-----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, GyevwGF59JBUOotMxM4FGSmwEktNJHCxKnh+3LOhGWwpd5o52yOSRQYTHvkoIVPb At2vWMmpjD7h42u0imbnqQ== 0000950134-96-004562.txt : 19960829 0000950134-96-004562.hdr.sgml : 19960829 ACCESSION NUMBER: 0000950134-96-004562 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960202 FILED AS OF DATE: 19960828 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: TX FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-13076 FILM NUMBER: 96622280 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 10-K/A 1 AMENDMENT NO.1 TO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KA AMENDMENT NO. 1 TO FORM 10-K AMENDMENT TO ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 2, 1996 Commission File Number 0-13076 50-OFF STORES, INC. (Exact name of registrant as specified in its charter) Delaware 74-2640559 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization) 8750 Tesoro Drive San Antonio, Texas 78217-0555 (Address of principal executive offices, including ZIP Code) Registrant's telephone number, including area code: (210) 805-9300 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of Each Class ------------------- Common Stock, $0.01 par value 50-Off Stores, Inc. hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the fiscal year ended February 2, 1996 by amending Part I, Item 1 - Business - Subsequent Events, Part I, Item 3 - Legal Proceedings, and Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations (Liquidity and Capital Resources); by adding Part III omitted from its initial Form 10-K filing for such fiscal year in the expectation that they would have been included in the Registrant's definitive proxy statement, and by amending Part IV, Item 14 - Note 9 (Common Stock) to Financial Statements. 2 PART I ITEM 1. BUSINESS Subsequent Events While significant operating losses continued through the Company's first fiscal quarter of 1997 (final results are not yet available), in late February, the Company began to address its liquidity problem by restructuring certain debt obligations, including its unsecured trade obligations owed to vendors and its long term notes with an insurance company. 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 will be paid in full within a two year period. The restructuring of the long term notes, including an extension of the maturity, reduced monthly debt service requirements (see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, below). 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, has served in various consulting capacities for 50-OFF, including Acting Chief Administrative and Financial Officer until his new appointment. Mr. Fuhrmann, most recently 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 promotions of Allen Fields to Senior Vice President - Operations, Joe Goldstein to Senior Vice President - Merchandise and James Scogin to Vice President - Controller, Chief Accounting Officer and Assistant Secretary. On May 13, 1996, the Company entered into a new $22.5 million revolving credit arrangement with Foothill Capital Corporation and GBFC, Inc. which provides 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%. The new loan facility matures on May 31, 1998. This facility replaces a prior commitment of $20.0 million providing for a 45% advance rate with interest set at prime plus 1.75% expiring on January 12, 1998. The agreement contains minimum gross margin, minimum EBITDA, minimum and maximum inventory levels, minimum working capital and minimum trade support financial covenants. The line of credit is secured by inventory, accounts receivable, collateral assignment of claim proceeds and other assets. The Company expects the increased liquidity under the new facility to provide important cash resources to 50-OFF and, with the other restructurings discussed above, increased creditworthiness. In conjunction with the establishment of this new facility, the Company issued Foothill Capital and GBFC, Inc. a three year warrant to purchase 400,000 shares of Common Stock at $2.50 per share and granted related registration rights. As of May 13, 1996, the Company had approximately $4,061,000 available for use under its line of credit. For the balance of fiscal 1997, management has developed and is implementing a business strategy (see Business Strategy, below) which seeks to achieve higher gross margins than in fiscal 1996 and profitability. The key elements of this strategy are more close-out buying, higher initial mark-ups, less promotional pricing, new "hardlines" categories, elimination of certain "softline" categories subject to high mark-downs and shrink, extensive programs to reduce and control shrink generally and a reduced expense structure. Although management believes that it has developed an appropriate plan for the Company in its current environment, no assurance can be given that the Company will be successful in its efforts to improve operations and reverse recent operating trends. 2 3 ITEM 3. LEGAL PROCEEDINGS 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 obligation 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 removing the shares from an escrow account into which they had been issued for authentication purposes, even though the defendants have never paid anything for such shares. The Company seeks recovery of actual and punitive damages, an injunction against the defendant's 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 has answered the Complaint. Defaults have been sought and/or entered against Andalucian Villas, Brocimast and Koutsoubos for failure to appear. Banque Paribas, Betafid and Howard White have moved to dismiss the action for lack of jurisdiction and forum non conveniens. Written discovery has been served on all defendants who have appeared. The Court referred all pretrial matters to a U.S. Magistrate who entered an order requiring Paribas and Betafid to make witnesses available in the United States for depositions. Paribas appealed that decision. The Company, based upon advice of counsel, believes that it will obtain a favorable judgment against one or more of these defendants, however, the collectibility of any such judgment is uncertain at this time. 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. If the Company is unable to collect amounts due and the shares are not ultimately returned, an extraordinary non-cash charge to earnings for the uncollected amount of the subscription receivable will be recorded in the consolidated financial statements. Damages awarded to the Company or settlement amounts paid to the Company, if any, in excess of the subscriptions receivable would be credited to earnings. On January 9, 1996, the Company filed a 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 attorney's 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. The Company will continue to prosecute these cases vigorously. The Company is party to certain other legal proceedings arising in the ordinary coarse of business, none of which are believed to be material. 3 4 PART II ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company began fiscal 1996 with cash of $2,062,676. During the year, the Company increased borrowings by a net of $3,061,021, used $1,090,802 in operating activities, used $3,691,561 for capital expenditures in refurbishing existing stores and opening five stores and ended the year with cash on hand of $341,334. The Company had a line of credit loan facility for up to $20,000,000, obtained in January 1994, which was to expire on January 12, 1998; permitted loans up to the lesser of (i) 45% of eligible inventory or (ii) 80% of liquidation value of inventory, both minus $1,500,000; and bore interest at 1.75% over the prime rate. The line of credit was secured by inventory and other assets of the Company and contained minimum tangible net worth, minimum working capital and minimum pre-tax profit financial covenants. The maximum amounts outstanding under the line of credit during fiscal 1996 and fiscal 1995 were approximately $16,834,000 and $13,312,000, respectively. Peak cash requirements have historically occurred in the late third and early fourth fiscal quarters. As of February 2, 1996, the Company had approximately $23,000 in letters of credit and had approximately $143,000 available for use under its line of credit. The Company opened five stores during fiscal 1996. The Company has opened one store in fiscal 1997 and has no other lease commitments for additional stores. Further store openings will depend upon the sales and income performance of existing stores and the Company's ability to obtain attractive leases for locations in existing markets where the targeted customer base is large enough to support additional stores. As stated above, during fiscal 1996, certain factors negatively affected the Company's liquidity, including significant operating losses. While significant operating losses continued through the Company's first fiscal quarter of 1997 (final results are not yet available), in late February, 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, 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 will be paid in full within a two year period. The restructuring of the notes, including an extension of the maturity, reduced monthly debt service requirements. On May 13, 1996, the Company entered into a new $22.5 million revolving credit arrangement with Foothill Capital Corporation and GBFC, Inc. which provides 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%. The new loan facility matures on May 31, 1998. This facility replaces a prior commitment of $20.0 million providing for a 45% advance rate with interest set at prime plus 1.75% expiring on January 12, 1998. The agreement contains minimum gross margin, minimum EBITDA, minimum and maximum inventory levels, minimum working capital and minimum trade support financial covenants. The line of credit is secured by inventory, accounts receivable, collateral assignment of claim proceeds and other assets. The Company expects the increased liquidity under the new facility to provide important cash resources and, with the other restructurings discussed above, increased creditworthiness. In conjunction with the establishment of this new facility, the Company issued Foothill Capital and GBFC, Inc. a three year warrant to purchase 400,000 shares of Common Stock at $2.50 per share (see Note 4 of Notes to Consolidated Financial Statements) and granted related registration rights. As of May 13, 1996, the Company had approximately $4,061,000 available for use under its line of credit. The Company believes its operating cash flow, its new, increased line of credit with its larger advance rate, its restructuring of certain other debt obligations and its cash on hand will be adequate to finance its operations through fiscal 1997. 4 5 For the balance of fiscal 1997, management has developed and is implementing a business strategy which seeks, among other things, to achieve higher gross margins than in fiscal 1996 and a return to profitability. The key elements of this strategy are more close-out buying, higher initial mark-ups, less promotional pricing, new "hardlines" categories, elimination of certain "softline" categories subject to high mark-downs and shrink, extensive programs to reduce and control shrink generally and a reduced expense structure. Although management believes that it has developed an appropriate plan for the Company in its current environment, no assurance can be given that the Company will be successful in its efforts to improve operations and reverse recent operating trends. If the Company's plans to improve operations are not successful, and absent a positive resolution of its lawsuits (see below), a capital infusion or additional concessions from landlords or lenders, management will consider, among other alternatives, strategic or financial alliances with third parties (including wholesalers or manufacturers), and the merger or sale of all or a part of the Company. As discussed in Note 9 of Notes to Consolidated Financial Statements, the Company has filed lawsuits related to certain parties' breach of contractual obligations to purchase 1,500,000 shares of the Company's Common Stock and actions in misappropriating and removing these shares from an escrow account prior to payment for such shares. The Company intends to vigorously prosecute this matter and to pursue all available avenues to effect either the receipt of payment for such shares or the return of the shares themselves, plus actual and punitive damages. The Company, based upon advice of counsel, believes that it will obtain a judgment against one or more defendants in these cases; however, the collectibility of any such judgment is uncertain at this time. 5 6 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company are:
NAME AGE POSITION(S) HELD/BUSINESS EXPERIENCE - ---- --- ------------------------------------ Charles J. Fuhrmann II 51 Director, President and Chief Executive and Financial Officer. Served as President, Chief Executive and 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. See "Certain Relationships and Related Transactions." From 1978 through May 1991, was Vice President and Managing Director, Investment Banking of Merrill Lynch & Co., Inc., New York City, New York. Joseph Lehrman 71 Secretary, Treasurer and Director. A co-founder of the Company and has served as Treasurer of the Company since January 1976, as Secretary since September 1982, and as a director since March 1975. Engaged in various executive capacities in the retail discount industry for over 40 years. Allen Fields 38 Senior Vice-President - Operations. Served as Senior Vice President - Operations since May 1996 and as Vice-President - Store Operations since January 1995. Joined the company from Hill Department Stores where he served as a District Manager since January 1994. Served as a District Manager with McCrory Stores from May 1989 to December 1993, and from February 1987 until April 1989 served as a Store Manager with Jamesway Corp. Joe Goldstein 49 Senior Vice-President - Merchandise. Served as Senior Vice President - Merchandise since May 1996 and as Vice-President - Division Merchandise Manager (Softlines) since September 1993. Served as Merchandise Manager for Value City from November 1992 to September 1993 and from April 1987 to November 1992, served as Vice President - General Merchandise Manager for Alden's. Has over 20 years of retail experience, primarily in buying and general merchandising capacities. Richard Kelly 45 Vice-President - Distribution and Transportation. Served as Vice-President - Distribution and Transportation since November 1994. Joined the Company from Grossman's where he served as Logistics Facility Manager since January 1994. Served as a management consultant for Center City Consolidators from January 1993 to December 1993. Served as Assistant Vice President, Distribution Services for T.J. Maxx, Inc. from October 1992 to December 1992. Served as Director, Logistics Operations for Rent-A-Center Inc. from March 1991 to September 1992 and as General Manager of southwestern/western regional distribution from September 1988 to February 1991. James G. Scogin 35 Vice-President - Controller, Chief Accounting Officer and Assistant Secretary. Served as Vice-President - Controller, Chief Accounting Officer and Assistant Secretary since May 1996 and as Controller - Chief Accounting Officer since February 1995. Served as Controller since June 1992. A Certified Public Accountant, was employed by Deloitte & Touche LLP from August 1982 to June 1992. Doug Sims 47 Vice-President - Loss Prevention and Internal Audit. Served as Vice-President - Loss Prevention and Internal Audit since March 1994 and Director of Loss Prevention since June 1990. Self-employed in polygraph/investigations for numerous retail corporations from July 1980 to June 1990.
6 7 Roy E. Springer 47 Vice-President - Human Resources. 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 multiunit management positions for other retail organizations for 10 years prior to joining the Company. Anthony Tramontano 62 Vice-President - Inventory Control. Served as Vice-President - Inventory Control since February 1995. Served as Vice-President - Hardlines Merchandise since September 1983 and as merchandise manager for hardlines, linens and domestics since June 1979. Served as buyer of all hardlines, linens and domestics from 1975 to June 1979. Has over 35 years of retail experience, primarily in buying and general merchandising capacities. James M. Raines 56 Director. Served as a director of the Company since March 1991. Since September 1988, has been actively involved in investments in both private and public companies through his own investment firm, James M. Raines & Company. See "Certain Relationships and Related Transactions." From 1985 through 1988, was Senior Vice President of Lovett, Mitchell Webb & Garrison, an investment banking firm in Houston, Texas. Cecil Schenker 53 Director. Served as a director since July 1991. Previously served as a director from October 1983 until July 1986. 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. See "Certain Relationships and Related Transactions." Serves as a director of Taco Cabana, Inc. (a Mexican patio cafe chain).
Effective July 8, 1996, Richard Sherman resigned as a director of the Company. In May 1996, Charles M. Siegel resigned from his positions as President, Chief Executive Officer and a Director of the Company. In November 1995, Dennis Barringer's position as Executive Vice-President was eliminated. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires each director and executive officer of the Company, and each person who owns more than 10% of the Company's Common Stock to file by specific dates with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of change in ownership of Common Stock. Officers, directors and 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. The Company is required to report in this report any failure of its directors, executive officers and 10% stockholders to file by the relevant due date any of these reports during the Company's fiscal year. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company, all Section 16(a) filing requirements applicable to the Company's officers, directors and 10% stockholders were complied with for the fiscal year ended February 2, 1996. 7 8 ITEM 11. EXECUTIVE COMPENSATION 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 and Executive Vice-President, the only executive officers earning compensation in excess of $100,000 in fiscal 1996 (collectively the "named executive officers").
- ------------------------------------------------------------------------------------------------------------ Annual compensation Long-Term Compensation ------------------- -------------------------------- Awards Payouts -------------------------------- Long-Term Restricted Incentive stock Plan All other Name and Principal Fiscal Salary Bonus award(s) Options payouts compensation Position Year ($) ($) ($) (#) ($) ($) (1) - ------------------------------------------------------------------------------------------------------------ Charles M. Siegel 1996 203,846 - - 50,000 - - Chairman, President and CEO 1995 250,000 - - - - 308 1994 250,000 - - - - 1,444 Dennis Barringer 1996(2) 100,820 - - - - - Executive Vice President 1995 120,774 - - 40,000 - - 1994 102,885 5,592 - 20,000 - -
(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. Employment Arrangements 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. 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 vested immediately, with the remaining 300,000 options vesting 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. Compensation of Directors Prior to May 1, 1995, each outside director received $700 per Board meeting attended and, if serving on the Executive Committee, $1,000 per Executive Committee meeting attended (and $500 per telephone meeting in excess of two hours in duration). Commencing May 1, 1995, each outside director receives $750 per Board meeting attended (and $500 per telephone meeting in excess of two hours duration). In addition, each outside director receives $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 receive $1,000 per meeting attended, the Chairman $1,500, (and $500 per telephone meeting in excess of two hours duration). Each outside director also receives stock option grants. See "Stock Option Plan." Stock Option Plan Under the Company's Stock Option Plan (the "Option Plan"), stock options to purchase up to 3,000,000 shares of Common Stock may be granted to full-time employees, directors, advisors and outside consultants of the Company. Shares that by reason of the expiration of an option (other than by reason of exercise) or which are no longer subject to purchase pursuant to an option granted under the Option Plan may be reoptioned thereunder. The Company's Compensation Committee (the "Committee") sets specific terms and conditions of options granted under the Option Plan and administers the Option Plan, as well as the Company's other employee benefit plans which may be in effect from time to time. 8 9 Employees of the Company are eligible to receive either incentive stock options or nonqualified stock options or a combination of both, as the Committee determines. Non-employee participants may be granted only nonqualified stock options. Stock options may be granted for a term not to exceed ten years (five years with respect to a holder of 10% or more of the Company's shares in the case of an incentive stock option) and are not transferable other than by will or the laws of descent and distribution. Each option may be exercised within the term of the option pursuant to which it is granted, or within thirty days after the termination of employment of the optionee, or within one year after termination in case of termination because of death or disability, in each case to the extent the option was then exercisable. 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 fair market value with respect to any incentive stock option issued to a holder of 10% or more of the Company's shares. Any nonqualified stock option to be 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. Stock options may be exercised by payment in cash of the exercise price with respect to each share to be purchased, by delivering Common Stock of the Company already owned by such optionee with a market value equal to the exercise price, or by methods in which a concurrent sale of the acquired stock is arranged with the exercise price payable in cash from such sale proceeds, or by a combination of the foregoing methods. In accordance with the terms of the Option Plan, all current outside directors and Mr. Fuhrmann, who was an outside director upon appointment to the Board, received initial grants of options for 75,000 shares each. Subject to availability of shares allocated to the Option Plan and not already reserved for other outstanding stock options, outside directors who join the Board in the future will receive an initial grant of options for 75,000 shares, effective upon their appointment or election to the Board. Such options vest ratably in five equal annual installments, with the first such installment vesting on the date of grant and become exercisable in five equal annual installments commencing with the first anniversary following the date of grant through the sixth anniversary following the date of grant. Options, once granted and to the extent vested and exercisable, remain exercisable throughout their term, regardless of whether the holder continues as a director. The exercise price of the options is equal to 100% of the fair market value of the covered shares of Common Stock at the time of grant. If following five years of service as an outside director of the Company the director continues as such, then for each of the next five years for which such director serves he will be automatically granted in such year nonqualified stock options for an additional 15,000 shares. Such additional nonqualified options will be granted to each outside director on the business day following the next annual meeting of stockholders at which such a director is reelected following the expiration of the five-year period from the date of initial option grant. Such options will be granted at an exercise price equal to the then prevailing fair market value of the Company's common stock. Each such option will vest in full immediately and become exercisable on the first anniversary date following its grant, and will continue to be exercisable in whole or in part until the third anniversary of the grant date. The Option Plan terminates on August 28, 2000. The Board of Directors may, however, terminate the Option Plan at any time prior to such date. Termination of the Option Plan will not alter or impair, without the consent of the optionee, any of the rights or obligations pursuant to any option granted under the Option Plan. The Company repriced employee stock options (excluding executive officer, director, advisor and outside consultant options), at $4.125 per share effective December 5, 1994. As of July 15, 1996 stock options covering an aggregate of 1,477,112 shares of common stock were outstanding with a weighted average exercise price of $3.19 per share and 993,888 additional shares were available for issuance upon exercise of options which may be granted in the future. 9 10 Option Grants In Last Fiscal Year The following table sets forth certain information concerning options granted to the named executive officers during the Company's fiscal year ended February 2, 1996: - ---------------------------------------------------------------------------------------------------------------------- Option Grants in Fiscal 1996 - ---------------------------------------------------------------------------------------------------------------------- Potential realizable value at assumed annual rates of stock price appreciation for option term (3) ------------------------------------------- % of Total Options Granted to Exercise Options Employees Price Expiration Name Granted (#) in Fiscal 1996 (2) ($/sh) Date 5% 10% - ---------------------------------------------------------------------------------------------------------------------- Charles Siegel 50,000 - $1.94 7-12-2000 27,000 59,000 Dennis Barringer 10,000(1) 15% $1.94 7-12-2000 - -
(1) Mr. Barringer's options were canceled thirty days after elimination of position in November 1995. (2) In fiscal 1996, options for an aggregate 95,000 were granted to executive officers, as a group; and options for an aggregate 152,015 shares were granted to employees and outside consultants, other than executive officers, as a group. (3) The dollar amounts under these columns use the 5% and 10% rates of appreciation prescribed by the Securities and Exchange Commission. The 5% rate of appreciation would result in a per share price of $2.48. The 10% rate of appreciation would result in a per share price of $3.12. This presentation is not intended to forecast possible future appreciation of the Company's stock. Aggregated Option Exercises In Last Fiscal Year and Fiscal Year End Option Values The following table sets forth certain information concerning the value of unexercised options held by the named executive officers at February 2, 1996 (no options were exercised by such officers during the fiscal year ended on such date):
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at FY-End (#) Options at FY-End ($) (1) -------------------------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------- Charles M. Siegel 160,000 80,000 - - Dennis Barringer - - - -
(1) Values stated are based on the $1.125 closing price of the Company's Common Stock as reported on the NASDAQ national market system on February 2, 1996 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. 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. 10 11 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 and $67,998 during fiscal 1994. The Company did not make any contributions during fiscal 1996. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1996, Cecil Schenker and Richard Sherman served on the Company's Compensation Committee. The Company had three real estate leases in force with Spigel Properties, whose owner, Stanley Spigel, was a director of the Company and a member of the Company's Compensation Committee through September 1995. The leases for such store locations cover an aggregate of approximately 70,000 square feet and expire at February 1999 and December 1999, provide for one five-year renewal option and an aggregate annual rental of approximately $144,000 in fiscal 1997. The leases also provide for percentage rental payments which, along with minimum rentals and the Company's pro-rata share of taxes, insurance and property maintenance, typically do not exceed 4% of sales. The Company paid an aggregate of $124,000 in minimum rental and an aggregate of $27,000 in percentage rental for these locations during fiscal 1996. 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 Company believes that the ability of Mr. Schenker to make fair compensation decisions have not and will not be compromised by the relationship referred to above. ITEM 12. 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 Common Stock as of July 15, 1996 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. Number of Shares Percent of Name Beneficially Owned Class (1) Charles J. Fuhrmann II 155,000 (2) 1.25 Joseph Lehrman 302,000 (2) 2.5% James M. Raines 90,000 (2) * Cecil Schenker 75,000 (2) * All executive officers and directors as a group (11 persons) 730,875 5.8%
* Less than 1% 11 12 (1) This calculation is the quotient of: (a) the number of shares of Common Stock currently beneficially owned by the named individual or group, plus the number of shares of Common Stock, if any, for which options held by such person or group are currently exercisable or become exercisable within 60 days of July 15, 1996; divided by (b) the total number of shares of Common Stock outstanding and the number of shares of Common Stock, if any, for which options held by such person or group are currently exercisable or become exercisable within 60 days of July 15, 1996. (2) Includes 150,000 shares in the case of Mr. Fuhrmann, 95,000 shares in the case of Mr. Lehrman, 75,000 shares in the case of Mr. Schenker, and 60,000 shares in the case of Mr. Raines which are issuable pursuant to presently exercisable options (or those exercisable within 60 days of July 15, 1996 ). Excludes 360,000 shares, in the case of Mr. Fuhrmann, which are issuable pursuant to options which are not currently exercisable or exercisable within 60 days of July 15, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The investment firm of James M. Raines & Company, the owner of which is a director of the Company, performed consulting services for a fee in connection with the Company's Regulation S offering conducted during the fiscal year ended February 3, 1995. Charles J. Fuhrmann II, a director of the Company, performed certain financial and strategic advisory services for the Company and was compensated $127,500 during the fiscal year ended February 2, 1996. On May 7, 1996, Mr. Fuhrmann was appointed President, Chief Executive and Financial Officer of the Company. See "Compensation Committee Interlocks and Insider Participation" for certain additional relationships and related transactions. 12 13 PART IV ITEM 14. NOTE 9 - 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 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 obligation 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 removing the shares from an escrow account into which they had been issued for authentication purposes, even though the defendants have never paid anything for such shares. The Company seeks recovery of actual and punitive damages, an injunction against the defendant's 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 has answered the Complaint. Defaults have been sought and/or entered against Andalucian Villas, Brocimast and Koutsoubos for failure to appear. Banque Paribas, Betafid and Howard White have moved to dismiss the action for lack of jurisdiction and forum non conveniens. Written discovery has been served on all defendants who have appeared. The Court referred all pretrial matters to a U.S. Magistrate who entered an order requiring Paribas and Betafid to make witnesses available in the United States for depositions. Paribas appealed that decision. The Company, based upon advice of counsel, believes that it will obtain a favorable judgment against one or more of these defendants, however, the collectibility of any such judgment is uncertain at this time. 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. If the Company is unable to collect amounts due and the shares are not ultimately returned, an extraordinary non-cash charge to earnings for the uncollected amount of the subscription receivable will be recorded in the consolidated financial statements. Damages awarded to the Company or settlement amounts paid to the Company, if any, in excess of the subscriptions receivable would be credited to earnings. On January 9, 1996, the Company filed a 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 attorney's 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. The Company will continue to prosecute these cases vigorously. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized: 50-OFF STORES, INC. By: /s/ James G. Scogin ----------------------------------- James G. Scogin Vice President, Controller and Chief Accounting Officer Date: August 28, 1996 14 -----END PRIVACY-ENHANCED MESSAGE-----