company on the Effective ---------------- Date shall be automatically granted effective on the Effective Date a Nonqualified Stock Option for 5,000 shares of Common Stock which Options shall become exercisable (in whole or in part, at an exercise price of $1.67 per share) commencing 90 days after the Effective Date and remain exercisable until the Options expire on the fifth anniversary following the Effective Date. In addition to such initial awards, each director elected or appointed to the Company's Board of Directors (whether newly elected or appointed or reelected at a meeting of stockholders) on or after the Effective Date, shall receive upon such election or appointment an automatic award of a Nonqualified Option for 5,000 shares of Common Stock which Options shall become exercisable (in whole or in part, at an exercise price per share equal to the fair market value of a share of Common Stock on the date of grant) commencing after the passage of six months from the date of grant and remain exercisable until the Options expire on the fifth anniversary following the date of grant. Directors may receive additional Option grants as may be determined by the Board of Directors or the Committee, as the case may be. (G) RIGHTS AS SHAREHOLDER. An Optionee, or a transferee of an Option, --------------------- shall have no rights with respect to any shares covered by an Option until the date of the issuance of a stock certificate for such shares and the recording of such issuance upon the Company's stock ledger by its duly appointed, regular transfer agent. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to such date, except as provided in Section 6 hereof. (H) ADDITIONAL PROVISIONS. The Options authorized under this Plan --------------------- shall contain such other provisions as the Board or Committee shall deem advisable, including, without limitation, further restrictions upon the exercise of the Option. Any Incentive Stock Option shall contain such limitations and restrictions upon the exercise of the Option as shall be necessary in order that the Option shall be an "incentive stock option" as defined in Section 422 of the Internal Revenue Code of 1986. (I) COMPLIANCE WITH SECURITIES LAWS. At the time of exercise of any ------------------------------- Option, the Company may require the Optionee to execute any documents or take any action which may then be necessary to comply with the Securities Act of 1933 and the rules and regulations adopted thereunder, or any other applicable federal or state laws regulating the sale and issuance of securities, and the Company may, if it deems necessary, include provisions in the Options to assure such compliance. The Company may from time to time change its requirements with respect to enforcing compliance with federal and state securities laws, including the request for, or insistence upon, letters of investment intent, such requirements to be determined by the Company in its judgment as necessary to assure compliance with said securities laws. Such changes may be made with respect to any particular Option or to any stock issued upon exercise thereof. 3 6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any ------------------------------------------ change in the number of issued and outstanding shares of Common Stock of the Company which results from a stock split, reverse stock split, the payment of a stock dividend or any other change in the capital structure of the Company, such as a merger, consolidation, reorganization or recapitalization, the Board or Committee shall appropriately adjust (a) the maximum number of shares which may be issued under this Plan, (b) the number of shares subject to each outstanding Option, and (c) the Option Price per share thereof, so that upon exercise of the Option the Optionee shall receive the same number of shares he or she would have received had he or she been the holder of all shares subject to such outstanding Options immediately before the effective date of such change in the number of issued shares of the Common Stock of the Company. Any such adjustment shall not result in or entitle the Optionee to the issuance of fractional shares. Instead, appropriate adjustments to any such Option and, in the aggregate, all other options of the Company of the same class (that is, Incentive Stock Options or Nonqualified Options) held by each Optionee shall be made so that such Option and other options of the same class, if any, held by any such Optionee cover the greatest whole number of shares of the Company's Common Stock which does not exceed the number of shares which would be covered applying such adjustments in the absence of any restriction on the issuance of fractional shares. Any excess fractional share shall be redeemed in cash at the then current fair market value of the Common Stock (determined as provided in Section 5(A) hereof) multiplied by the appropriate fraction of a share. 7. TERMINATION OR AMENDMENT OF THE PLAN. The Board of Directors may at ------------------------------------ any time suspend, amend, or terminate this Plan. No amendment may be adopted without stockholder approval that will: (a) increase the number of shares of Common Stock which may be issued under this Plan; (b) materially modify the requirements as to eligibility for participation in the Plan, or (c) effect any other change requiring stockholder approval under the Internal Revenue Code of 1986, as amended. No amendment or termination of the Plan shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted under the Plan. 4 EX-10.3 13 PROMISSORY NOTE AND MISC AGREEMENTS EXHIBIT 10.3 PROMISSORY NOTE $15,000,000.00 November 18, 1996 FOR VALUE RECEIVED, the undersigned, 50-OFF STORES, INC., a Delaware corporation, 50-OFF TEXAS STORES, L.P., a Texas limited partnership, 50-OFF MULTISTATE OPERATIONS, INC., a Nevada corporation and 50-OFF OPERATING COMPANY, a Nevada corporation (collectively, "Borrowers"), hereby jointly and severally promise to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION ("Lender"), ------ at the office of Lender located at 3379 Peachtree Road, N.E., Suite 600, Atlanta, Georgia 30326, in lawful money of the United States of America and in immediately available funds, the principal amount of the lesser of (a) FIFTEEN MILLION DOLLARS ($15,000,000) and (b) the aggregate unpaid principal amount of all Advances made by Lender to Borrowers pursuant to the Credit Agreement referred to below. All capitalized terms, unless otherwise defined herein, shall have the respective meanings assigned to such terms in the Credit Agreement referred to below. Borrowers further agree to pay interest on the unpaid principal amount outstanding hereunder from time to time from the date hereof in like money and funds at such office at the rates per annum and on the dates provided in the Credit Agreement referred to below. The date and amount of each Advance made by Lender to Borrowers, the rate of interest applicable thereto and each payment made on account of the principal thereof shall be recorded by Lender on its books, provided that the failure of Lender to make any such recordation or -------- endorsement shall not affect the obligations of Borrowers to make payments when due of any amount owing under the Credit Agreement referred to below or this Promissory Note in respect of the Advances made by Lender. This Promissory Note is the Note referred to in that certain $15,000,000 Senior Secured Super Priority Debtor-In-Possession Revolving Credit Agreement, dated as of November 18, 1996, by and among Borrowers and Lender (as amended, supplemented or otherwise modified from time to time, the "Credit ------ Promissory Note -- Page 1 of 4 pages Initial Makers: ------ ------ ------ ------ Agreement"), is entitled to the benefits thereof, and is secured as provided - --------- therein. Reference is made to the Credit Agreement for all purposes, including, without limitation, for provisions for the prepayment and repayment hereof. If any payment of this Promissory Note becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. Upon the occurrence of any one or more of the Events of Default specified in the Credit Agreement, all amounts then remaining unpaid on this Promissory Note shall become, or may be declared to be, immediately due and payable, all as provided therein. All parties now or hereafter liable with respect to this Promissory Note, whether any Borrower, guarantor, endorser or other Person, hereby waive diligence, presentment, protest, demand, notice of non-payment or dishonor and other notices of any kind. Borrowers promise to pay all reasonable out-of-pocket costs of collection, including reasonable attorneys' fees as provided in the Credit Agreement, should this Promissory Note be collected by or through an attorney- at-law or under advice therefrom. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF GEORGIA, WITHOUT GIVING EFFECT TO CONFLICTS OF LAW PRINCIPLES. [Remainder of page intentionally left blank.] Promissory Note -- Page 2 of 4 pages Initial Makers: ------ ------ ------ ------ IN WITNESS WHEREOF, Borrowers have caused this Promissory Note dated November 18, 1996 in the original principal amount of $15,000,000 (subect to the terms hereof) in favor of General Electric Capital Corporation to be duly executed and delivered under seal by their respective officers thereunto duly authorized as of the date hereof. 50-OFF STORES, INC. By: /s/ CHARLES J. FUHRMANN II ---------------------------- Charles J. Fuhrmann II President Attest: /s/ JAMES G. SCOGIN ------------------------ James G. Scogin Assistant Secretary 50-OFF TEXAS STORES, L.P. By: 50-OFF Texas Management, Inc., Managing General Partner By: /s/ CHARLES J. FUHRMANN ------------------------- Charles J. Fuhrmann II Its President Attest: /s/ JAMES G. SCOGIN --------------------- James G. Scogin Assistant Secretary Promissory Note -- Page 3 of 4 pages Initial Makers: ------ ------ ------ ------ 50-OFF MULTISTATE OPERATIONS, INC. By: /s/ CHARLES J. FUHRMANN II ---------------------------- Charles J. Fuhrmann II President Attest: /s/ JAMES G. SCOGIN ------------------------ James G. Scogin Assistant Secretary 50-OFF OPERATING COMPANY By: /s/ CHARLES J. FUHRMANN II ---------------------------- Charles J. Fuhrmann II President Attest: /s/ JAMES G. SCOGIN ------------------------ James G. Scogin Assistant Secretary Promissory Note -- Page 4 of 4 pages Initial Makers: ------ ------ ------ ------ SECURITY AGREEMENT SECURITY AGREEMENT, dated as of November 18, 1996, made by 50-OFF STORES, INC., a Delaware corporation, 50-OFF TEXAS STORES, L.P., a Texas limited partnership, 50-OFF MULTISTATE OPERATIONS, INC., a Nevada corporation and 50-OFF OPERATING COMPANY, a Nevada corporation, (collectively, "Grantors," and each -------- individually a "Grantor"), in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a ------- New York corporation having an office at 3379 Peachtree Road, N.E., Suite 600, Atlanta, Georgia 30326 ("Lender"). ------ W I T N E S S E T H: WHEREAS, pursuant to and subject to the terms and conditions of that certain $15,000,000 Senior Secured Super Priority Debtor-In-Possession Revolving Credit Agreement dated as of November 18, 1996, by and among Grantors and Lender (as the same from time to time may be amended, restated, supplemented or otherwise modified, the "Credit Agreement"), Lender has agreed, among other ---------------- things, to make Advances to Grantors (except as otherwise defined herein, all capitalized terms used in these recitals having the respective meanings referred to in Section 1 hereof); --------- WHEREAS, Lender is willing to make Advances as and to the extent provided for in the Credit Agreement, but only upon the condition, among others, that Grantors shall have executed and delivered this Security Agreement in favor of Lender for its benefit; NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS. (a) The following capitalized terms used herein have ------------- the respective meanings set forth or referred to below: "Accounts" shall mean all "accounts," as such term is defined in the Code -------- and, in any event, shall include, without limitation, all accounts, accounts receivable, credit card receivables, notes, drafts, acceptances, and other forms of obligations and receivables and rights to payment for credit extended and for goods sold or leased, or services rendered, whether or not yet earned by performance, and all rights under any Contract, and all "contract rights" as formerly defined in the Code, and all Inventory which gave rise thereto, and all rights associated with such Inventory, including the right of stoppage in transit, and all reclaimed, returned, rejected or repossessed Inventory (if any) the sale of which gave rise to any Account. "Account Debtor" shall mean any Person who is or who may become obligated -------------- to any Borrower under, with respect to, or on account of, an Account. "Chattel Paper" shall mean all "chattel paper," as such term is defined in ------------- the Code, now owned or hereafter acquired and wherever located. "Code" shall mean the Uniform Commercial Code as the same may, from time to ---- time, be in effect in the State of Georgia; provided, that in the event that by -------- reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or the remedies with respect to, Lender's security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Georgia, the term "Code" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions. "Collateral" shall have the meaning ascribed thereto in Section 2 of this ---------- Agreement. "Contracts" shall mean, with respect to any Person, all the contracts, --------- undertakings, or agreements (other than rights evidenced by Chattel Paper, Documents or Instruments) in or under which such Person may now or hereafter have any right, title or interest, including any agreement relating to the terms of payment or the terms of performance of any Account. "Documents" shall mean, with respect to any Person, all "documents," as --------- such term is defined in the Code, now owned or hereafter acquired by such Person, wherever located, and in any event any bills of lading, dock warrants, dock receipts, warehouse receipts or other documents of title. "Equipment" shall mean all "equipment" as such term is defined in the Code, --------- and, in any event, shall include all motor vehicles, rolling stock, machinery, office equipment, plant equipment, tools, dies, molds, store fixtures, furnishings, and other goods, property and assets which are used, or were purchased for use, in the operation or furtherance of any Grantor's business, and any and all additions, accessions, substitutions and replacements of any of the foregoing, wherever located, together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto. "Fixtures" shall, with respect to any Person, mean all "fixtures," as such -------- term is defined in the Code, now or hereafter owned or acquired by such Person, wherever located, and, in any event, including all of the fixtures, systems, machinery, -2- apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions therefor or replacements thereof, now or hereafter attached or affixed to or constituting a part of, or located in or upon, real property wherever located (including all heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air- conditioning and air cooling, refrigerating, incinerating and power, loading and unloading, signs, escalators, elevators, boilers, communication, switchboards, sprinkler and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, together with all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, any of the foregoing property). "General Intangibles" shall mean, with respect to any Person, all "general ------------------- intangibles," as such term is defined in the Code, now owned or hereafter acquired by such Person and, in any event, including without limitation all right, title and interest which such Person may now or hereafter have in or under any or all of the following: right to payment for credit extended; deposits; amounts due to any Grantor; credit memoranda in favor of any Grantor; warranty claims; tax refunds and abatements; insurance refunds and premium rebates; all means and vehicles of investment or hedging, including, without limitation, options, warrants and futures contracts; records; customer lists; telephone numbers; goodwill; causes of action (including, without limitation, the proceeds of (a) that action initiated in the United States District Court for the Western District of Texas, San Antonio Division and styled "50-Off Stores, Inc. v. Banque Paribas (Suisse) S.A., et al" (Docket No. SA-95-CA-0159), and (b) that action initiated in the District Court for the 224th Judicial District, Bexar County, Texas, and styled as "50-OFF Stores, Inc. v. Jefferies & Company, Inc., et al" (Docket No. 96CI-00349) which is currently pending in Adv. No. 96-05198 in the Chapter 11 Case, and (c) any action, cause of action or right to payment which arises out of, or is in respect to, the set of facts which forms the basis for each aforementioned action); judgments; payments under any settlement or other agreement; royalties; license and/or franchise fees; rights of admission; licenses; franchises; and permits; certificates of convenience and necessity, and similar rights granted by any governmental authority; proprietary processes; blueprints, drawings, designs, diagrams, plans, reports and charts; catalogs; manuals; technical data; computer records, computer software, rights of access to computer record service bureaus, service bureau computer contracts and computer data; trade names, trademarks, service marks and all goodwill relating thereto; proposals; cost estimates and reproductions on paper, or otherwise, of any and all concepts or ideas; and any matter related to, or connected with, the design, development, manufacture, sale, marketing, leasing or -3- use of any or all property produced, sold or leased by any Grantor, or credit extended or services performed by any Grantor, whether intended for an individual customer or the general business of any Grantor, or used or useful in connection with research by any Grantor. "Goods" has the meaning assigned to it in the Code. ----- "Headquarters Building" shall have the meaning ascribed thereto in Section --------------------- 1(a) of this Agreement. "Instruments" shall mean, for any Person, all "instruments," as such term ----------- is defined in the Code, now owned or hereafter acquired by such Person, wherever located and in any event all certificated securities, certificates of deposit and all notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper. "Proceeds" shall mean all "proceeds," as such term is defined in the Code -------- and, in any event, shall include, with respect to any Person: (a) any and all proceeds of any insurance, indemnity, warranty or guarantee payable to such Person from time to time with respect to any of its property or assets; (b) any and all payments (in any form whatsoever) made or due and payable to such Person from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of such Person's property or assets by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (c) any recoveries by such Person against third parties with respect to any litigation or dispute concerning any of such Person's property or assets (including, without limitation, any recovery with respect to that litigation specifically identified in the definition of General Intangibles); and (d) any and all other amounts from time to time paid or payable under or in connection with any of such Person's property or assets, upon disposition or otherwise. "Real Property" shall mean all present and future right, title and interest ------------- (including, without limitation, any leasehold estate) in (i) any plots, pieces or parcels of land, (ii) any improvements, buildings, structures and fixtures now or hereafter located or erected thereon or attached thereto of every nature whatsoever (the rights and interests described in clauses (i) and (ii) above being the "Premises"), (iii) all easements, rights of way, gores of land or any lands occupied by streets, ways, alleys, passages, sewer rights, water courses, water rights and powers, and public places adjoining such land, and any other interests in property constituting appurtenances to the Premises, or which hereafter shall in any way belong, relate or be appurtenant thereto, (iv) all hereditaments, gas, oil, minerals (with the right to extract, sever and remove such gas, oil and -4- minerals), and easements, of every nature whatsoever, located in or on the Premises and (v) all other rights and privileges thereunto belonging or appertaining and all extensions, additions, improvements, betterments, renewals, substitutions and replacements to or of an of the rights and interests described in clauses (iii) and (iv) above, and shall specifically include, but not be limited to, that real property generally known as the 50-OFF Building and the land on which it is located together with an adjacent parcel of land, all of which is the Grantors' corporate headquarters located at 8750 Tesoro Drive, San Antonio, Texas 78217 (the "Headquarters Building"). (b) Except as expressly defined above or elsewhere herein, all other capitalized terms used herein shall have the respective meanings set forth in the Credit Agreement. 2. GRANT OF SECURITY INTEREST. (a) To secure the prompt and complete -------------------------- payment, performance and observance of all of the Obligations, and to induce Lender to enter into the Credit Agreement and to make extensions of credit provided for therein in accordance with the terms thereof, each Grantor hereby grants to Lender a security interest in all property of such Grantor, including, without limitation, all of such Grantor's right, title and interest in, to and under the following, whether now owned by or owing to, or hereafter acquired by or arising in favor of such Grantor (including, but not limited to, under any trade names or divisions thereof), and whether owned, leased or consigned by or to such Grantor, and regardless of where located (all of which being hereinafter collectively referred to as the "Collateral"): ---------- (i) all Accounts; (ii) all Chattel Paper; (iii) all Contracts; (iv) all General Intangibles; (v) all Inventory; (vi) all Equipment; (vii) all Instruments, Documents, policies and certificates of insurance, securities, deposits, deposit accounts, impressed accounts, compensating balances, money, cash, cash equivalents or other property; (viii) all lockbox, deposit and other bank accounts of each Grantor and all deposits therein and investments made with the funds therein, including, but not limited to, all accounts of any Grantor maintained at NationsBank or Bank One; -5- (ix) all Real Property; (x) all Fixtures; (xi) all other Goods and interests in property of any kind, nature or description whatsoever, whether tangible or intangible, whether real or personal, and whether now or hereafter owned or existing, leased, consigned by or to, or acquired by, any Grantor and wherever located; (xii) all books, records and information relating to the Collateral and/or to the operation of any Borrower's business, and all rights of access to such books, records and information, and all property in which such books, records and information are stored, recorded and maintained; (xiii) all insurance proceeds, refunds and premium rebates, including, without limitation, proceeds of fire and credit insurance, whether any of such proceeds, refunds and premium rebates arise out of any of the foregoing ((i) through (xii)) or otherwise; (xiv) all liens, guaranties, rights, remedies and privileges pertaining to any of the foregoing ((i) through (xii)) including the right of stoppage in transit; and (xv) all proceeds of any and all of the foregoing Collateral, including, but not limited to, that litigation specifically identified in the definition of General Intangibles and the Headquarters Building specifically identified in the definition of Real Property, (including, without limitation, cash proceeds and other proceeds which constitute property of the types described subsections (i) through (xi) of this Section 2(a)), and to the extent not otherwise included, all payments under insurance (whether or not the Lender is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. (b) In addition, to secure the prompt and complete payment, performance and observance of the Obligations and in order to induce Lender as aforesaid, each Grantor hereby grants to Lender a security interest in all property of such Grantor held by Lender including, without limitation, all property of every description now or hereafter in the possession or custody of, or in transit to Lender for any purpose, including safekeeping, collection or pledge, for the account of such Grantor, or as to which such Grantor may have any right or power. -6- 3. RIGHTS OF LENDER; LIMITATIONS ON OBLIGATIONS OF LENDER. (a) It ------------------------------------------------------ is expressly agreed by each Grantor that, anything herein to the contrary notwithstanding, such Grantor shall remain liable under each of its Contracts and each of its Licenses to observe and perform all the conditions and obligations to be observed and performed by it thereunder and Lender shall have no obligation or liability under any Contract or License by reason of or arising out of this Security Agreement or the granting herein of a security interest therein or the receipt by Lender of any payment relating to any Contract or License pursuant hereto, nor shall Lender be required or obligated in any manner to perform or fulfill any of the obligations of any Grantor under or pursuant to any Contract or License, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it or the sufficiency of any performance by any party under any Contract or License, or to present or file any claim, or to take any action to collect or enforce any performance or the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. (b) Lender may at any time after the occurrence of an Event of Default and without prior notice to any Grantor, notify Account Debtors, parties to the Contracts, and obligors in respect of Instruments and Chattel Paper that the Accounts and the right, title and interest of each Grantor in and under such Contracts, Instruments and Chattel Paper have been assigned to Lender and that payments shall be made directly to Lender. Upon the request of Lender, each Grantor shall so notify such Account Debtors, parties to Contracts and obligors in respect of Instruments and Chattel Paper. (c) Lender shall have the right from time to time upon prior notice to any Grantor to make test verifications of the Accounts and physical verifications and appraisals of the Inventory and other Collateral in any manner and through any medium that it considers reasonably advisable, and each Grantor agrees to furnish all such assistance and information as Lender may require in connection therewith. Lender may at any time in Lender's own name or in the name of any Grantor communicate with Account Debtors, parties to Contracts and obligors in respect of Instruments to verify with such Persons, to Lender's satisfaction, the existence, amount and terms of any Accounts, Contracts, Instruments or Chattel Paper. 4. REPRESENTATIONS AND WARRANTIES. Each Grantor hereby represents ------------------------------ and warrants that: (a) Each Grantor is the sole owner of each item of the Collateral in which it purports to grant a security interest hereunder, having good and marketable title thereto free and clear of any and all Liens except (i) the security interest granted to Lender under this Security Agreement, (ii) Permitted Encumbrances, -7- and (iii) as otherwise expressly permitted by the Credit Agreement. Each Grantor will warrant and defend such Collateral against all claims and demands of all persons at any time claiming the same or any interest thereon. (b) No effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except (i) such as have been or will be filed in favor of Lender pursuant to this Security Agreement, (ii) such as relate to Permitted Encumbrances or (iii) such as have been filed by GBFC, Inc. prior to the Relief Date and for which appropriate termination statements and releases have been delivered to Lender or will be filed prior to the Funding Date. (c) Immediately upon the filing of appropriate financing statements in the jurisdictions listed on Schedule 1 hereto or as may be otherwise provided in ---------- the Orders, this Security Agreement is and will be effective to create a valid and continuing Lien on and perfected security interest in favor of Lender in the Collateral with respect to which a security interest may be perfected by filing pursuant to the Code, which Lien and security interest is prior to all other Liens except Senior Liens and those Liens specifically disclosed in the Credit Agreement as being prior to the Lien of this Security Agreement, and is enforceable as such as against creditors of and purchasers from any Grantor (other than purchasers of Inventory in the ordinary course of business). All action (including, without limitation, all filings, registrations and recordings) necessary or desirable to create, protect and perfect the security interest granted to Lender hereby in respect of each item of the Collateral has been duly accomplished. (d) Each Grantor's chief executive office, principal place of business, corporate offices, all warehouses and premises within which Collateral is stored or located and the locations of all of its records concerning the Collateral are set forth on Schedule 1. Such Schedule 1 correctly identifies ---------- ---------- any of such facilities or locations that are not owned by any Grantor and sets forth the names of the owners and lessors or collateral of, and the holders of any mortgages on, such facilities and locations. Each Grantor agrees that it shall not change its chief executive office, principal place of business, corporate offices, or warehouses or Collateral premises or the location of its records concerning the Collateral without giving thirty (30) days prior written notice thereof to Lender and taking all actions deemed by Lender to be reasonably necessary or appropriate to protect and perfect Lender's interest in the Collateral. 5. COVENANTS. Each Grantor covenants and agrees with Lender that --------- from and after the date of this Security Agreement and until the Termination Date: -8- (a) Further Assurances; Pledge of Instruments. At any time and from ----------------------------------------- time to time, upon the written request of Lender and at the sole expense of such Grantor, each Grantor shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Lender may reasonably deem desirable to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including (i) securing all consents and approvals necessary or appropriate for the assignment to or for the benefit of Lender of any License or Contract held by any Grantor or in which any Grantor has any rights not heretofore assigned, (ii) filing any financing or continuation statements under the Code with respect to the liens and security interests granted hereunder or under any other Loan Document, (iii) transferring Collateral to Lender's possession (if such Collateral consists of Documents, or Chattel Paper or if a security interest in such Collateral can be perfected by possession, or if requested by Lender) and (iv) obtaining waivers of liens from landlords and mortgagees or the subordination of such liens in the Emergency Interim Order and the Final Order in accordance with Section 6.18 of the Credit Agreement (it being understood that Lender in its discretion may establish a reserve against availability under the Credit Agreement until the same have been obtained). Each Grantor also hereby authorizes Lender to file any such financing or continuation statement without the signature of such Grantor to the extent permitted by applicable law. Each Grantor will warrant and defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest thereon. Each Grantor shall give Lender not less than thirty (30) days prior written notice before moving any Collateral to a location not set forth in Schedule 1 hereto, and shall in no event move any Collateral ---------- outside the United States of America. (b) Maintenance of Records. Each Grantor shall keep and maintain, at ---------------------- its own cost and expense, satisfactory and complete records of the Collateral, including a record of any and all payments received and any and all credits granted with respect to the Collateral and all other dealings with the Collateral. Each Grantor shall mark its books and records pertaining to the Collateral to evidence this Security Agreement and the security interests granted hereby. Upon the occurrence of any Event of Default, each Grantor shall deliver and turn over all of its books and records pertaining to the Collateral to Lender or to Lender's representatives at any time on demand of Lender. (c) Continuous Perfection. Each Grantor agrees that it shall not --------------------- change its name, identity or corporate structure in any manner which might make any financing or continuation statement filed in connection herewith seriously misleading within the meaning of any applicable provision of the Code unless such Grantor shall have given Lender at least thirty (30) days' prior written notice thereof and shall have taken all action necessary or -9- requested by Lender to amend such financing statement or continuation statement so that it is not seriously misleading. (d) Provisions Regarding Accounts. ----------------------------- (i) Each Grantor agrees that it shall not re-date any invoice or sale or make sales on extended dating beyond that customary in such Grantor's business, or extend or modify any Account (other than correction of errors in the ordinary course). If any Grantor becomes aware of any matter materially affecting any Account, including information regarding such Account Debtor's creditworthiness, such Grantor will promptly so advise Lender; and (ii) Except as provided in the Credit Agreement, each Grantor agrees that it shall not grant any discount, credit or allowance to any Account Debtor without Lender's consent, except for discounts, credits and allowances for returns, rejections and damaged goods made or given in the ordinary course of such Grantor's business consistent with past practices. (e) Provisions Regarding Inventory. ------------------------------ (i) Each Grantor agrees that it will engage in the sale of the Inventory for fair consideration in the conduct of each Grantor's business in the ordinary course and that each of the Grantors will not engage in sales or other dispositions to creditors, sales or other dispositions in bulk, or in any way use any of the Inventory in breach of any provision of this Agreement; (ii) Each Grantor agrees that there shall be no sale of Inventory on consignment, approval, or under any other circumstances such that, with the exception of the subject Grantor's customary return policy applicable to the return of Inventory purchased by that Grantor's retail customers in the ordinary course, such Inventory may be returned to such Grantor without the consent of the Lender; and (iii) Each Grantor agrees that all Inventory now owned or hereafter acquired is and will be of good and merchantable quality free from defects (other than defects within customary trade tolerances). No tangible personal property of any Grantor is or will be stored or entrusted with a bailee or other third party without the Lender's prior written consent and approval. 6. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. ---------------------------------------- (a) Each Grantor hereby irrevocably constitutes and appoints Lender, and any designee of Lender, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time in Lender's reasonable discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and -10- all appropriate action and to execute and deliver any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby grants to Lender the power and right, on behalf of such Grantor, without notice to or assent by any Grantor, and at any time, to do the following: (i) in the name of such Grantor, in its own name or otherwise, take possession of, endorse and receive payment of any checks, drafts, notes, acceptances or other Instruments for the payment of monies due under any Collateral; (ii) if such Grantor fails or refuses to do so, continue any insurance existing pursuant to the terms of the Loan Documents, and pay all or any part of the premiums therefor and the costs thereof; (iii) receive payment of any and all monies, claims and other amounts due or to become due at any time arising out of or in respect of any Collateral; (iv) ask, demand, collect, receive and give acquittances and receipts for any and all money due or to become due under any Collateral; and (v) pay or discharge any taxes, Liens, security interests or other encumbrances levied or placed on or threatened against the Collateral; (b) Each Grantor hereby irrevocably constitutes and appoints Lender and any designee of Lender, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, from time to time in Lender's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute and deliver any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement and, without limiting the generality of the foregoing, hereby grants to Lender the power and right, on behalf of such Grantor, without notice to or assent by any Grantor, upon the occurrence of an Event of Default and until such Event of Default is waived in writing by the Lender, to do the following: (i) sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against Account Debtors, assignments, verifications and notices in connection with accounts and other documents constituting or related to the Collateral; -11- (ii) settle, compromise or adjust any suit, action or proceeding described above and, in connection therewith, give such discharges or releases as Lender may deem reasonably appropriate; (iii) file any claim or take or commence any other action or proceeding in any court of law or equity or otherwise deemed reasonably appropriate by Lender for the purpose of collecting any and all such monies due under any Collateral whenever payable; (iv) commence and prosecute any suits, actions or proceedings at law or in equity in any court to collect the Collateral or any part thereof and to enforce any other right in respect of any Collateral; (v) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral if such Grantor does not defend such suit, action or proceeding or if Lender believes that such Grantor is not pursuing its defense in a manner that will maximize the recovery with respect to such Collateral; (vi) license or, to the extent permitted by an applicable License, sublicense whether general, specific or otherwise, and whether on an exclusive or non-exclusive basis, any Trademark throughout the world on such terms and conditions and in such manner as Lender shall, in its sole discretion, determine; and (vii) sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and such Grantor's expense, at any time, or from time to time, all acts and other things which Lender reasonably deems necessary to perfect, preserve or realize upon the Collateral and Lender's Lien therein in order to effect the intent of this Security Agreement, all as fully and effectively as such Grantor might do and execute, in connection with the sale provided for in Section 8 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) Each Grantor hereby ratifies, to the extent permitted by law, all that said attorneys shall lawfully do or cause to be done by virtue hereof. The power of attorney granted pursuant to this Section 6 is a power coupled with an interest and shall be irrevocable until the Termination Date. (d) The powers conferred on Lender hereunder are solely to protect Lender's security interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and none of its officers, directors, employees, agents or representatives shall be -12- responsible to any Grantor for any act or failure to act, except for their own gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. 7. PERFORMANCE BY LENDER OF ANY GRANTOR'S OBLIGATIONS. If any Grantor -------------------------------------------------- fails to perform or comply with any of its agreements contained herein or in any of the other Loan Documents, and Lender, as provided for by the terms of this Security Agreement or any other Loan Documents, shall itself perform or comply, or otherwise cause performance of or compliance with such agreement, the expenses, including reasonable attorneys' fees, of Lender incurred in connection with such performance or compliance, together with interest thereon at the default rate provided in the Credit Agreement shall be payable by each Grantor to Lender on demand and shall constitute part of the Obligations secured hereby. 8. REMEDIES; RIGHTS UPON AN EVENT OF DEFAULT. (a) If any Event of ----------------------------------------- Default shall occur and until such Event of Default is waived in writing by Lender, Lender may exercise in addition to all other rights and remedies granted to it under this Security Agreement, the Credit Agreement, the other Loan Documents and under any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, each Grantor expressly agrees that in any such event Lender, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale or as expressly required by the Credit Agreement) to or upon any Grantor or any other Person and without any further order of the Court other than the Final Order (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), may forthwith enter upon the premises of any Grantor where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving any Grantor notice and opportunity for a hearing on Lender's claim or action, and without paying rent to any Grantor, and collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. Lender shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for its benefit the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption each Grantor hereby releases. Such sales may be adjourned or continued from time to time with or without notice. Lender shall have the right to conduct such sales on any Grantor's premises or elsewhere and -13- shall have the right to use any Grantor's premises without charge for such sales for such time or times as Lender deems necessary or advisable except as otherwise provided in the applicable landlord's waiver. For the purpose of enabling Lender to exercise rights and remedies under this Section 8, each Grantor hereby grants to Lender an irrevocable, non-exclusive license to use, transfer, license or sublicense any trademark or trade name now owned or hereafter acquired by such Grantor. Each Grantor further agrees, at Lender's request, to assemble the Collateral and make it available to Lender at places which Lender shall reasonably select, whether at any Grantor's premises or elsewhere. Until Lender is able to effect a sale, lease or other disposition of the Collateral, Lender shall have the right to hold or use the Collateral on behalf of Lender, or any part thereof, to the extent that it deems appropriate for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by Lender. Lender shall have no obligation to any Grantor to maintain or preserve the rights of such Grantor as against third parties with respect to the Collateral while the Collateral is in the possession of Lender. Lender may, if it so elects, seek the appointment of a receiver or keeper to take possession of the Collateral and to enforce any of Lender's remedies with respect to such appointment without prior notice or hearing. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, as provided in Section 8(d) hereof, each Grantor remaining liable for any deficiency remaining unpaid after such application, and after so paying over such net proceeds and after the payment in full of the Obligations, the surplus, if any, will be delivered to the Court. To the maximum extent permitted by applicable law, each Grantor waives all claims, damages and demands against Lender arising out of the repossession, retention or sale of the Collateral except such as arise out of the gross negligence or willful misconduct of such party. Each Grantor agrees that ten (10) days' prior notice by Lender of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled, each Grantor also being liable for any and all costs and expenses incurred by Lender, including reasonable attorneys' fees, to collect such deficiency. (b) Each Grantor agrees to pay any and all costs of Lender, including, without limitation, reasonable attorneys' fees, incurred in connection with the enforcement of any of its rights and remedies hereunder. (c) Except as otherwise specifically provided herein or in the Credit Agreement, to the maximum extent permitted by applicable law, each Grantor hereby waives presentment, demand, -14- protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral. (d) The Proceeds of any sale, disposition or other realization upon all or any part of the Collateral shall be distributed by Lender upon receipt, in the following order of priorities: First, the payment in full of all fees and expenses of Lender then ----- due and payable to Lender, including all expenses of Lender in connection with such sale, disposition or other realization and all expenses, liabilities and advances incurred or made by Lender in connection therewith, including reasonable attorney's fees and any other Obligations owed to Lender (other than principal, interest or Letter of Credit Obligations); Second, to the payment of accrued but unpaid interest on the ------ Obligations; Third, to cash collaterize Letter of Credit Obligations as provided ----- for in the Credit Agreement; Fourth, to the payment of unpaid principal of the Obligations; ------ Fifth, to the payment of all other Obligations until all other ----- Obligations shall have been paid in full; and Finally, any surplus then remaining from such proceeds shall be ------- delivered to the Court or to payment to any Person as the Court may otherwise direct. 9. LIMITATION ON LENDER'S DUTY IN RESPECT OF COLLATERAL. Lender shall ---------------------------------------------------- use reasonable care with respect to the Collateral in its possession or under its control. Lender shall not have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of Lender, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. Upon request of any Grantor, Lender shall account for any monies received by Lender in respect of any foreclosure on or disposition of the Collateral. 10. NOTICES. Except as otherwise provided herein, whenever it is ------- provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever either of the parties desires to give or serve upon any communication with respect to this Security Agreement, each such notice, demand, request, consent, approval, declaration or other -15- communication shall be in writing and shall be given in the manner as provided for in the Credit Agreement. 11. SEVERABILITY. Any provision of this Security Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Security Agreement is to be read, construed and applied together with the Credit Agreement and the other Loan Documents, which, taken together, set forth the complete understanding and agreement of the Lender and each Grantor with respect to the matters referred to herein and therein. 12. NO WAIVER; CUMULATIVE REMEDIES. Lender shall not by any act, delay, ------------------------------ omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by Lender and then only to the extent therein set forth. A waiver by Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Lender would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Lender, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by Lender and each Grantor. 13. LIMITATION BY LAW. All rights, remedies and powers provided in this ----------------- Security Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Security Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they do not render this Security Agreement invalid, unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law. 14. TERMINATION OF THIS SECURITY AGREEMENT. This Security Agreement -------------------------------------- shall terminate upon the Termination Date. 15. SUCCESSOR AND ASSIGNS. This Security Agreement and all obligations --------------------- of each Grantor hereunder shall be binding upon the successors and assigns of such Grantor, and shall, together with -16- the rights and remedies of Lender hereunder, inure to the benefit of Lender, all future holders of any instrument evidencing any of the Obligations, any other Person that becomes a 'Lender' under the Credit Agreement, and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Obligations or any portion thereof or interest therein shall in any manner affect the security interest granted to Lender hereunder. Each Grantor acknowledges that it may not assign, sell or otherwise transfer an interest in this Security Agreement. 16. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS ------------------------------------------------ OTHERWISE EXPRESSLY PROVIDED HEREIN OR IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SECURITY AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. NOTHING IN THIS SECURITY AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGEMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. EACH GRANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY FEDERAL COURT SITTING IN THE STATE OF TEXAS, AND EACH GRANTOR HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS -------------------- AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH GRANTOR HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL OR BY FEDERAL EXPRESS OR OTHER COURIER SERVICE ADDRESSED TO EACH GRANTOR AT THE ADDRESSES SET FORTH IN THE CREDIT AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON EACH GRANTOR'S ACTUAL RECEIPT THEREOF. [Remainder of page intentionally left blank.] -17- IN WITNESS WHEREOF, the parties have caused this Security Agreement to be executed and delivered by its duly authorized officer on the date first set forth above. GRANTORS: 50-OFF STORES, INC., - -------- 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 -18- LENDER: GENERAL ELECTRIC CAPITAL CORPORATION - ------ By: /s/ General Electric Capital Corporation ----------------------------------------- Name: --------------------------------------- Its: ---------------------------------------- -19- SCHEDULE 1 ---------- Location of Collateral ---------------------- 1. Collateral is located at each of the non-rejected store locations identified in the attached exhibit of store leases. 2. Further collateral is located at 8750 Tesoro Drive, San Antonio, Bexar County, Texas 78217. 3. Further collateral is located at the warehouse of DFW Logistics located at 3801 La Reunion Parkway, Dallas, Dallas County, Texas 75212. TRADEMARK AND LICENSE SECURITY AGREEMENT ---------------------------------------- THIS TRADEMARK AND LICENSE SECURITY AGREEMENT (this "Agreement") is made as of November 18, 1996, by and among 50-OFF Stores, Inc., a Delaware corporation, 50-OFF Texas Stores, L.P., a Texas limited partnership, 50-OFF Operating Company, a Nevada corporation, and 50-OFF Multistate Operations, Inc., a Nevada corporation (collectively, the "Borrowers"), and General Electric Capital Corporation, a New York corporation (the "Lender") (as such terms are defined in the Credit Agreement defined below). W I T N E S S E T H: ------------------- WHEREAS, the Borrowers and the Lender are parties to that certain $15,000,000 Senior Secured Super Priority Debtor-in-Possession Revolving Credit Agreement of even date herewith (as the same may hereafter be modified, amended, restated or supplemented from time to time, the "Credit Agreement"), pursuant to ---------------- which the Lender may, from time to time, extend credit to the Borrowers; and WHEREAS, the Borrowers and the Lender are parties to that certain Security Agreement of even date herewith (as the same may hereafter be modified, amended, restated or supplemented from time to time, the "Security Agreement"), ------------------ pursuant to which each of the Borrowers has granted a security interest in certain of its assets to the Lender; and WHEREAS, the Lender has required each of the Borrowers to execute and deliver this Agreement (i) in order to secure the prompt and complete payment, observance and performance of all of the Obligations (as defined in the Credit Agreement) and (ii) as a condition precedent to any extension of credit under the Credit Agreement; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Borrower agrees as follows: 1. Defined Terms. ------------- (a) Unless otherwise defined herein, each capitalized term used herein that is defined in the Credit Agreement shall have the meaning specified for such term in the Credit Agreement. Unless otherwise defined herein or in the Credit Agreement, each capitalized term used herein that is defined in the Security Agreement shall have the meaning specified for such term in the Security Agreement. (b) The words "hereof," "herein" and "hereunder" and words of like import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and paragraph references are to this Agreement unless otherwise specified. (c) All terms defined in this Agreement in the singular shall have comparable meanings when used in the plural, and vice versa, unless otherwise ---------- specified. 2. Incorporation of Premises. The premises set forth above are ------------------------- incorporated into this Agreement by this reference thereto and are made a part hereof. 3. Incorporation of the Credit Agreement. The Credit Agreement ------------------------------------- and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. 4. Security Interest in Trademarks. To secure the complete and ------------------------------- timely payment, performance and satisfaction of all of the Obligations, each Borrower hereby grants to the Lender, a security interest in, as and by way of a first mortgage and security interest having priority over all other security interests, with power of sale to the extent permitted by applicable law, all of each Borrower's now owned or existing and hereafter acquired or arising: (i) trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications, including, without limitation, the trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications listed on Schedule 1 attached hereto and made a part hereof, and ---------- (a) all renewals thereof, (b) all income, royalties, damages and payments now and hereafter due and/or payable under and with respect thereto, including, without limitation, payments under all licenses entered into in connection therewith and damages and payments for past or future infringements or dilutions thereof, (c) the right to sue for past, present and future infringements and dilutions thereof, (d) the goodwill of each Borrower's business symbolized by the foregoing and connected therewith, and 2 (e) all of each Borrower's rights corresponding thereto throughout the world (all of the foregoing trademarks, trade names, registered trademarks and trademark applications, service marks, registered service marks and service mark applications, together with the items described in clauses (a)-(e) in this --------------- paragraph 4(i), are sometimes hereinafter individually and/or collectively - -------------- referred to as the "Trademarks"); and (ii) the goodwill of each Borrower's ---------- business connected with and symbolized by the Trademarks. 5. Security Interest in Licenses. To secure the complete and ----------------------------- timely payment, performance and satisfaction of all of the Obligations, each Borrower hereby grants to the Lender, a security interest in, as and by way of a first mortgage and security interest having priority over all other security interests, with power of sale to the extent permitted by applicable law, all of each Borrower's now owned or existing and hereafter acquired or arising rights under or interest in any license agreements with any other party, whether such Borrower is a licensee or licensor under any such license agreement, including, without limitation, license agreements listed on Schedule 2 attached hereto and ---------- made a part hereof, together with any goodwill connected with and symbolized by any such license agreements, and the right to use the foregoing in connection with the enforcement of the Lender's rights under the Credit Agreement, including without limitation, the right to prepare for sale and sell any and all Inventory now or hereafter owned by any Borrower and now or hereafter covered by such licenses (all of the foregoing are hereinafter referred to collectively as the "Licenses"). Notwithstanding the foregoing provisions of this paragraph 5, -------- ----------- the Licenses shall not include any license agreement in effect as of the date hereof which by its terms prohibits the grant of the security contemplated by this Agreement; provided, however, that upon the termination of such -------- ------- prohibitions for any reason whatsoever, the provisions of this paragraph 5 shall ----------- be deemed to apply thereto automatically. 6. Restrictions on Future Agreements. None of the Borrowers --------------------------------- will, without the Lender's prior written consent, enter into any agreement, including, without limitation, any license agreement, which is inconsistent with this Agreement, and each Borrower further agrees that it will not take any action, and will use its best efforts not to permit any action to be taken by others subject to its control, including, without limitation, licensees, or fail to take any action, which would in any 3 material respect affect the validity or enforcement of the rights transferred to the Agent under this Agreement or the rights associated with the Trademarks or the Licenses. 7. New Trademarks and Licenses. Each Borrower represents and --------------------------- warrants that, from and after the Closing Date, (a) the Trademarks listed on Schedule 1 include all of the trademarks, trade names, registered trademarks, - ---------- trademark applications, service marks, registered service marks and service mark applications now owned or held by any Borrower, (b) the Licenses listed on Schedule 2 include all of the license agreements under which any Borrower is the - ---------- license or licensor, and (c) no liens, claims or security interests in such Trademarks or Licenses have been granted by any Borrower to any Person other than the Lender and except as disclosed in the Credit Agreement. If, prior to the termination of this Agreement, any Borrower shall (i) obtain rights to any new trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks or service mark applications, (ii) obtain rights to any new license agreements, (iii) become entitled to the benefit of any trademarks, trade names, registered trademarks, trademark applications, trademark licenses, trademark license renewals, service marks, registered service marks, service mark applications, service mark licenses or service mark license renewals or license agreements whether as licensee or licensor, or (iv) enter into any new license agreement, the provisions of paragraphs 4 & 5, as applicable, above shall automatically apply thereto (to the - ---------------- extent permitted by licensors under agreements in connection with the granting of such licenses). Each Borrower shall give to the Agent written notice of events described in clauses (i), (ii), (iii), and (iv) of the preceding sentence ------------------------- ---- promptly after the occurrence thereof. Each Borrower hereby authorizes the Lender to modify this Agreement unilaterally (i) by amending Schedule 1 to ---------- include any future trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications, which are Trademarks under paragraph 4 above or under this ----------- paragraph 7, (ii) by amending Schedule 2 to include any future license - ----------- ---------- agreements which are licenses under paragraph 5 above or under this paragraph 7, ----------- ----------- and (iii) by filing, in addition to and not in substitution for this Agreement, a duplicate original of this Agreement containing on Schedule 1 thereto, as the ---------- case may be, such future trademarks, trade names, registered trademarks, trademark applications, service marks, registered service marks and service mark applications and 4 containing on Schedule 2 thereto, as the case may be, such future license ---------- agreements. 8. Royalties. Each Borrower hereby agrees that the use by the --------- Lender of the Trademarks and the Licenses as authorized hereunder in connection with the Lender's exercise of its rights and remedies under paragraph 16 or ------------ pursuant to any Loan Document shall be coextensive with each Borrower's rights thereunder and with respect thereto and without any liability for royalties or other related charges from the Lender to the Borrowers. 9. Right to Inspect; Further Assignments and Security Interest. ----------------------------------------------------------- The Lender may at all times, in accordance with the Credit Agreement, have access to, examine, audit, make copies (at such Borrower's expense) and extracts from and inspect each Borrower's premises and examine each Borrower's books, records and operations relating to the Trademarks or the Licenses. Each Borrower agrees (i) not to sell or assign its respective interests in, or grant any license under, the Trademarks without the prior and express written consent of the Lender, and (ii) not to sell or assign its respective interests in the Licenses without the prior and express written consent of the Lender. 10. Nature and Continuation of the Lender's Security Interest; ---------------------------------------------------------- Termination of the Lender's Security Interest. This Agreement is made for - --------------------------------------------- collateral security purposes only. This Agreement shall create a continuing security interest in the Trademarks and the Licenses and shall terminate only when the Obligations have been paid in full and the Commitment, the Credit Agreement and the Security Agreement have been terminated. When this Agreement has terminated, the Lender shall promptly execute and deliver to the Borrower Representative, at the Borrowers' expense, all termination statements and other instruments as may be necessary or proper to terminate the Lender's security interest in the Trademarks and in the Licenses, subject to any disposition thereof which may have been made by the Lender pursuant to this Agreement or the Security Agreement. 11. Duties of the Borrowers. Each Borrower shall have the duty: ----------------------- (i) to the extent desirable in the normal conduct of each Borrower's business, (x) to prosecute diligently any trademark application or service mark application that is part of the Trademarks pending as of the date hereof or hereafter until 5 the termination of this Agreement and (y) to take all reasonable and necessary action to preserve and maintain all of each Borrower's rights in the Licenses, and (ii) to make application for trademarks or service marks. Each Borrower further agrees (i) not to abandon any Trademark or any License without the prior written consent of the Lender, and (ii) to use its best efforts to maintain in full force and effect the Trademarks and the Licenses that are or shall be necessary or economically desirable in the operation of any Borrower's business. Any expenses incurred in connection with the foregoing shall be borne by the Borrowers. The Lender shall not have any duty with respect to the Trademarks or the Licenses. Without limiting the generality of the foregoing, the Lender shall not be under any obligation to take any steps necessary to preserve rights in the Trademarks or the Licenses against any other parties, but the Lender may do so at its option from and after the occurrence of an Event of Default, and all expenses incurred in connection therewith shall be for the sole account of the Borrowers and shall be added to the Obligations secured hereby. 12. The Lender's Right to Sue. From and after the occurrence of ------------------------- an Event of Default, the Lender shall have the right, but shall not be obligated, to bring suit in its own name to enforce the Trademarks and Licenses and, if the Lender shall commence any such suit, each Borrower shall, at the request of the Lender, do any and all lawful acts and execute any and all proper documents reasonably required by the Lender in aid of such enforcement. Each Borrower shall, upon demand, promptly reimburse the Lender for all costs and expenses incurred by the Lender in the exercise of its rights under this paragraph 12 (including, without limitation, reasonable fees and expenses of - ------------ attorneys and paralegals for the Lender). 13. Waivers. The Lender's failure, at any time or times hereafter, to ------- require strict performance by each Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Lender thereafter to demand strict compliance and performance therewith nor shall any course of dealing between any Borrower and the Lender have such effect. No single or partial exercise of any right hereunder shall preclude any other or further exercise thereof or the exercise of any other right. None of the undertakings, agreements, warranties, covenants and representations of any Borrower contained in this Agreement shall be deemed to have been suspended or waived by the Lender unless such suspension or waiver is in writing signed by 6 an officer of the Lender and directed to such Borrower specifying such suspension or waiver. 14. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but the provisions of this Agreement are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part hereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 15. Modification. This Agreement cannot be altered, amended or ------------ modified in any way, except as specifically provided in paragraph 7 hereof or by ----------- a writing signed by the parties hereto. 16. Power of Attorney; Cumulative Remedies. (a) Each Borrower -------------------------------------- hereby irrevocably designates, constitutes and appoints the Lender (and all officers and agents of the Lender designated by the Lender in its sole and absolute discretion) as each Borrower's true and lawful attorney-in-fact, and authorizes the Lender and any of the Lender's designees, in any Borrower's or the Lender's name, from and after the occurrence of an Event of Default, and upon the giving by the Lender of notice to any Borrower of the Lender's intention to enforce its rights and claims against such Borrower, to take any action and execute any instrument necessary or reasonably advisable to accomplish the purposes of this Agreement, including, without limitation, to (i) endorse the Borrower's name on all applications, documents, papers and instruments necessary or reasonably desirable for the Lender in the use of the Trademarks or the Licenses, (ii) assign, pledge, convey or otherwise transfer title in or dispose of the Trademarks or the Licenses to anyone, if permitted by their terms or by the Court, (iii) grant or issue any exclusive or nonexclusive license under the Trademarks or the Licenses, if permitted by their terms or by the Court, to anyone, and (iv) take any other actions with respect to the Trademarks or the Licenses as the Lender deems in its best interest. Each Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable. Each Borrower acknowledges and agrees that this Agreement is not intended to 7 limit or restrict in any way the rights and remedies of the Lender under the Security Agreement, any other Loan Document or the Final Order, but rather is intended to facilitate the exercise of such rights and remedies. (b) The Lender shall have, in addition to all other rights and remedies given it by the terms of this Agreement, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in any jurisdiction in which the Trademarks or the Licenses may be located or deemed located. Upon the occurrence of an Event of Default and the election by the Lender to exercise any of its remedies under Section 9-504 or Section 9-505 of the Uniform Commercial Code with respect to the Trademarks or the Licenses, each Borrower agrees to assign, convey and otherwise transfer title in and to the Trademarks and the Licenses to the Lender or any transferee of the Lender and to execute and deliver to the Lender or any such transferee all such agreements, documents and instruments as may be necessary, in the Lender's sole discretion, to effect such assignment, conveyance and transfer. All of the Lender's rights and remedies with respect to the Trademarks and the Licenses, whether established hereby, by the Security Agreement or by any other agreements or by law, shall be cumulative and may be exercised separately or concurrently. Notwithstanding anything set forth herein to the contrary, it is hereby expressly agreed that upon the occurrence of an Event of Default, the Lender may exercise any of the rights and remedies provided in this Agreement, the Security Agreement, any of the other Loan Documents and the Final Order. Each Borrower agrees that any notification of intended disposition of any of the Trademarks or Licenses required by law shall be deemed reasonably and properly given if given at least ten (10) days before such disposition; provided, however, that the Lender may give any shorter notice -------- ------- that is commercially reasonable under the circumstances or approved by the Court. 17. Successors and Assigns. This Agreement shall be binding upon ---------------------- each Borrower and its successors and assigns, and shall inure to the benefit of each of the Lender and its nominees, successors and assigns. Each Borrower's successors and assigns shall include, without limitation, a receiver, or a trustee of or such Borrower; provided, however, that none of the Borrowers shall -------- ------- voluntarily assign or transfer its rights or obligations hereunder without the Lender's prior written consent. 8 18. Governing Law. This Agreement shall be construed and enforced ------------- and the rights and duties of the parties shall be governed by in all respects in accordance with the laws and decisions of the State of Georgia without reference to the conflicts of law principles thereof. 19. Notices. All notices or other communications hereunder shall ------- be given in the manner and to the addresses set forth in the Credit Agreement. 20. Paragraph Titles. The paragraph titles herein are for ---------------- convenience of reference only, and shall not affect in any way the interpretation of any of the provisions hereof. 21. Execution in Counterparts. This Agreement may be executed in ------------------------- any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 22. Merger. This Agreement represents the final agreement of the ------ Borrowers and the Lender with respect to the matters contained herein and may not be contradicted by evidence of prior or contemporaneous agreements, or subsequent oral agreements, between any Borrower. 23. This Agreement shall become effective on the Closing Date. [Remainder of this page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. Sworn to and subscribed 50-OFF STORES, INC. before me this ___ day of November, 1996. By: /s/ 50-OFF Stores, Inc. ----------------------------------- - -------------------------------------- Its: NOTARY PUBLIC ---------------------------------- - -------------------------------------- My Commission Expires Accepted and agreed to as of the day and year first above written. Sworn to and subscribed 50-OFF TEXAS STORES, L.P. before me this ___ day of November, 1996. By: /s/ 50-OFF Texas Management, Inc. ----------------------------------- - -------------------------------------- Its: NOTARY PUBLIC ---------------------------------- - -------------------------------------- My Commission Expires Accepted and agreed to as of the day and year first above written. Sworn to and subscribed 50-OFF OPERATING COMPANY before me this ___ day of November, 1996. By: /s/ 50-OFF Operating Company - -------------------------------------- ----------------------------------- NOTARY PUBLIC Its: ---------------------------------- - -------------------------------------- My Commission Expires 10 Sworn to and subscribed 50-OFF MULTISTATE OPERATIONS, INC. before me this ___ day of November, 1996. By: /s/ 50-OFF Multistate Operations, Inc. - ------------------------------- ------------------------------------------ NOTARY PUBLIC Its: ------------------------------------------ - ------------------------------- My Commission Expires Accepted and agreed to as of the day and year first above written. Sworn to and subscribed GENERAL ELECTRIC CAPITAL before me this ___ day of CORPORATION November, 1996. - ------------------------------- By: /s/ General Electric Capital Corporation NOTARY PUBLIC ------------------------------------------ Its: - ------------------------------- ----------------------------------------- My Commission Expires 11 Schedule 1 to Trademark and License Security Agreement Dated as of November 18, 1996 Current Trademarks ------------------ SECTION 8 & 15 DUE RENEWAL COUNTRY REG. NO. REG. DATE MARK BY DATE - --------- --------- --------- --------------------- -------- ------- Mexico 482,205 12/22/92 The 50-Off (Plus n/a 4/23/02 Design) U.S. 1,710,636 8/25/92 The 50-Off (Plus 8/25/98 8/25/02 Design) U.S. 1,710,637 8/25/92 50 Off (Plus Design) 8/25/98 8/25/02 U.S. 1,716,901 9/16/92 50-Off Why Pay More 9/15/98 9/15/02 (Plus Design) U.S. 1,818,263 1/25/94 50-Off Stores Where 1/25/00 1/25/04 You Save as Much as you Spend U.S. 1,494,671 6/28/88 The 50-Off (Plus n/a 6/28/08 Design) Tradenames ---------- Trademarks Not Currently In Use ------------------------------- Name Registration No. ---- ---------------- A-1 Trademarks and Service Mark Applications ---------------------------------------- Section 8 & Renewal Country Docket No. Reg. Date Mark 15 Due By Date - --------- ---------- --------- -------- --------- ------- U.S. 060615.120 n/a Lots Off n/a n/a A-2 SCHEDULE 2 ---------- License Agreements ------------------ The sole licenses, permits and approvals of Borrowers consist of sales tax permits, certificates of occupancy, and food and non-alcoholic beverage licenses which will be provided to Lender within ten (10) business days of written request therefor from Lender to Borrowers. STOCK PLEDGE AGREEMENT ---------------------- This Stock Pledge Agreement (this "Agreement"), entered into as of this 18 day of November, 1996, by and between 50-OFF Stores, Inc., a Delaware corporation (the "Pledgor") and General Electric Capital Corporation, a New York corporation (the "Lender"), W I T N E S S E T H : --------------------- WHEREAS, the Pledgor is the owner of the issued and outstanding stock of each of the Subsidiaries listed on Schedule 1 attached hereto in the percentage ---------- amounts set forth on Schedule 1 attached hereto (the "Subsidiaries"); and ---------- WHEREAS, the Pledgor, 50-OFF Texas Stores, L.P., a Texas limited partnership, 50-OFF Operating Company, a Nevada corporation, and 50-OFF Multistate Operations, Inc., a Nevada corporation (together with Pledgor, referred to collectively as the "Borrowers") and the Lender are parties to that certain $15,000,000 Senior Secured Super Priority Debtor-In-Possession Revolving Credit Agreement of even date herewith among Pledgor (as amended, modified or supplemented from time to time, the "Credit Agreement"), pursuant to which the Lender has agreed to extend credit to the Borrowers in an aggregate amount not to exceed $15,000,000; and WHEREAS, in consideration for, among other things, the Lender's execution of the Credit Agreement, and to secure the payment and performance of the Obligations of the Borrowers under the Credit Agreement, the Pledgor has agreed to pledge to the Lender all of the shares of stock of Subsidiaries owned by the Pledgor (the "Stock"); NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that capitalized terms used herein shall have the meanings ascribed to them in the Credit Agreement to the extent not otherwise defined or limited herein, and further agree as follows: 1. Security Interest. The Pledgor hereby unconditionally pledges, ----------------- transfers, conveys, grants and assigns to the Lender and its successors and assigns a continuing security interest in and security title to the Stock owned by it and all substitutions therefor and replacements thereof, all proceeds and products thereof and all rights relating thereto, including, without limitation, the certificates representing the Stock, all warrants, options, share appreciation rights and other rights, contractual or otherwise, in respect thereof and of all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in addition to, in substitution of, on account of or in exchange for any or all of the Stock, whether now owned or hereafter acquired by the Pledgor. The Pledgor has delivered to the Lender certificates representing the Stock owned by it, and an undated stock power endorsed in blank, as security for the Obligations; it being the intention of the parties hereto that record and beneficial ownership of the Stock including, without limitation, all voting and consensual rights shall remain in the Pledgor until the occurrence of an Event of Default and until the Lender shall notify the Pledgor of the Lender's exercise of voting and dividend rights to the Stock pursuant to Section 9 of this Agreement. --------- 2. Additional Shares. In the event that, during the term of this ----------------- Agreement: (a) any stock dividend, stock split, reclassification, readjustment or other change is declared or made in the capital structure of any of the Subsidiaries, or any new stock is issued by any of the Subsidiaries, all new, substituted, and additional shares, or other securities, shall be issued to the Pledgor, and shall be promptly delivered to the Lender, together with undated stock powers endorsed in blank by the Pledgor and shall thereupon constitute additional Stock, to be held by the Lender under the terms of this Agreement; and (b) any subscriptions, warrants or any other rights or options issued in connection with the Stock, all new stock or other securities acquired through such subscriptions, warrants, rights or options by the 2 Pledgor, together with appropriate powers, shall be promptly delivered to the Lender and shall thereupon constitute additional Stock, to be held by the Lender under the terms of this Agreement. 3. Representations and Warranties. The Pledgor hereby represents and ------------------------------ warrants to the Lender that: (a) except for the security interest created hereby, the Pledgor is and will at all times be the legal and beneficial owner of the Stock free and clear of all Liens; (b) all shares of capital stock from time to time constituting the Stock, either have been or will be duly authorized, validly issued, fully paid and non-assessable, with no personal liability attaching to the ownership thereof, and the Stock constitutes such percentage of the issued and outstanding shares of capital stock of each of the Subsidiaries as set forth on Schedule 1 attached hereto; (c) the Pledgor has the ---------- unencumbered right and power to pledge the Stock, as provided herein; and (d) all actions necessary or desirable to perfect, establish the first priority of, or otherwise protect, the security interest of the Lender in the Stock, have been duly taken, upon the taking possession by the Lender of certificates constituting Stock on the date hereof. 4. Default. Upon the occurrence of an Event of Default and until such ------- Event of Default is waived in writing by the Lender, the Lender may, in accordance with Section 9.2 of the Credit Agreement, sell or otherwise dispose ----------- of the Stock, at a public or private sale or make other disposition of the Stock, or any portion thereof, and the Lender may purchase the Stock, or any portion thereof at any public sale. The proceeds of the public or private sale or other disposition shall be first applied to the reasonable costs of the Lender incurred in connection with the sale, expressly including, but not limited to, any costs under Section 7 hereof, and then applied as set forth in --------- the Credit Agreement, and the Borrowers shall remain liable for any deficiency. 5. Additional Rights of Secured Party. In addition to its rights and ---------------------------------- privileges under this Agreement, the Lender, shall have all the rights, powers and privileges of a secured party under the Uniform Commercial Code as in effect in any applicable jurisdiction. 3 6. Return of Stock to the Pledgor. On the Termination Date, the Lender ------------------------------ shall return the remaining Stock and all rights received by the Lender as a result of its possessory interest in the Stock to the Pledgor (except to the extent the Stock is subject to remedies then being exercised by the Lender hereunder), and this Agreement shall terminate. 7. Disposition of Stock by Lender. The Stock is not registered or ------------------------------ qualified under the various Federal or state securities laws of the United States and disposition thereof after an Event of Default, in accordance with Section 4 above, may be restricted to one or more private (instead of public) - --------- sales in view of the lack of such registration. The Pledgor understands that upon such disposition, the Lender may approach only a restricted number of potential purchasers and further understands that a sale under such circumstances may yield a lower price for the Stock than if the Stock was registered and qualified pursuant to Federal and state securities laws and sold on the open market. The Pledgor, therefore, agrees that: (a) if the Lender shall, pursuant to the terms of this Agreement, sell or cause the Stock or any portion thereof to be sold at a private sale, the Lender shall have the right to rely upon the advice and opinion of any national investment firm (but shall not be obligated to seek such advice and the failure to do so shall not be considered in determining the commercial reasonableness of such action) as to the best manner in which to expose the Stock for sale and as to the best price reasonably obtainable at the private sale thereof; and (b) that such reliance shall be conclusive evidence that the Lender has handled such disposition in a commercially reasonable manner. 8. Pledgor's Obligations Absolute. The obligations of the Pledgor ------------------------------ under this Agreement shall be direct and immediate and not conditional or contingent upon the pursuit of any remedies against other security or liens available to the Lender. The Pledgor waives any right to require that resort be had to any security or to any balance of any deposit account or credit on the books of the Lender prior to the exercise of remedies hereunder, or to require action hereunder prior to resort by the Lender to any other security or collateral for the Obligations. 4 9. Voting Rights. ------------- (a) After the occurrence of an Event of Default, motion for authorization filed with the Court and entry of an order of the Court pursuant to Section 9.2 of the Credit Agreeent, (i) the Lender may, upon ten (10) calendar days' prior notice to the Pledgor of its intention to do so, exercise all voting rights, and all other ownership or consensual rights of the Stock but under no circumstances is the Lender obligated by the terms of this Agreement to exercise such rights (and if the Lender fails to exercise such rights, the Pledgor may continue to exercise such rights), and (ii) the Pledgor hereby appoints the Lender, which appointment shall be effective on the 10th day following the giving of notice by the Lender as provided in the foregoing Section 9(a)(i), the --------------- Pledgor's true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote the Stock in any manner the Lender deems advisable for or against all matters submitted or which may be submitted to a vote of shareholders. The power-of-attorney granted hereby is coupled with an interest and shall be irrevocable until this Agreement is terminated pursuant to Section 6 hereof. --------- (b) For so long as the Pledgor shall have the right to vote the Stock, the Pledgor covenants and agrees that it will not, without the prior written consent of the Lender, vote or take any consensual action with respect to the Stock which would constitute a breach of any covenant or condition under the Credit Agreement or any other Loan Document. 10. Notices. All notices and other communications required or permitted ------- hereunder shall be in writing and shall be given in the manner and at the addresses as set forth in the Credit Agreement. 11. Governing Law; Entire Agreement. This Agreement shall be construed ------------------------------- and interpreted in accordance with the internal laws of the State of Georgia applicable to agreements made and to be performed wholly within the State of Georgia. This Agreement, together with all documents referred to herein, 5 constitutes the entire agreement between the parties with respect to the matters addressed herein and may not be modified except by a writing executed by the Lender and the Pledgor and delivered by the Lender to the Pledgor. 12. Severability. If any paragraph of this Agreement, or part thereof, ------------ shall for any reason be held or adjudged to be invalid, illegal or unenforceable by any court of competent jurisdiction, such paragraph or part thereof so adjudicated invalid, illegal or unenforceable shall be deemed separate, distinct and independent, and the remainder of this Agreement shall remain in full force and effect and shall not be affected by such holding or adjudication. 13. Successors and Assigns. This Agreement shall be binding upon the ---------------------- Pledgor and its successors and assigns, and shall inure to the benefit of the Lender, any other Person which subsequently becomes a 'Lender' under the Credit Agreement, and their respective successors and assigns. 14. Counterparts. This Agreement may be executed in multiple ------------ counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. [Remainder of this page intentionally left blank.] 6 IN WITNESS WHEREOF, the undersigned parties hereto have executed this Agreement by and through their duly authorized officers, as of the day and year first above written. PLEDGOR: 50-OFF STORES, INC. By: /s/ 50-OFF Stores, Inc. -------------------------------------------- Its: ------------------------------------------- GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ General Electric Capital Corporation -------------------------------------------- Its: --------------------------------- 7 SCHEDULE 1 ---------- Outstanding Stock of Subsidiaries
ENTITY SHARES OWNED BY PERCENTAGE OUTSTANDING OWNERSHIP - ----------------------------------------------------------------------------------- 50-OFF Multistate Operations, Inc. 25,000 50-OFF Stores, Inc. 100% - ----------------------------------------------------------------------------------- 50-OFF Operating Company 25,000 50-OFF Stores, Inc. 100% - ----------------------------------------------------------------------------------- 50-OFF Texas Management, Inc. 25,000 50-OFF Stores, Inc. 100% - ----------------------------------------------------------------------------------- You Pay Half Investments, Inc. 25,000 50-OFF Stores, Inc. 100% - -----------------------------------------------------------------------------------
GUARANTY -------- THIS GUARANTY (this "Guaranty") is made and entered into as of November 18, 1996 by 50-OFF TEXAS MANAGEMENT, INC., a Nevada corporation (the "Guarantor"), in favor of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation having an office at 3379 Peachtree Road, N.E., Suite 600, Atlanta, Georgia 30326 ("Lender"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, pursuant to and subject to the terms and conditions of that certain $15,000,000 Senior Secured Super Priority Debtor-In-Possession Revolving Credit Agreement dated as of November 18, 1996, by and among 50-Off Stores, Inc. a Delaware corporation ("Parent"), 50-Off Texas Stores, L.P., a Texas limited partnership, 50-Off Multistate Operations, Inc., a Nevada corporation, and 50-Off Operating Company, a Nevada corporation, (together with Parent, collectively referred to as "Borrowers" and individually as a "Borrower") and Lender (as the same from time to time may be amended, restated, supplemented or otherwise modified, the "Credit Agreement"), Lender has agreed, among other things, to make Advances to Borrowers pursuant to the Credit Agreement (except as otherwise defined herein, all other capitalized terms used herein shall have the respective meanings given to such terms in the Credit Agreement); and WHEREAS, Parent owns 100% of the issued and outstanding capital stock of the Guarantor; and WHEREAS, the transactions contemplated by the Credit Agreement will confer, directly or indirectly, a benefit on the Guarantor; and WHEREAS, Lender is willing to make Advances as and to the extent provided for in the Credit Agreement, but only upon the condition, among others, that the Guarantor shall have executed and delivered this Guaranty in favor of Lender for the benefit of securing the Obligations under the Loan Documents; NOW, THEREFORE, in consideration of the premises and in order to induce Lender to extend credit under the Credit Agreement, the Guarantor hereby agrees with Lender, for the benefit of Lender, as follows: SECTION 1. THE GUARANTY. The guaranty of the Guarantor hereunder ------------ is as follows: SECTION 1.1 Guaranty of Extensions of Credit to Borrowers. The --------------------------------------------- Guarantor hereby unconditionally and irrevocably guarantees to Lender and its successors, endorsees, transferees and assigns, the prompt and complete payment when due (whether at stated maturity, by acceleration or otherwise) and performance of all of the Obligations. The Guarantor agrees that this Guaranty is a guaranty of payment and performance and not of collection, and that its obligations under this Guaranty shall be joint and several with every other guarantor and any other Persons which may at any time or from time to time be or become directly or indirectly financially responsible to Lender with respect to the Obligations and shall be under all circumstances primary, absolute and unconditional, irrespective of, and unaffected by: (a) the genuineness, validity, regularity, enforceability or any future amendment of, or change in this Guaranty, the Credit Agreement, any Loan Document or other agreement, document or instrument to which any Borrower or the Guarantor (collectively, a "Loan Party") is or may become a party; (b) the absence of any action to enforce this Guaranty, the Credit Agreement, any Loan Document or the waiver or consent by Lender with respect to any of the provisions thereof; (c) the existence, value or condition of, or failure of Lender to perfect its Lien against, any security for the Obligations or any action, or the absence of any action, by Lender in respect thereof (including, without limitation, the release of any such security); (d) any bankruptcy, insolvency, reorganization, arrangement, adjustment, composition, liquidation or the like of the Guarantor; (e) any merger or consolidation of any Loan Party into or with any other Person, or any sale, lease or transfer of any or all of the assets of any Loan Party to any other Person; (f) any circumstance other than full and final payment which might constitute a defense available to, or a discharge of, any Loan Party; 2 (g) absence of any notice to, or knowledge by, the Guarantor of the existence or occurrence of any of the matters or events set forth in the foregoing subdivisions (a) through (f); or (h) any sale, transfer or other disposition by Parent of any stock of the Guarantor; it being agreed by the Guarantor that its obligations under this Guaranty shall not be discharged until the Termination Date or the release in writing of the Guarantor by Lender of the Guarantor's obligations hereunder, whichever shall occur first. The Guarantor shall be regarded, and shall be in the same position, as principal debtor with respect to the Obligations and specifically agrees that, notwithstanding any discharge of any Borrower or any other Person or the operation of any provision of the Bankruptcy Code with respect to the Obligations or any such Persons, the Guarantor shall be fully responsible for paying all interest and costs of enforcement or preservation and protection of Collateral which may at any time accrue with respect to the Obligations. The Guarantor expressly waives all rights it may have now or in the future under any statute, or at common law, or at law or in equity, or otherwise, to compel Lender to proceed in respect of the Obligations against any Borrower or any other Person or against any security for the payment and performance of the Obligations before proceeding against, or as a condition to proceeding against, the Guarantor. The Guarantor agrees that any notice or directive given at any time to Lender which is inconsistent with the waiver in the immediately preceding sentence shall be null and void and may be ignored by , and, in addition, may not be pleaded or introduced as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty unless Lender has specifically agreed otherwise in writing. It is agreed between the Guarantor and Lender that the foregoing waivers are of the essence of the transaction contemplated by the Loan Documents and that, but for this Guaranty and such waivers, Lender will decline to extend credit under the Credit Agreement. SECTION 1.2 Maximum Guaranteed Amount. Notwithstanding any other ------------------------- provision of this Guaranty to the contrary, if the obligations of the Guarantor hereunder would otherwise be held or determined by a court of competent jurisdiction in any action or proceeding involving any state corporate law or any state or Federal bankruptcy, insolvency, reorganization, moratorium, 3 fraudulent conveyance or other law affecting the rights of creditors generally, to be void, invalid or unenforceable to any extent on account of the amount of the Guarantor's liability under this Guaranty, then notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantor or any other Person, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. SECTION 1.3 Enforcement of Guaranty. In no event shall Lender have ----------------------- any obligation (although it is entitled, at its option) to proceed against any Borrower or any other Person or any real or personal property pledged to secure the Obligations before seeking satisfaction from the Guarantor, and Lender may proceed, prior or subsequent to, or simultaneously with, the enforcement of Lender's rights hereunder, to exercise any right or remedy which it may have against any property, real or personal, as a result of any Lien it or they may have as security for all or any portion of the Obligations. SECTION 1.4 Waiver. The Guarantor hereby waives diligence, ------ presentment and demand (whether for nonpayment or protest or of acceptance, maturity, extension of time, change in nature or form of the Obligations, acceptance of further security, release of further security, composition or agreement arrived at as to the amount of, or the terms of, the Obligations, notice of adverse change in any Borrower's financial condition or any other fact which might materially increase the risk to the Guarantor) with respect to any of the Obligations or all other demands whatsoever and waives the benefit of all provisions of law which are or might be in conflict with the terms of this Guaranty. Lender will use reasonable efforts to mitigate the damages resulting from any default under the Obligations. Notwithstanding the foregoing, however, the Guarantor hereby waives any defense based on the failure of Lender or any holder of any Obligation to mitigate the damages resulting from any default with respect to such Obligations. The Guarantor represents, warrants and agrees that, as of the date of this Guaranty, its obligations under this Guaranty are not subject to any offsets or defenses of any kind against Lender, any Borrower or any other Person that executes a Loan Document. The Guarantor hereby waives, to the extent permitted by applicable law: (a) defenses and offsets of any kind which may arise in the future against Lender, any Borrower or any other Person that executes a Loan Document, and (b) the right to interpose any counterclaim or cross-claim, except to the extent 4 that the failure to assert any such counterclaim or cross-claim would permanently preclude the prosecution of or recovery upon same; provided that the -------- Guarantor agrees that any such counterclaim will not be used as an offset against any recovery by Lender hereunder. SECTION 1.5 Benefit of Guaranty. The provisions of this Guaranty are ------------------- for the benefit of Lender and its respective successors, transferees, endorsees and assigns. In the event all or any part of the Obligations are transferred, endorsed or assigned by Lender to any Person or Persons in accordance with the terms of the Credit Agreement, any reference to "Lender" herein shall be deemed to refer equally to such Person or Persons. SECTION 1.6 Modification of Obligations. If Lender shall at any time --------------------------- or from time to time, with or without the consent of, or notice to, the Guarantor: (a) change or extend the manner, place or terms of payment of, or renew or alter all or any portion of, the Obligations; (b) take any action under or in respect of the Loan Documents in the exercise of any remedy, power or privilege contained therein or available to it at law, equity or otherwise, or waive or refrain from exercising any such remedies, powers or privileges; (c) amend or modify, in any manner whatsoever, any Loan Document; (d) extend or waive the time for the Guarantor's or any other Person's performance of, or compliance with, any term, covenant or agreement on the Guarantor's or any other Person's part to be performed or observed under the Loan Documents, or waive such performance or compliance or consent to a failure of, or departure from, such performance or compliance; (e) take and hold security or collateral for the payment of the Obligations, or sell, exchange, release, dispose of, or otherwise deal with, any property pledged, mortgaged or conveyed, or in which Lender has been granted a Lien, to secure any indebtedness of the Guarantor or any Borrower to Lender; 5 (f) release or limit the liability of anyone who may be liable in any manner for the payment of any amounts owed by the Guarantor or any Borrower to Lender; (g) modify or terminate the terms of any intercreditor or subordination agreement pursuant to which claims of other creditors of the Guarantor or any Borrower are subordinated to the claims of Lender; and/or (h) apply any sums by whomever paid or however realized to any amounts owing by the Guarantor or any Borrower to Lender in such manner as Lender shall determine in its discretion; then Lender shall not incur any liability to the Guarantor pursuant hereto as a result thereof and no such action shall impair or otherwise affect or release the obligations of the Guarantor under this Guaranty. SECTION 1.7 Reinstatement. This Guaranty shall remain in full force ------------- and effect and continue to be effective in the event any petition is filed by or against the Guarantor for liquidation or reorganization, in the event the Guarantor becomes insolvent or makes an assignment for the benefit of creditors or in the event a receiver or trustee is appointed for all or any significant part of the Guarantor's assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by Lender, whether as a "voidable preference," "fraudulent conveyance," or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned. SECTION 1.8 No Subrogation. Notwithstanding any payment or payments -------------- made by the Guarantor hereunder, or any set-off or application of funds of the Guarantor by Lender, the Guarantor shall not be entitled to be subrogated to any of the rights of Lender against any Borrower or against any collateral security or guaranty or right of offset held by Lender for the payment of the Obligations, nor shall the Guarantor seek any reimbursement from any Borrower in respect of payments made by the Guarantor hereunder, until the Termination Date. If any amount shall be paid 6 to the Guarantor on account of such subrogation rights at any time prior to the Termination Date, such amount shall be held by the Guarantor in trust for Lender, segregated from other funds of the Guarantor, and shall, forthwith upon receipt by the Guarantor, be turned over to Lender in the exact form received by the Guarantor (duly indorsed by the Guarantor to Lender, if required), to be applied against the Obligations, whether matured or unmatured, in the manner provided in the Credit Agreement. SECTION 1.9 Continuing Guaranty. This Guaranty is a continuing ------------------- guaranty and shall (i) remain in full force and effect until the Termination Date, (ii) be binding upon the Guarantor and its respective successors and permitted assigns, and (iii) inure, together with the rights and remedies of the Lender hereunder, to the benefit of Lender and its respective successors, transferees and assigns. SECTION 2. DELIVERIES. In a form satisfactory to Lender, the ---------- Guarantor shall deliver to Lender, concurrently with the execution of this Guaranty, such Loan Documents and other instruments, certificates and documents as are required to be delivered by the Guarantor to Lender under the Credit Agreement. SECTION 3. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) The ----------------------------------------- Guarantor hereby makes all representations and warranties, and agrees to comply with all of the obligations, requirements and restrictions in the representations, warranties and covenants contained in the Credit Agreement, to the extent such obligations, requirements and restrictions are expressly applicable to the Guarantor. (b) The Guarantor further represents and warrants to Lender that: (i) the execution, delivery and performance by the Guarantor of this Guaranty are within the Guarantor's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental authority, do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or bylaws of the Guarantor, or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Guarantor and will not result in the creation or imposition of any Lien on any asset of the Guarantor (other than pursuant to the Loan Documents); and (ii) this such Guaranty has been duly authorized, executed and delivered by the Guarantor and constitutes a legal, valid and binding obligation of the Guarantor, 7 enforceable against the Guarantor in accordance with its terms, except as such enforceability may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general principles of equity. SECTION 4. FURTHER ASSURANCES. The Guarantor agrees, upon the ------------------ written request of Lender, and at the Guarantor's expense, to execute and deliver to Lender, from time to time, any additional instruments or documents considered reasonably necessary by Lender to cause this Guaranty to be, become or remain valid and effective in accordance with its terms. SECTION 5. RIGHT OF SET-OFF. In addition to and not in limitation of ---------------- all rights of offset that Lender or any other holder of any Obligation may have under applicable law or under the Credit Agreement, Lender or any other holder of any Obligation shall, upon the occurrence of any Event of Default and whether or not Lender or such holder has made any demand or whether the Guarantor's obligations are matured, have the right to appropriate and apply to the payment of the Guarantor's obligations hereunder, all deposits (general or special, time or demand, provisional or final) then or thereafter held by, and other indebtedness or property then or thereafter owing, Lender whether or not related to this Guaranty or any transaction hereunder. SECTION 6. MISCELLANEOUS PROVISIONS. ------------------------ SECTION 6.1 Amendments. Any amendment or waiver of any provision of ---------- this Guaranty and any consent to any departure by the Guarantor from any provision of this Guaranty, shall be effective only if made pursuant to a written instrument executed by the Guarantor and Lender (or, if a waiver or a consent, a written letter or agreement executed by Lender). SECTION 6.2 Headings. The headings in this Guaranty are for purposes -------- of reference only and shall not otherwise affect the meaning or construction or any provision of this Guaranty. SECTION 6.3 Severability. The provisions of this Guaranty are ------------ severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect in that jurisdiction only such clause or provision, or part thereof, and shall not in any manner affect such clause or 8 provision in any other jurisdiction, or any other clause or provision of this Guaranty in any jurisdiction. SECTION 6.4 NOTICES. Except as otherwise provided herein, whenever ------- it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by any other party, or whenever either of the parties desires to give or serve upon any communication with respect to this Guaranty, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be given in the manner provided for in Section 10.9 of the Credit Agreement and, in the case of the Guarantor, delivered to the Guarantor at its respective address listed on Schedule 1 to this Guaranty. ---------- SECTION 6.5 Remedies Cumulative. Each right, power and remedy of ------------------- Lender provided in this Guaranty or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Guaranty or now or hereafter existing at law or in equity or by statute or otherwise. The exercise or partial exercise by Lender of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Lender of all such other rights, powers or remedies, and no failure or delay on the part of Lender to exercise any such right, power or remedy shall operate as a waiver thereof. SECTION 6.6 Statute of Limitations. To the full extent permitted by ---------------------- applicable law, the Guarantor hereby waives the right to plead any statute of limitations as a defense to performance of its obligations under, or enforcement of, this Guaranty. SECTION 6.7 Final Expression. This Guaranty, together with any other ---------------- agreement executed in connection herewith, is intended by the parties as a final expression of this Guaranty and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Guaranty shall not be relevant to determine the meaning of this Guaranty even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection. SECTION 6.8 Financial Status. The Guarantor hereby assumes ---------------- responsibility for keeping itself informed of the financial 9 condition of each Borrower and any and all endorsers and/or other guarantors of any instrument or document evidencing all or any part of the Obligations and of all other circumstances bearing upon the risk of nonpayment of the Obligations or any part thereof that diligent inquiry would reveal, and the Guarantor hereby agrees that Lender shall have no duty to advise the Guarantor of information known to Lender regarding such condition or any such circumstances. SECTION 6.9 Assignability. This Guaranty shall be binding on the ------------- Guarantor and its respective successors and shall inure to the benefit of Lender and its respective successors and assignees. This Guaranty may not be assigned by the Guarantor without the prior written consent of Lender. SECTION 6.10 Non-Waiver. The failure of Lender to enforce any right ---------- or remedy hereunder, or promptly to enforce any such right or remedy, shall not constitute a waiver thereof, nor give rise to any estoppel against Lender, nor excuse the Guarantor from its obligations hereunder. SECTION 6.11 GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. ------------------------------------------------ EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS GUARANTY AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. THE GUARANTOR HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE STATE OF TEXAS, SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE GUARANTOR AND LENDER PERTAINING TO THIS GUARANTY OR TO ANY MATTER ARISING OUT OF OR RELATING TO THIS GUARANTY, THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, PROVIDED, THAT NOTHING IN THIS GUARANTY SHALL BE DEEMED OR OPERATE TO -------- PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO ENFORCE A JUDGEMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. THE GUARANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE GUARANTOR HEREBY WAIVES ANY OBJECTION WHICH THE GUARANTOR MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE -------------------- GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. THE GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINTS AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE 10 OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL OR BY FEDERAL EXPRESS OR OTHER COURIER SERVICE ADDRESSED TO THE GUARANTOR AT ITS RESPECTIVE ADDRESS SET FORTH ON SCHEDULE 1 HERETO AND THAT ---------- SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE GUARANTOR'S ACTUAL RECEIPT THEREOF. SECTION 6.12 MUTUAL WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN --------------------------- CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE PARTIES ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH, THIS GUARANTY, THE CREDIT AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTION THERETO. SECTION 6.13 Acknowledgements. The Guarantor hereby acknowledges ---------------- that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Guaranty; (b) Lender has no fiduciary relationship to the Guarantor, and the relationship between Lender, on the one hand, and the Guarantor, on the other hand, is solely that of creditor and debtor, respectively; and (c) no joint venture exists among Lender or among the Guarantor and Lender. [Remainder of this page intentionally left blank.] 11 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered as of the date first above written. GUARANTOR: 50-OFF TEXAS MANAGEMENT, INC., - --------- A NEVADA CORPORATION By: /s/ 50-OFF Texas Management, Inc. ------------------------------------------------- Name: Title: 12 SCHEDULE 1 ---------- Notice Addresses 50-OFF Texas Management, Inc. Attn: Charles J. Fuhrmann, II. 8750 Tesoro Drive San Antonio, Texas 78217 Telephone: (210) 805-9300 Facsimile: (210) 804-4980 With a copy to: Sheinfeld, Maley & Kay, P.C. Attn: Sam Stricklin, Esq. 1700 Pacific Avneue, Suite 4400 Dallas, Texas 75201-4618 Telephone: (214) 953-0700 Facsimile: (214) 953-1189 ASSIGNMENT OF PARTNERSHIP INTEREST THIS ASSIGNMENT OF PARTNERSHIP INTEREST (the "Assignment"), made as of the 18 day of November, 1996 by the undersigned entity (the "Partner") in favor of General Electric Capital Corporation (the "Lender"), W I T N E S S E T H ------------------- IN CONSIDERATION of the execution and delivery of a certain $15,000,000 Senior Secured Super Priority Debtor-in-Possession Revolving Credit Agreement of even date (as amended, modified or supplemented from time to time, the "Credit Agreement") among 50-Off Stores, Inc., a Delaware corporation, 50-Off Texas Stores, L.P., a Texas limited partnership, 50-Off Operating Company, a Nevada corporation, and 50-Off Multistate Operations, Inc., a Nevada corporation (collectively, the "Borrowers") and the Lender pursuant to which the Lender has agreed to lend up to U.S. $15,000,000 to the Borrowers, and the sum of Ten and No/100 Dollars ($10.00) in hand paid, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged: The Partner, as the sole general partner of 50-Off Texas Stores, L.P., a Texas limited partnership (the "Partnership"), hereby sells, assigns, transfers, conveys and grants unto the Lender, and its respective successors and assigns, all of its right, title and interest in and to, and a continuing security interest in and security title to, all of its economic general partner interest in the Partnership, as more fully set forth on Schedule 1 hereto, including, ---------- without limitation, right to receive all proceeds, distributions of income, profits, surplus or other compensation by way of income or liquidating distributions, in cash or in kind, from the Partnership, including such right, title and interest now owned by the Partner or which is hereafter acquired by it, whether a general or limited partnership interest, (the "Assigned Rights"), as security for payment and performance of the Obligations. TO HAVE AND TO HOLD UNTO the Lender and it successors and assigns forever, upon and subject to the following terms and conditions: 1. For purposes of this Assignment, capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement unless otherwise defined herein. 2. The Partner hereby constitutes and appoints the Lender as its true and lawful attorney, in its name and stead upon the occurrence of an Event of Default: (a) to collect any and all distributions of cash and other assets due the Partner from the Partnership or otherwise in respect of the Assigned Rights, and (b) to use such measures, legal or equitable, as in its discretion may be deemed necessary or appropriate to enforce the payment thereof to the Lender. The power of attorney hereby created is coupled with an interest and is irrevocable. 3. The Lender is hereby granted full irrevocable power and authority to hold, use and apply all cash and non-cash distributions received by it upon the occurrence of an Event of Default (together with all interest earned thereon) in full or partial payment of the Obligations and may convert any such non-cash distributions to cash and may apply the proceeds thereof in payment of charges or expenses incurred by the Lender in connection with any and all things which the Lender may do or cause to be done hereunder, and thereafter in the order of application set forth in the Credit Agreement. 4. The Lender shall not in any way be responsible for any failure to do any or all of the things for which rights, interests, power and authority are herein granted. The Lender shall be responsible only for the application of such cash or other property as it actually receives under the terms hereof; provided, however, that the failure of the Lender to do any of the things or exercise any of the rights, interests, powers and authorities hereunder shall not be construed to be a waiver of any such rights, interests, powers and authorities. 5. This Assignment shall not operate to place any responsibility or obligation whatsoever upon the Lender. The Lender shall not have assumed any liability of the Partner or of the Partnership as a result of this Assignment. The Partner agrees to protect, indemnify and save harmless the Lender from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses including, without limitation, attorneys' fees and expenses (except as may arise from the gross negligence or wilful misconduct of the Lender) imposed upon or incurred by the Lender by reason of this 2 Assignment and any claim and demand whatsoever which may be asserted against the Lender by reason of any alleged obligation or undertaking to be performed or discharged by the Lender under this Assignment. In the event the Lender incurs any liability, loss or damage by reason of this Assignment, or in curing any default or breach by the Partner of its obligations under the partnership agreement of the Partnership (the "Partnership Agreement"), or in the defense of any claims or demands arising out of or in connection with this Assignment, the amount of such liability, loss or damage shall be added to the Obligations. 6. The Partner agrees to execute, deliver and record, upon the request of the Lender, any and all instruments requested by the Lender to carry these presents into effect or to accomplish any other purpose deemed by the Lender to be necessary or appropriate in connection with these presents, expressly including UCC-l financing statements. 7. The Partner hereby warrants and represents that copies of the Partnership Agreement to which it is a party furnished to the Lender are true, complete and correct copies of the Partnership Agreement, as amended through the date hereof; that the Partnership Agreement is unmodified and in full force and effect; that the Assigned Rights have not been heretofore sold, assigned, transferred, set over or encumbered by any instrument now in force, and will not at any time during the term of this Assignment be sold, assigned, transferred, set over or encumbered by it or by any Person or Persons whomsoever, without the prior written consent of the Lender; that the Assigned Rights are all of such rights the Partner has arising from its partnership interests in the Partnership and that the interests of the Partner in the Partnership represent the percentage shown on Schedule 1 attached hereto of the general partner ownership ---------- interest in the Partnership; that the Partner has the right to sell, assign, transfer, set over and encumber the Assigned Rights to the Lender and to grant to and confer upon the Lender the Assigned Rights; that the Partner is not at present in default in any material respect under the Partnership Agreement; and that all actions, approvals and consents required by applicable law or by the Partnership Agreement have been obtained. 8. The Partner hereby agrees that it will not, at any time during the term of this Assignment, convey or encumber any of its interests, including, without limitation, the Assigned Rights, in the Partnership in any manner whatsoever or consent to 3 any departure from or any modification or amendment to the Partnership Agreement, or consent to the admission of any new general or limited partner or consent to any change in the business of the Partnership, without the prior written consent of the Lender. The Partner agrees that it will perform all its obligations as a general or a limited partner, as applicable, under the Partnership Agreement, and that it will do all things necessary to maintain its interests in the Partnership in full force and effect. 9. In the event the Partner receives any payment or other distribution of any kind or character from the Partnership or from any other source whatsoever in respect of the Partner's interest in the Partnership hereby assigned, such payments or other distributions shall be received in trust for the Lender and shall be promptly turned over by the Partner to the Lender. The Partner will mark its books and records, so as to clearly indicate that the Partner's rights as a general partner, or a limited partner as applicable, of the Partnership are subject to the terms of this Assignment. 10. This Assignment and the rights hereunder shall inure to the benefit of the Lender and may be assigned in whole or in part by the Lender in connection with any assignment of the Credit Agreement or the Indebtedness evidenced thereby, as is permitted thereunder, and shall be binding upon the Partner and its respective successors and assigns. 11. Notwithstanding anything herein to the contrary, it is understood and agreed that although this Assignment is and shall be effective as of the date hereof, no right or power granted hereunder or obligation under Section 9 --------- hereof shall be exercised or enforced by the Lender unless and until an Event of Default shall have occurred. It is the intention of the parties hereto that beneficial ownership of the Assigned Rights, including, without limitation, all voting, consensual and distribution rights, shall remain in the Partner until an Event of Default shall have occurred. Upon the occurrence of any Event of Default, the Lender may exercise such rights and remedies as are provided in the Credit Agreement, the other Loan Documents, the Final Order, and in this Assignment and under applicable law. The rights and remedies granted hereunder shall be cumulative, and not exclusive. The Partner expressly agrees that the Lender shall not in any event be under any obligation to resort to any right or remedy hereunder prior to exercising any 4 other rights the Lender may have against the Partner or any Borrower or any other Person to secure repayment of the Obligations, nor shall the Lender be required to resort to any such other rights prior to the exercise of rights and remedies hereunder. 12. After the occurrence of an Event of Default, the Lender may exercise all ownership or consensual rights pertaining to the Assigned Rights of the Partner and may notify and instruct the Partnership to thereafter make all payments otherwise due the Partner in respect of the Assigned Rights payable directly to the Lender, and the Lender shall have the right to apply such payments in reduction of the Obligations in accordance with the Credit Agreement. The Partner hereby appoints the Lender as the Partner's true and lawful attorney-in-fact at such times to exercise such ownership or consensual rights pertaining to the Assigned Rights in any manner the Lender deems advisable for or against all matters with respect to the Partnership. The power of attorney granted hereby is coupled with an interest and shall be irrevocable. 13. The Partner undertakes and agrees, in connection herewith, to deliver to the Lender a copy of any notice or mailing received by the Partner from the Partnership, at the address of the Lender given for notices in the Credit Agreement. 14. In addition to its rights and privileges under this Assignment, the Lender shall have all of the rights, powers and privileges of a secured party under the Uniform Commercial Code as in effect in any applicable jurisdiction. 15. This Assignment shall be deemed to be made pursuant to the internal laws of the State of Georgia with respect to agreements made and to be performed wholly within the State of Georgia and shall be construed, interpreted, performed and enforced in accordance therewith. 16. This Assignment may be executed in multiple counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. 17. On the Termination Date, the Lender shall return its remaining interest in the Assigned Rights to the Partner. 5 IN WITNESS WHEREOF, the undersigned Partner and the Lender have caused this instrument to be executed by their duly authorized representatives as of the day and year first above written. PARTNER: 50-OFF TEXAS MANAGEMENT, INC. By: /s/ 50-OFF Texas Management, Inc. ------------------------------------------ Its: ----------------------------------------- LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ General Electric Capital Corporation ------------------------------------------ Its: ----------------------------------------- 5 SCHEDULE 1 ---------- Description of Partnership Interests 50-OFF Texas Management, Inc., Nevada corporation, is the Managing Genral Partner of 50-OFF Texas Stores, L.P., a Texas limited partnership. A copy of the Limited Partnership Agreement is attached hereto as Schedule 1(a). Schedule 1(a) intentionally omitted EX-23.1 14 CONSENT OF DELOITTE & TOUCHE, LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 1 to Registration Statement No. 333-25061 of 50-OFF Stores, Inc. of our report (which report expresses an unqualified opinion and includes explanatory paragraphs referring to 50-OFF Stores, Inc.'s ability to continue as a going concern and bankruptcy filing) dated June 9, 1997 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP San Antonio, Texas June 11, 1997 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 50-OFF STORES, INC.'S FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED JANUARY 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JAN-31-1997 JAN-31-1997 821 0 718 0 12,975 14,908 7,276 3,287 19,255 10,568 0 0 0 122 (21,709) 19,255 106,194 106,194 78,560 78,560 44,848 0 1,672 (18,812) 153 (18,965) 0 (24,645) 0 (43,610) (3.57) (3.57)
EX-99.1 16 NOTIFICATION OF RESIGNATIONS EXHIBIT 99.1 Joseph Lehrman May 28, 1997 Board of Directors 50-OFF Stores, Inc. 8750 Tesoro San Antonio, Texas 78217 Gentlemen: I do hereby resign as a director and as secretary/treasurer of the Company (and of each affiliate thereof, to the extent applicable) effective May 28, 1997. In view of my resignation as a director, I will not, of course, be responsible for matters occurring after my resignation such as the implementation of the Company's Plan of Reorganization upon confirmation and the matters contemplated thereby or the registration statement filed with the SEC in connection with such Plan, when and if it becomes effective. I have enjoyed serving on the Board of Directors of 50-OFF Stores, Inc. and wish the Company every success. Very truly yours, /s/ JOSEPH LEHRMAN Joseph Lehrman cc: Securities and Exchange Commission EXHIBIT 99.1 James M. Raines May 28, 1997 Board of Directors 50-OFF Stores, Inc. 8750 Tesoro San Antonio, Texas 78217 Gentlemen: I do hereby resign as a director of the Company (and of each affiliate thereof, to the extent applicable) effective May 28, 1997. In view of my resignation from the Company's Board of Directors, I will not, of course, be responsible for matters occurring after my resignation such as the implementation of the Company's Plan of Reorganization upon confirmation and the matters contemplated thereby or the registration statement filed with the SEC in connection with such Plan, when and if it becomes effective. I have enjoyed serving on the Board of Directors of 50-OFF Stores, Inc. and wish the Company every success. Very truly yours, /s/ JAMES M. RAINES James M. Raines cc: Securities and Exchange Commission EX-99.2 17 CONSENTS OF NEW DIRECTORS EXHIBIT 99.2 CONSENT As a person about to become a director of 50-OFF Stores, Inc. (the "Company"), I consent to the use of my name in the Prospectus included as part of the Company's Registration Statement on Form S-1 (No. 333-25061), as amended at the time it becomes effective. Dated: June 3, 1997 /s/ SHERYLE J. BOLTON ------------------------------------ Sheryle J. Bolton EXHIBIT 99.2 CONSENT As a person about to become a director of 50-OFF Stores, Inc. (the "Company"), I consent to the use of my name in the Prospectus included as part of the Company's Registration Statement on Form S-1 (No. 333-25061), as amended at the time it becomes effective. Dated: June 3, 1997 /s/ WILLIAM B. SNOW ------------------------------------ William B. Snow EXHIBIT 99.2 CONSENT As a person about to become a director of 50-OFF Stores, Inc. (the "Company"), I consent to the use of my name in the Prospectus included as part of the Company's Registration Statement on Form S-1 (No. 333-25061), as amended at the time it becomes effective. Dated: June 3, 1997 /s/ DAVID WHITE -------------------------------------- M. David White -----END PRIVACY-ENHANCED MESSAGE-----