-----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, WQrdnKhRxUGQbeLAKm4HXThysK1z6IPAkZ2z/hdV0OTtx3OdaZ2QFtKli/eYpJAT 00CIuazL1ZhYHbl1votIng== 0001047469-98-034622.txt : 19980916 0001047469-98-034622.hdr.sgml : 19980916 ACCESSION NUMBER: 0001047469-98-034622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980915 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOTSOFF CORP 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-13076 FILM NUMBER: 98709626 BUSINESS ADDRESS: STREET 1: 1201 AUSTIN HIGHWAY #116 CITY: SAN ANTONIO STATE: TX ZIP: 78209-4859 BUSINESS PHONE: 2108059300 MAIL ADDRESS: STREET 1: 1201 AUSTIN HIGHWAY #116 CITY: SAN ANTONIO STATE: TX ZIP: 78209-4859 FORMER COMPANY: FORMER CONFORMED NAME: 50 OFF STORES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SHOPPERS WORLD STORES INC DATE OF NAME CHANGE: 19871214 10-Q 1 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1998 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-13076 ------- LOT$OFF CORPORATION DELAWARE 74-2640559 - ------------------------------------------ --------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 1201 Austin Highway, #116, San Antonio, TX 78209-4859 - ------------------------------------------ --------------------------------- (Address of principal executive offices) (Zip Code) Telephone: (210) 805-9300 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No: --- --- - ------------ 4,202,610 shares of the Registrant's Common Stock were outstanding at August 31, 1998, which includes 832,697 shares held in escrow and awaiting distribution to holders of allowed general unsecured claims and 763,723 shares distributed to holders of allowed general unsecured claims on September 14, 1998. - ------------
FORM 10-Q INDEX PAGE PART I ITEM 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheets: July 31, 1998 (unaudited); January 30, 1998; and August 1, 1997 (unaudited) . . . 3 Condensed Consolidated Statements of Operations: thirteen and twenty-six weeks ended July 31, 1998 (unaudited) and thirteen and twenty-six weeks ended August 1, 1997 (unaudited). . . 5 Condensed Consolidated Statements of Cash Flows: twenty- six weeks ended July 31, 1998 (unaudited) and twenty-six weeks ended August 1, 1997 (unaudited). . . . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements (unaudited). . 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . 13 PART II ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .19 ITEM 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .19 ITEM 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .19 ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . .20 ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .20 ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .20 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PART I ITEM 1. FINANCIAL STATEMENTS LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
July 31, 1998 January 30, 1998 August 1, 1997 ------------- ---------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 526,272 $ 473,533 $ 453,388 Accounts receivable 992,586 113,463 616,469 Merchandise inventories 14,771,043 15,309,715 10,801,656 Prepaid and other current assets 309,448 265,814 548,792 ----------- ----------- ----------- TOTAL CURRENT ASSETS 16,599,349 16,162,525 12,420,305 ----------- ----------- ----------- PROPERTY AND EQUIPMENT-NET 3,163,579 3,632,965 3,816,739 OTHER ASSETS 750,824 548,464 431,184 ---------- ---------- ---------- TOTAL ASSETS $20,513,752 $20,343,954 $16,668,228 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -3- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
July 31, 1998 January 30, 1998 August 1, 1997 ------------- ---------------- -------------- CURRENT LIABILITIES: Credit facility $6,539,495 $6,330,598 $3,400,369 Accounts payable-trade 3,357,763 3,132,965 1,267,041 Accounts payable-other 1,751,441 3,333,093 2,119,447 Accrued expenses and other current liabilities 1,671,025 1,597,859 1,721,594 Bank checks outstanding 960,069 1,048,855 1,088,575 Current portion of long-term debt 186,136 131,553 - ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 14,465,929 15,574,923 9,597,326 LONG-TERM DEBT AND OTHER OBLIGATIONS, less current portion 4,066,902 1,263,263 1,444,762 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Series A Preferred Stock - - 4,280,400 Series B Preferred Stock - 3,991,050 3,991,050 Common Stock 42,026 25,325 8,561 Additional paid-in capital 65,136,349 60,447,467 56,147,275 Accumulated deficit (63,197,454) (60,958,074) (58,801,146) ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,980,921 3,505,768 5,626,140 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,513,752 $20,343,954 $16,668,228 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -4- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Twenty-six Weeks Ended --------------------------------- --------------------------------- July 31, 1998 August 1, 1997 July 31, 1998 August 1, 1997 ------------- -------------- ------------- -------------- NET SALES $11,130,934 $10,381,017 $23,365,837 $22,300,169 COST OF SALES 7,818,327 7,350,110 16,489,006 15,207,530 ----------- ----------- ----------- ----------- GROSS PROFIT 3,312,607 3,030,907 6,876,831 7,092,639 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, advertising, general and administrative 5,765,543 4,980,380 11,572,240 10,785,809 Depreciation and amortization 201,282 177,285 402,564 354,570 Pre-opening expenses 70,123 - 70,123 - Store closing costs 597,610 - 723,256 - Reorganization items 100,000 200,000 100,000 500,000 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 6,734,558 5,357,665 12,868,183 11,640,379 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) (3,421,951) (2,326,758) (5,991,352) (4,547,740) OTHER (INCOME) EXPENSE: Non-operating (income) expense, net (392,317) - (4,208,054) - Interest (income) expense, net 229,643 127,225 456,082 269,439 ----------- ----------- ----------- ----------- TOTAL OTHER (INCOME) EXPENSE (162,674) 127,225 (3,751,972) 269,439 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (3,259,277) (2,453,983) (2,239,380) (4,817,179) (BENEFIT FROM) INCOME TAXES - - - - ----------- ----------- ----------- ----------- NET INCOME (LOSS) $(3,259,277) $(2,453,983) $(2,239,380) $(4,817,179) ----------- ----------- ----------- ----------- PREFERRED DIVIDENDS - (30,315) - (30,315) ----------- ----------- ----------- ----------- EARNINGS APPLICABLE TO COMMON STOCK $(3,259,277) $(2,484,298) $(2,239,280) $(4,847,494) INCOME (LOSS) PER COMMON SHARE: Basic $ (0.78) $ (0.39) $ (0.54) $ (0.52) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE SHARES: Basic 4,190,741 6,341,495 4,162,663 9,271,205 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -5- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Twenty-six Weeks Ended --------------------------------- July 31, 1998 August 1, 1997 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(2,239,380) $(4,817,179) Adjustments to reconcile net income (loss) to net Cash provided by (used in) operating activities: Depreciation and amortization 402,564 354,570 Asset impairment charges 119,912 - Reorganization items 100,000 500,000 Non-cash interest expense on long-term debt 53,035 - Changes in assets and liabilities: Accounts receivable (329,123) 101,383 Merchandise inventories 538,672 2,173,302 Prepaid and other current assets (43,634) (155,266) Other assets (14,510) (72,841) Accounts payable-trade 224,798 108,072 Accounts payable-other (1,581,652) (828,555) Accrued expenses and other current liabilities (26,834) 98,384 ----------- ----------- Net cash provided by (used in) operating activities 2,796,152 (2,538,130) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (53,090) (182,549) ----------- ----------- Net cash provided by (used in) investing activities (53,090) (182,549) ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -6- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (CONTINUED)
Twenty-six Weeks Ended --------------------------------- July 31, 1998 August 1, 1997 ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility 32,525,530 28,251,967 Payments on credit facility (32,316,633) (30,248,178) Bank checks outstanding (88,786) 520,865 Payments on long-term debt (58,750) (266,667) Proceeds from long-term debt and warrants 2,719,369 - Net proceeds from sale of Common and Preferred Stock - 4,094,783 Net proceeds from exercise of stock options 121,251 - Cash in escrow - 330,000 ----------- ----------- Net cash provided by (used in) financing activities 2,901,981 2,682,770 ----------- ----------- Increase (decrease) in cash and cash equivalents $ 52,739 $ (37,909) Cash and cash equivalents at beginning of period 473,533 491,297 ----------- ----------- Cash and cash equivalents at end of period $ 526,272 $ 453,388 ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 385,618 $ 311,629 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES: Conversion of liabilities subject to compromise to: - Long-term debt $ - $ 1,394,816 - Accounts payable-other $ - $ 458,111 - Series B Preferred Stock $ - $ 3,991,050 - Additional paid-in capital $ - $24,349,075 Conversion of Series B Preferred Stock to: - Common Stock $ 15,964 $ - - Additional paid-in capital $ 3,975,086 $ - Warrants issued $ 187,850 $ -
See accompanying notes to these condensed consolidated financial statements. -7- LOT$OFF CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1: The condensed consolidated balance sheet at January 30, 1998 has been condensed from the audited consolidated balance sheet at January 30, 1998. The condensed consolidated balance sheets at July 31, 1998 and August 1, 1997, the condensed consolidated statements of operations and cash flows for the thirteen and twenty-six weeks ended July 31, 1998 and August 1, 1997 and the condensed consolidated statements of cash flows for the thirteen and twenty-six weeks ended July 31, 1998 and August 1, 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the condensed consolidated financial position, results of operations and cash flows have been made. The results of operations for the twenty-six week period ended July 31, 1998 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's annual report on Form 10-K for the year ended January 30, 1998. The Company is a regional, extreme value retailer specializing in close-out merchandise. The actual merchandise mix fluctuates by category, by season and by store based on customer needs and buying trends, demographics and the availability of products at close-out prices. This merchandising concept is designed to appeal to value-conscious shoppers and other bargain hunters, and management is hopeful its continued implementation will lead to increased store traffic and improved operating results. The Company's business plan is focused on achieving higher gross margins, higher store contribution and controlled corporate overhead, all designed to promote overall profitability, and on being a major factor in extreme value retailing in Texas. The key elements of this strategy include the geographic consolidation of the chain and the liquidation and closing of under-performing stores and stores located outside of the reduced market area. The management team is concentrating on optimizing the contribution from store operations while maintaining only the absolute minimum amount of corporate overhead necessary to support store operations, on expanding its presence in Texas, on collecting on judgments from significant litigation (see Note 5) and on maximizing shareholder value. The Company's ability to continue as a going concern will be affected by a number of factors, including, but not limited to, the need to remain in compliance with the terms, covenants and conditions of it revolving credit facility, the degree of success in continuing to increase sales, the ability to achieve an operating profit and the ability to maintain trade credit and merchandise flows to its stores. While management believes that the downsizing of stores and the reduction in the geographic area it serves has facilitated its efforts to improve the Company's operating performance and that the recapitalization implemented upon the consummation of its Plan, coupled with the receipt of net lawsuit proceeds, the receipt of contingent claim proceeds from GECC (see Note 4) and the recent note financing (see Note 4), have strengthened its financial position and alleviated concerns of credit and merchandise suppliers, no assurance can be given that the Company will be successful in its continuing efforts to return to profitability. The anticipated receipt of additional proceeds from the Company's lawsuit related to certain parties' breaches of contractual obligations, as well as certain other violations, especially conversion, related to the Company's November 1994 Regulation S offering would further strengthen the Company's financial position. -8- If the Company's plans to improve operations are not successful in producing results which comply with the covenants of its revolving credit facility (see Note 4), which the Company and GECC amended July 24, 1998, and in achieving sustained profitability, management will consider, among other alternatives, strategic and/or financial alliances with third parties and the merger or sale of all or a part of the Company. Management believes that borrowings available under its revolving credit facility, available trade credit, its restructuring of certain obligations under the Plan, the $5.8 million in proceeds received from the purchase by GECC of a contingent claim on a $10,000,000 portion of the potential net proceeds from the judgment obtained against The Chase Manhattan Bank (see Notes 4 and 5), net proceeds from the recent note financing, anticipated proceeds from outstanding litigation, its operating cash flow and its cash on hand will be adequate to finance its operations, including the opening of new stores in Texas, through fiscal 1999. No assurance can be given, however, that such sources of capital will be sufficient or that the Company will be successful in its continuing efforts to attain profitability. For this reason, any investment in Common Stock should be considered speculative. The receipt of additional proceeds from the significant litigation brought by the Company could add significantly to the Company's liquidity and capital resources. See Note 5. NOTE 2: On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc. ("50-OFF") and its significant subsidiaries (together, the "Debtors") filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (the "Court"). The filing was precipitated by the notification from 50-OFF's then asset based lender that it was in violation of the minimum gross margin and the minimum working capital financial covenants of its credit agreement and that such breaches constituted events of default under the loan documents. The lender subsequently established additional availability reserves which reduced availability, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing, which, individually and together, substantially impacted 50-OFF's financial liquidity and, therefore, its ability to acquire and maintain much needed inventory for its stores. 50-OFF was unable to secure the resources required to cure the defaults under the loan documents and to implement its business plan and effect the changes believed necessary to improve operations and reverse its disappointing operating results without the protections afforded under the Bankruptcy Code. 50-OFF continued to manage its business as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code while management formulated and promoted a plan of reorganization. At a confirmation hearing held on June 3, 1997, United States Bankruptcy Judge Leif M. Clark entered an order confirming the Debtors' Joint Plan of Reorganization, as Amended and Modified (the "Plan"). The Plan became effective June 16, 1997 (the "Effective Date"). The Plan required that the Company's existing senior secured revolving credit facility lender, General Electric Capital Corporation ("GECC"), provide a post-confirmation revolving credit facility or be replaced by a new senior secured lender so that the Company would have a source of revolving funds to continue to operate. GECC provided such financing. See Note 4. The Plan also provided for the restructure of the Company's collateralized obligation to MetLife Capital Corporation [recently acquired by an affiliate of GECC and now known as GE Capital Business Asset Funding ("GEC-BAF")] at a face amount of $850,000; and the Plan provided for the payment of such amount over approximately seven years. GEC-BAF agreed to such treatment with the balance of its claim (approximately $3.3 million) becoming an allowed general unsecured claim. See Note 3. The Plan also provided for the cancellation of all non-priority unsecured indebtedness of the Company. Such cancellation caused the elimination of over $25 million of unsecured debt and the $3.3 million of collateralized debt which was converted to unsecured debt from the Company's balance sheet. Under the Plan, as further modified by Court order on March 19, 1998 (see Note 3), each holder of an allowed general unsecured claim will, in partial cancellation of its allowed claim ($3,991,050 in the aggregate), receive a pro rata share of 1,596,420 shares of LOT$OFF's common stock (the "Common Stock"). Certain further obligations of the Company to holders of allowed general unsecured claims are secured under the Plan by a lien up to the full face amount of the balance of their allowed claims against potential -9- net lawsuit proceeds over $3,991,050 from significant litigation being prosecuted by the Company. See Note 5. As net proceeds over $3,991,050 (net of certain items set forth in the Plan) from such litigation are received by the Company, holders of allowed general unsecured claims will receive additional shares of Common Stock and/or cash (provided that at least the Excess Net Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, will be paid in cash) as determined under the Plan. The receipt of such Common Stock and/or cash by holders of allowed general unsecured claims will result in a proportionate release of the lien. By the Company's issuing such Common Stock and/or paying such cash to allowed general unsecured creditors, such creditors will be essentially receiving the net value of the Company's significant litigation which was pending pre-Petition Date up to the full face amount of their allowed claims. See Notes 3 and 5. Finally, the Plan provided for the recapitalization of the Company through cash raised from 50-OFF's existing common stockholders (the "Rights Offering") and, potentially, as discussed above, from the litigation. Specifically, the Plan provided for the issuance to such stockholders of rights to subscribe for units, each consisting of 20 shares of Series A Preferred Stock and 20 shares of Common Stock (a "Unit"). Up to 122,009 Units and a minimum of 30,500 Units could be sold in the Rights Offering at $100.00 per Unit. The record date for determining which holders of 50-OFF common stock ("Old Common Stock") were entitled to vote on the Plan and receive such rights was March 21, 1997. Persons who acquired Old Common Stock after such record date were not entitled to vote on the Plan or subscribe for Units pursuant to the Rights Offering. The Rights Offering expired on May 22, 1997. At the confirmation hearing on June 3, 1997, the Company announced it had received more than enough subscriptions for Units for the required minimum in the Rights Offering to be met. Subscriptions received in the Rights Offering were held in escrow with Bank One, Texas N. A. pending the Effective Date of the Plan. Contemporaneously with its filing of the Plan on February 6, 1997, the Company filed the Disclosure Statement With Respect to the Debtors' Joint Plan of Reorganization ("the Disclosure Statement") setting forth more detailed information regarding the Company and the Plan. Under applicable Court rules and procedures, a hearing was held to review and approve the Disclosure Statement, which was approved as containing adequate information in accordance with section 1125 of the Bankruptcy Code on March 20, 1997. Upon approval of the Disclosure Statement by the Court, the Plan and Disclosure Statement were furnished to all creditors of the bankruptcy estates and all holders of Old Common Stock as of March 21, 1997 and were also filed with the SEC. Votes in support of the Plan were solicited, and, at the confirmation hearing on June 3, 1997, the Company announced that the Plan had been approved by both creditors and stockholders. On the Effective Date, certain key elements of the Plan were implemented, including: the Company's corporate name was changed from 50-OFF to LOT$OFF Corporation ("LOT$OFF" or the "Company"); the Old Common Stock was canceled, along with all then existing options and warrants to buy Old Common Stock; and 856,080 shares of LOT$OFF Series A Preferred Stock (each such share was convertible into two shares of Common Stock and was entitled to a 5.5%, $0.275, cumulative annual dividend) and 856,080 shares of Common Stock (LOTS: CUSIP # 545674103) were issued to subscribers to the Rights Offering for gross proceeds of $4,280,400. Also on the Effective Date, LOT$OFF entered into a $15,000,000 revolving credit agreement maturing on June 16, 2000 with GECC. See Note 4. The proceeds of the facility, together with the net proceeds from the Rights Offering, were used to refinance the Company's debtor in possession facility, also with GECC, and to provide post-confirmation working capital for increased inventories for its then 41 stores and selected other general corporate purposes, including financing LOT$OFF's exit from bankruptcy. -10- NOTE 3: Prior to the Effective Date, liabilities in existence at October 9, 1996 were reflected as liabilities subject to compromise in the Company's consolidated balance sheet. The principal categories of claims included in such liabilities subject to compromise were as follows: Secured debt, 8.5%, collateralized by furniture, fixtures and equipment...................................$ 4,179,942 Secured debt (capital leases), collateralized by signs... 88,498 Trade and other miscellaneous claims, including costs of lease rejections of approximately $5,869,000................................. 25,924,612 ----------- $30,193,052 ----------- -----------
Under the Plan, these $30,193,052 of liabilities subject to compromise were converted to: long-term debt - $1,394,816 (see Note 4); accounts payable other - $458,111; Series B Preferred Stock - $3,991,050; and additional paid in capital - $24,349,075. These amounts may be subject to adjustments as a result of actions of the Court and/or developments with respect to disputed claims. The procedures used to determine the amount of any additional liabilities or of any elimination of liabilities have not been completed. On May 12, 1998, a decision and order was entered by Judge Leif M. Clark in the Company's bankruptcy proceeding in the Court effectively denying creditors in the bankruptcy proceeding leave to file late proofs of claim or, alternatively, excuse from filing proofs of claim by finding that the confirmation of the Company's Plan, operates as RES JUDICATA to bar the allowance of any late claims that have been or might be filed in the Company's bankruptcy case. The Company estimates that at least $5.9 million of claims were eliminated by such order. The Company's best estimate of the maximum amount of unsecured claims which will ultimately be allowed by the Court is $28.3 million, $3,991,050 of which were satisfied by the issuance of Series B Preferred Stock under the Plan. The amount of allowed claims may differ materially from the Company's estimate; additional amounts may arise from the Court's fixing of allowed claims for disputed amounts. CONVERSION OF SERIES B PREFERRED STOCK On March 19, 1998, in response to the Company's motion to modify the Plan by consolidating certain steps to be taken pursuant to the Plan and with the support of the Class 7 agent and its counsel, representing the allowed general unsecured creditors, the Court entered an order to consolidate the treatment of Class 7 creditors by allowing the issuance of two shares of Common Stock in lieu of any single share of Series B Preferred Stock and other intermediate steps which would otherwise have been required under the Plan. The immediate effect of the order was to cause the conversion of the previously issued, but undelivered, 798,210 shares of Series B Preferred Stock into 1,596,420 shares of Common Stock and the cancellation of the Series B Preferred Stock and any obligation of the Company to issue Series A Conversion Rights (as defined in the Plan) or Series A Preferred Stock to allowed general unsecured creditors under the Plan effective March 19, 1998. Of such shares of Common Stock, 832,697 are now in an escrow account at Continental Stock Transfer & Trust Company for the benefit of holders of allowed general unsecured claims pending delivery upon the resolution of claims objections; an initial distribution of 763,723 of such shares was made September 14, 1998. Future obligations, if any, to the allowed general unsecured creditors (up to the full face amount of their allowed claims, depending only on Net Lawsuits' Proceeds as defined in the Plan) may be satisfied by the issuance of additional shares of Common Stock and/or cash (provided that at least the Excess Net Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be paid in cash). -11- NOTE 4: CREDIT FACILITY On June 16, 1997, the Company, with the approval of the Court, entered into a credit agreement (as amended on August 28, 1997, December 22, 1997, February 15, 1998, April 17, 1998, June 12, 1998 and July 24, 1998) with GECC providing the Company with a line of credit through June 16, 2000 of up to $15,000,000, including letters of credit. Borrowings under the line are limited to a borrowing base equal to a percentage of eligible inventory at cost: August 15 through December 15, 65%; and December 16 through August 14, 60%. Interest under the line is charged on funds borrowed at the annualized yield of 30-day commercial paper (currently 5.56%) plus 3%. The line of credit is collateralized by inventory, accounts receivable and other assets. The credit agreement, as amended, contains certain reserve requirements, various restrictive covenants, including restrictions on the payment of dividends on Common Stock, and various financial covenants, including minimum availability, minimum working capital ratio and minimum EBITDA. On July 31, 1998, the Company had approximately $8,347,000 available for borrowings under the credit facility (after reserves of $749,000) of which $6,539,000 was committed, leaving a net availability of $1,059,000, and was not in default under the credit agreement. LONG-TERM DEBT Long-term debt at July 31, 1998 consists of five general types of obligations. The furniture and fixture note, ad valorem tax notes and non-ad valorem tax notes are long-term debts settled as part of the Plan. Long-term debt consists of the following:
JULY 31, 1998 JANUARY 30, 1998 ------------- ---------------- Promissory notes collateralized by furniture, fixtures and equipment . . . . $819,516 $849,559 Notes to ad valorem taxing authorities . . . . . . . . . . . . . . . 385,992 414,698 Notes to taxing authorities, other than ad valorem taxing authorities. . . . 130,559 130,559 Guarantee to GECC . . . . . . . . . . . . 1,877,403 - Senior subordinated notes . . . . . . . . 1,039,568 - Less: current portion. . . . . . . . . . (186,136) (131,553) ---------- ---------- $4,066,902 $1,263,263 ---------- ---------- ---------- ----------
On April 17, 1998, as part of a corporate reorganization involving the formation of a Delaware limited partnership, the Company assigned its judgment and cause of action against Chase to such newly formed limited partnership. The limited partnership was formed on April 17, 1998 by two wholly-owned subsidiaries of the Company, as the general partner and common limited partner, and GECC, as the preferred limited partner. GECC acquired its preferred limited partnership interest for $5.8 million or 58 cents on the dollar, resulting in a gain of $3,815,737 net of certain related expenses. Such interest represents a contingent claim on a $10 million portion of the potential net proceeds from the $148,575,000 judgment against Chase. See Note 5. While the Company has no material present financial obligation to GECC or the partnership, upon receipt of net proceeds from Chase, or otherwise, attributable to the judgment, GECC could receive as much as $10,000,000 (but in no event less than a guaranteed $3,000,000), according to a scheduled payout with respect to its contingent claim. The $3,000,000 minimum is cross-collateralized to the Company's indebtedness to GECC (see Credit Facility, above) and is payable upon the sooner of the resolution of the Chase litigation, April 17, 2003 or certain other events. As of July 31, 1998, the Company reflects a $1,877,403 (discounted at 10%) liability in the consolidated balance sheet for the minimum guarantee to GECC. Effective July 31, 1998, the Company completed a private placement of $1,445,000 principal amount of senior subordinated notes (the "Notes") with detachable warrants to purchase up to 216,750 shares of -12- Common Stock at $4.83 per share. The proceeds will be used to facilitate and accelerate the Company's plans to open additional stores in Texas and for working capital. The Notes accrue interest at 9.25% which is paid semi-annually and are specifically subordinated to only GECC. There is no prepayment penalty on the Notes which mature August 15, 2000 or at the option of the holder if a change in control of the Company occurs (defined as an accumulation of 51% of the Company's Common Stock by any person or group) after August 1, 1999. The warrants to purchase Common Stock expire at the end of July 2002. The Notes may be used in satisfaction of the warrant exercise price. In conjunction with the placement, the Company issued an additional 72,250 warrants and paid $77,250 for fees and expenses. NOTE 5: In November 1994, 50-OFF received subscriptions for approximately 1,810,000 shares of Old Common Stock in a Regulation S offering to qualified investors. 50-OFF received net proceeds of approximately $861,000 from the sale of 310,000 shares and recorded a subscription receivable for the purchase agreements for 1,500,000 shares for which proceeds were never received. On February 21, 1995, 50-OFF filed a lawsuit [50-OFF STORES, INC. V. BANQUE PARIBAS (SUISSE), S.A., BETAFID, S.A., YANNI KOUTSOUBOS, ANDALUCIAN VILLAS (FORTY EIGHT) LIMITED, ARNASS LIMITED, BROCIMAST ENTERPRISES LTD., DENNIS MORRIS, HOWARD WHITE, CHASE MANHATTAN BANK, N.A. AND ARIES PEAK, INC., Case No. SA-95-CA-0159] in the United States District Court in San Antonio, Texas against Banque Paribas (Suisse) S.A. ("Paribas"), Yanni Koutsoubos, Chase, Howard White and certain affiliated individuals and companies in connection with the theft of 1,500,000 shares of Old Common Stock which certain of the defendants had agreed to purchase at $3.65 per share. Among other counts, the lawsuit alleged breaches of contracts, securities fraud, conspiracy and conversion. The conversion claim related to actions of the defendants in the transferring, selling and trading of the shares despite the fact that the defendants had never paid for such shares. 50-OFF sought recovery of actual and punitive damages and pre- and post-judgment interest. On October 14, 1997, the trial of this case began before the Honorable H.F. Garcia. Defendants, Paribas, Chase and Dennis Morris, appeared and announced ready for trial. On November 14, 1997, after four weeks of evidence, the Company entered into a Settlement Agreement and Full and Final General Release with Paribas. As part of the settlement, Paribas agreed to pay the Company $2,400,000 (of which the Company received $1,800,000 after attorneys' contingency fees but before other related expenses) in exchange for which the Company agreed to dismiss all claims against Paribas with prejudice. The Company also dismissed all claims against Dennis Morris; however, such dismissal was not the result of a settlement agreement between the parties. On November 20, 1997, at the close of evidence, the Company obtained a jury verdict against Chase on its claim of conversion in the amount of $150,975,000, representing $12,975,000 in actual damages and $138,000,000 in punitive damages. On November 21, 1997, the Company moved the court to enter a final judgment against Chase in the amount of $148,575,000, which reflects the jury's verdict, minus a credit for Paribas' settlement amount. In addition to the verdict against Chase, the Company obtained a $30,000,000 default judgment against Yanni Koutsoubos on its claims for violation of Section 10b-5 of the Securities Exchange Act and common law fraud. Such judgment represents $10,000,000 in actual damages and $20,000,000 in punitive damages. On December 4, 1997, the court entered a judgment against Chase in the Company's favor for $148,575,000 plus costs of court, pre-judgment interest on $12,975,000 at 10% per annum from November 18, 1994 until December 4, 1997 and post-judgment interest on the entire judgment amount at 5.42% from December 4, 1997. Subsequently, Chase filed five post-judgment motions with the court: motion for new trial; motion to alter or amend the judgment; renewed motion for judgment as a matter of law; motion to apply a settlement credit and motion for leave to conduct oral deposition; and motion for hearing. On February 23, 1998, the court, having considered such motions, the supplements to such motions, the response of the Company to such motions and the entire record in the cause, denied all of Chase's post-judgment motions. Chase appealed the judgment entered by the court to the Fifth Circuit Court of Appeals in New Orleans. The Fifth Circuit Court of Appeals requested and arranged a pre-hearing conference among the parties in New Orleans on May 14, 1998. The parties were unable to reach a resolution at such conference, and, while discussions have continued, there is no sign of resolution by settlement. On August 6, 1998, Chase filed its appeal brief with the Fifth Circuit Court o Appeals, and the Company has until October 8, 1998 to file its response. -13- On April 6, 1998, the court entered default judgments against Betafid S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited, Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on the Company's claims for violations of Section 10b-5 of the Securities Exchange Act and common law fraud. Such judgments total $166,275,000, plus pre-judgment interest on $12,975,000 at 10% per annum from November 18, 1994 until April 6, 1998 and post-judgment interest on the entire amount at 5.31% from April 6, 1998. On May 19, 1998, the Company entered into a Settlement Agreement and Full and Final General Release with Howard White and Aries Peak, Inc. As part of the settlement, Howard White agreed to pay the Company $150,000 (of which the Company received $100,000 after attorneys' contingency fees but before other related expenses) in exchange for which the Company agreed to dismiss all claims against Howard White and Aries Peak, Inc. with prejudice. The Company intends to vigorously pursue the favorable judgments obtained against defendants in the above matter. The Company, based upon advice from counsel, believes that it will obtain a favorable result in the appeal of the judgment against defendant Chase referenced in the above proceeding. To the extent reasonable, the Company intends to vigorously pursue the collection of the sums owing to the Company as per the judgments that have been obtained against the other defendants, although the collection of these judgments is uncertain. Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the Company in these matters on a contingency fee basis. The Company is party to certain other legal proceedings, none of which are believed to be material. NOTE 6: The following table shows pro forma earnings per share calculated assuming that the Company's emergence from bankruptcy and the resulting recapitalization discussed in Note 2 occurred as of the beginning of each period.
13 WEEKS ENDED 13 WEEKS ENDED 26 WEEKS ENDED 26 WEEKS ENDED JULY 31, 1998 AUGUST 1, 1997 JULY 31, 1998 AUGUST 1, 1997 ------------- -------------- ------------- -------------- Net income (loss) $(3,259,277) $(2,453,983) $(2,239,280) $(4,817,179) Weighted average number of shares 4,190,741 4,190,741 4,162,663 4,162,663 Earnings per share $(0.78) $(0.59) $(0.54) $(1.16)
-14- ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following tables set forth (i) certain items in the Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated and (ii) the percentage change in such items from the comparable period of the prior year.
Percentage of Sales ------------------------------------------------------- Thirteen Weeks Ended Twenty-six Weeks Ended ------------------------- --------------------------- July 31, August 1, July 31, August 1, 1998 1997 1998 1997 -------- --------- -------- --------- Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% Cost of sales. . . . . . . . . . . . . . . . 70.2 70.8 70.6 68.2 Selling, advertising, general and administrative . . . . . . . . . . . . . . 51.8 48.0 49.5 48.4 Depreciation and amortization. . . . . . . . 1.8 1.7 1.7 1.6 Pre-opening expenses . . . . . . . . . . . . 0.6 - 0.3 - Store closing costs. . . . . . . . . . . . . 5.4 - 3.1 - Reorganization items . . . . . . . . . . . . 0.9 1.9 0.4 2.2 ----- ----- ----- ----- Operating income (loss). . . . . . . . . . . (30.7) (22.4) (25.6) (20.4) Other expense (income), net. . . . . . . . . (1.5) 1.2 (16.1) 1.2 ----- ----- ----- ----- Total expenses . . . . . . . . . . . . . . . 129.3 123.6 109.6 121.6 ----- ----- ----- ----- Income (loss) before income taxes. . . . . . (29.3) (23.6) (9.6) (21.6) Net income (loss). . . . . . . . . . . . . . (29.3)% (23.6)% (9.6)% (21.6)% ----- ----- ----- ----- ----- ----- ----- -----
Percentage Change ------------------------------------------------------- Thirteen Weeks Ended Twenty-six Weeks Ended July 31, 1998 compared to July 31, 1998 compared to Thirteen Weeks Ended Twenty-six Weeks Ended August 1, 1997 August 1, 1997 --------------------------- -------------------------- Net sales. . . . . . . . . . . . . . . . . . 7.2% 4.8% Cost of sales. . . . . . . . . . . . . . . . 6.4% 8.4% Selling, advertising, general and administrative. . . . . . . . . . . . 15.8% 7.3% Depreciation and amortization. . . . . . . . 13.5% 13.5% Reorganization items . . . . . . . . . . . . (50.0)% (80.0)% Operating income (loss). . . . . . . . . . . 47.1% 31.7% Other expense (income), net. . . . . . . . . NC NC Income (loss) before income taxes. . . . . . 32.8% (53.5)% Net income (loss). . . . . . . . . . . . . . 32.8% (53.5)%
-15- THIRTEEN WEEKS ENDED JULY 31, 1998 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 1, 1997: The net sales increase of 7.2% for the thirteen weeks ended July 31, 1998 compared to the thirteen weeks ended August 1, 1997 is attributable primarily to a 6.3% increase in the weighted average number of stores in operation (from 41.0 stores to 43.6 stores ) and a 5% increase in comparable store merchandise sales (due primarily to improved inventory balance at the store level and the increased resources to promote customer traffic to the stores) and is partially offset by a decline in other income, including income from leased shoe departments. Cost of sales as a percentage of net sales decreased from 70.8% for the thirteen weeks ended August 1, 1997 to 70.2% for the thirteen weeks ended July 31, 1998, due primarily to higher maintained margins compared to the prior year, offset by a $150,000 charge for inventory markdowns anticipated at a closing store. Without such charge, cost of sales as a percentage of net sales would have been 68.9% for the fiscal 1999 period. Selling, advertising, general and administrative expense increased from 48.0% of net sales for the thirteen weeks ended August 1, 1997 to 51.8% of net sales for the thirteen weeks ended July 31, 1998 due primarily to a substantial increase in advertising expenses from approximately $219,000 (approximately 2.1% of sales) for the thirteen weeks ended August 1, 1997 to $951,000 (approximately 8.5% of sales) for the thirteen weeks ended July 31, 1998. The 15.8% increase in the amount of selling, advertising, general and administrative expense compared to the thirteen weeks ended August 1, 1997 was the result of the 6.3% increase in the weighted average number of stores in operation and the substantial increase in advertising expenses. Depreciation and amortization expense increased by 13.5% in the thirteen weeks ended July 31, 1998 compared to the comparable period of fiscal 1998, due primarily to capital expenditures associated with the increased number of stores in operation and the second-half fiscal 1998 conversions of existing stores to the LOT$OFF format. Other (income) expense increased approximately $290,000, from an expense of $127,000 in the thirteen weeks ended August 1, 1997 to income of $163,000 in the comparable period of fiscal 1999, due primarily to income from litigation partially offset by higher interest expense caused by a higher average outstanding loan balance for the period ended July 31, 1998 and the cessation of interest accrual on liabilities subject to compromise through June 16, 1997 of the fiscal 1998 period. The increase in the Company's loss before income taxes for the thirteen weeks ended July 31, 1998 compared to the loss for the thirteen weeks ended August 1, 1997 is primarily due to store closing expenses, higher advertising and interest expenses and pre-opening expenses. Income tax benefits related to the losses for the fiscal 1998 and 1999 periods were not recognized because the utilization of such benefits were not assured. TWENTY-SIX WEEKS ENDED JULY 31, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST 1, 1997: The net sales increase of 4.8% for the twenty-six weeks ended July 31, 1998 compared to the twenty-six weeks ended August 1, 1997 is attributable primarily to a 5.8% increase in the weighted average number of stores in operation (from 41.3 stores to 43.7 stores ) and a 4.1% increase in comparable store merchandise sales (due primarily to improved inventory balance at the store level and the increased resources to promote customer traffic to the stores) and is partially offset by a decline in other income, including income from leased shoe departments. Cost of sales as a percentage of net sales increased from 68.2% for the twenty-six weeks ended August 1, 1997 to 70.6% for the twenty-six weeks ended July 31, 1998, due primarily to inventory markdowns taken primarily in April 1998 as part of an effort to liquidate aged merchandise, especially apparel inconsistent with the Company's current merchandising philosophy, and a $150,000 charge for inventory markdowns, anticipated at a closing store, partially offset by otherwise higher maintained margins compared to the prior year. Excluding the $342,091 of revenue realized on the sale of such aged merchandise and the related cost of sales of $761,281 (including $423,400 of markdowns) and the $150,000 charge, the cost of sales as a percentage of net sales would have been 67.7% for the recent period reflecting the otherwise higher maintained margins. Selling, advertising, general and administrative expense increased from 48.4% of net sales for the twenty-six weeks ended August 1, 1997 to 49.5% of net sales for the twenty-six weeks ended July 31, 1998 due primarily to a substantial increase in advertising expenses from approximately $1,149,000 (approximately 5.2% of sales) for the twenty-six weeks -16- ended August 1, 1997 to $1,868,000 (approximately 8.0% of sales) for the twenty-six weeks ended July 31, 1998. The 7.3% increase in the amount of selling, advertising, general and administrative expense compared to the twenty-six weeks ended August 1, 1997 was the result of the 5.8% increase in the weighted average number of stores in operation and the substantial increase in advertising expenses. Depreciation and amortization expense increased by 13.5% in the twenty-six weeks ended July 31, 1998 compared to the comparable period of fiscal 1998, due primarily to capital expenditures associated with the increased number of stores in operation and the second-half fiscal 1998 conversions of existing stores to the LOT$OFF format. Other (income) expense improved $4,021,000 from an expense of $269,000 in the twenty-six weeks ended August 1, 1997 to income of approximately $3,752,000 in the comparable period of fiscal 1999, due primarily to the corporate reorganization described in Note 4 of Notes to Condensed Consolidated Financial Statements and the related receipt of $5.8 million of proceeds from GECC partially offset by higher interest expense caused by a higher average outstanding loan balance for the period ended July 31, 1998 and the cessation of interest accrual on liabilities subject to compromise through June 16, 1997 of the fiscal 1998 period. The decrease in the loss before income taxes for the twenty-six weeks ended July 31, 1998 compared to the loss for the twenty-six weeks ended August 1, 1997 is due to the corporate reorganization described above and in Note 4 to Notes to Condensed Consolidated Financial Statements. Income tax benefits related to the losses for the fiscal 1998 and 1999 periods were not recognized because the utilization of such benefits were not assured. INCOME TAX As of January 30, 1998, the Company had a federal tax net operating loss ("NOL") carryforward of approximately $58,549,000 expiring through 2014, an alternative minimum tax credit carryforward of approximately $337,000, which is available to offset regular federal income taxes in the future until fully utilized, and a targeted jobs credit carryforward of approximately $178,000 expiring in 2006 through 2009. As a result of the bankruptcy proceedings and the related Plan, the NOL carryforward, tax credit carryforward and other tax attributes of the Company will be reduced (perhaps significantly) as a result of debt forgiveness income in accordance with section 108(b) of the Internal Revenue Code ("IRC") and/or the receipt of substantial net lawsuit proceeds in excess of such debt. In addition, IRC section 382 limits a NOL and a tax credit carryforward when an ownership change of more than fifty percent of the value of stock in a loss corporation occurs within a three year period. Under the Plan and through subsequent transactions by investors in the Company's Common Stock, the ownership of the Company may be deemed to have changed by more than fifty percent. Accordingly, to the extent NOL and tax credit carryforwards remain after reduction under IRC section 108(b) and /or the receipt of any net lawsuit proceeds, the ability to utilize remaining NOL and tax credit carryforwards may be significantly restricted. STORE DEVELOPMENT PLANS While the Company will concentrate near term principally on developing existing stores to full maturity, it is management's intention to expand the Company's regional presence in existing and new markets, especially in Texas. The Company currently expects to be operating over 50 stores by this fiscal year's Christmas/holiday shopping season after the opening of new stores (limited to existing and new markets in Texas) and the closing of certain stores (the Lawton, Oklahoma store closed on April 25, 1998, the store in Shreveport, Louisiana closed on July 23, 1998, the store in Lubbock, Texas closed on July 22, 1998, and the store in Amarillo, Texas is expected to close on September 23, 1998) through negotiated lease cancellations or lease expirations. New stores are expected to be smaller than the Company's current stores which average 25,900 square feet (22,120 square feet of selling space). Consistent with its store development plan, the Company opened a 13,800 square foot store in San Angelo, Texas on June 6, 1998, a 19,200 square foot store in Lubbock, Texas on July 25, 1998 and a 6,493 square foot store in Killeen, Texas on August 14, 1998. New stores are expected to open by the week of September 21, 1998 in Carrollton (8,041 square feet) and Mesquite (8,506 square feet), Texas, by the week of September 28, 1998 in Dallas (11,020 square feet), Bedford (12,616 square feet) and San Antonio (15,143 square feet), Texas, and by the week of October 12, 1998 in Dallas (12,548 square feet), Irving (11,200 square feet) and Lewisville (15,000 square feet), Texas. -17- LIQUIDITY AND CAPITAL RESOURCES The Company began fiscal 1998 with cash of $473,533. During the twenty-six weeks ended July 31, 1998, the Company generated $2,901,981 from financing activities ($121,251 from the exercise of stock options under the Company's stock option plan, $1,829,369 from the obligation to GECC related to the corporate reorganization discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, $895,000 from a private placement of Notes and warrants also discussed in Note 4 and $208,897 from an increase in the Company's outstanding balance under its credit agreement with GECC net of an $88,786 decrease in bank checks outstanding and $58,750 in payments on long term debt), used $2,796,152 in operating activities, used $53,090 for capital expenditures and ended the period with cash on hand of $526,272. On June 16, 1997, the Company entered into a credit agreement with GECC providing the Company with a revolving credit facility through June 16, 2000 of up to $15,000,000. The credit facility bears interest at a floating rate equal to the published rate for thirty-day commercial paper issued by major corporations (5.53% at July 31, 1998) plus 3% per annum and provides for an unused facility fee of 0.5% per annum. Borrowings under the facility are available in aggregate amounts up to 65% of LOT$OFF's eligible inventory for the period from August 15 through December 15 and up to 60% for the period from December 16 through August 14, subject to certain required reserves. The credit facility is collateralized by inventory, accounts receivable and other assets. The credit agreement, as amended, contains certain reserve requirements, various restrictive covenants, including restrictions on the payment of dividends on Common Stock, and various financial covenants, including minimum EBITDA, minimum working capital and minimum availability. See Notes 1 and 4 of Notes to Condensed Consolidated Financial Statements. As of August 25, 1998, LOT$OFF had approximately $8,035,000 available for borrowings under the credit facility (after reserves of $727,000) of which $6,958,000 was committed, leaving a net availability of $1,077,000. Management believes that borrowings available under its revolving credit facility, available trade credit, its restructuring of certain obligations under the Plan, the capital obtained from the purchase by GECC of a contingent claim on a $10,000,000 portion of the potential net proceeds from the judgment obtained against The Chase Manhattan Bank for $5.8 million (see Notes 3 and 5 of Notes to Condensed Consolidated Financial Statements), net proceeds from the recent Note financing, anticipated proceeds from outstanding litigation, its operating cash flow and its cash on hand will be adequate to finance its operations, including the opening of new stores in Texas, through fiscal 1999. No assurance can be given, however, that such sources of capital will be sufficient or, in the case of anticipated proceeds from important litigation, timely received or that the Company will be successful in its continuing efforts to attain profitability. For these reasons, any investment in Common Stock should be considered speculative, and additional external financing may be necessary. The receipt of additional proceeds from the significant litigation brought by the Company could add significantly to the Company's liquidity and capital resources. See Notes 1 and 5 of Notes to Condensed Consolidated Financial Statements. SIGNIFICANT LITIGATION The Company has received a jury verdict and substantial judgments in its favor from a lawsuit, under appeal, related to certain parties' breaches of contractual obligations to purchase 1,500,000 shares of Old Common Stock and actions in misappropriating and removing these shares from an escrow account prior to payment for such shares. The Company intends to vigorously pursue all reasonable available avenues to effect the receipt of payment for actual and punitive damages. The matter is being handled by counsel on a contingency fee basis. The Company, based upon advice of counsel, believes that it will obtain a favorable result in this lawsuit. See Note 5 of Notes to Condensed Consolidated Financial Statements for further discussion of this matter. SEASONALITY AND QUARTERLY FLUCTUATIONS As with most retailers, highest net sales and operating income are experienced during the fourth quarter, which includes the Christmas/holiday selling season. Otherwise, LOT$OFF's business is heaviest on weekends (Friday through Sunday) and at the beginning of each month. Any adverse trend in net sales for the fourth quarter could have a material adverse effect upon the Company's results of operations for an entire fiscal year. -18- In addition to seasonality, the Company's results of operations may fluctuate from quarter to quarter as a result of the timing of store openings and/or closings, including the level of advertising and pre-opening expenses associated with store openings and inventory markdowns and other expenses associated with store closings, as well as other factors. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. YEAR 2000 COMPLIANCE The Company is evaluating its information systems for Year 2000 compliance, which refers to its having information systems that will accurately process date and time data for the Year 2000 and beyond. The Company currently expects to replace certain software programs, modify other software programs and complete testing of all programs prior to July 1999 in order to achieve Year 2000 compliance. While a complete cost analysis cannot be done prior to completion of the evaluation phase, the Company does not currently expect these costs to have a material adverse effect on the Company's financial condition, results of operations or liquidity. The Company is communicating with its suppliers of products and services in order to assess the extent of those companies' Year 2000 compliance. FORWARD-LOOKING INFORMATION This Form 10-Q, including Management's Discussions and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "believe", "expect", "anticipate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions including those set forth below and identified elsewhere herein. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition to the other risk factors set forth above and in Note 1 of Notes to Condensed Consolidated Financial Statements, among the key factors that may have a direct bearing on the Company's results are competitive practices in the close-out merchandising industry generally and particularly in the Company's targeted market, the result and timing of resolution of significant litigation the Company is pursuing and the ability of the Company to fund its continuing operations in the event of disappointing operating performance or adverse industry or economic conditions, including economic conditions along the border of Texas and Mexico. PART II ITEM 1. LEGAL PROCEEDINGS See Note 5 of Notes to Condensed Consolidated Financial Statements regarding a lawsuit filed in February 1995. Such lawsuit was also reported in the Company's annual reports on Form 10-K for the fiscal years ended February 3, 1995, February 2, 1996, January 31, 1997 and January 30, 1998 and was the subject of a report on Form 8-K dated December 9, 1997. The Company is a party to certain other legal proceedings arising in the ordinary course of business, none of which are believed to be material. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. -19- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held July 14, 1998 in San Antonio, Texas. The record date for the Annual Meeting was May 28, 1998. At May 28, 1998, there were 4,159,210 shares of Common Stock outstanding, 1,596,420 shares of which were held in an escrow account at Continental Stock Transfer & Trust Company for the benefit of holders of allowed general unsecured claims pending delivery upon the filing and/or resolution of claims objections under the Company's confirmed Plan of Reorganization, as Amended and Modified. Such escrowed shares were not entitled to vote at the Annual Meeting. During the Annual Meeting, the Company's five directors were re-elected for one year terms. ITEM 5. OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 10 - Fifth Amendment to the General Electric Capital Corporation Revolving Credit Agreement Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: LOT$OFF CORPORATION By: /s/ CHARLES J. FUHRMANN II ------------------------------------------------------- Charles J. Fuhrmann II, Chairman, President and Chief Executive Officer (Principal Executive Officer) By: /s/ JEFF SEIDEL ------------------------------------------------------- Jeff Seidel, Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -20- EXHIBIT INDEX Page Exhibit 10 Exhibit 27 21 EX-10 2 EXHIBIT 10 EXHIBIT 10 SIXTH AMENDMENT TO REVOLVING CREDIT AGREEMENT This Sixth Amendment to Revolving Credit Agreement (this "Amendment"), made as of the 24th of July, 1998, among LOT$OFF CORPORATION (the "Parent"), 50-OFF TEXAS STORES, L.P., 50-OFF OPERATING COMPANY, and 50-OFF MULTISTATE OPERATIONS, INC., as Borrowers (together with the Parent, the "Borrowers"), and GENERAL ELECTRIC CAPITAL CORPORATION, as Lender (the "Lender"), W I T N E S S E T H WHEREAS, the Borrowers and the Lender are parties to that certain Revolving Credit Agreement dated as of June 16, 1997, as amended by that certain First Amendment to Revolving Credit Agreement dated as of August 28, 1997, by that certain Second Amendment to Revolving Credit Agreement dated as of December 22, 1997, by that certain Third Amendment to Revolving Credit Agreement dated as of February 15, 1998, by that certain Fourth Amendment to Revolving Credit Agreement dated as of April 17, 1998, and by that certain Fifth Amendment to Revolving Credit Agreement dated as of June 12, 1998 (as further amended, modified, restated or supplemented from time to time, the "Credit Agreement"); and WHEREAS, the Parent desires to issue (i) unsecured Indebtedness in an original principal amount not to exceed $2,000,000 in the aggregate in favor of various purchasers of the Indebtedness (collectively, the "Subordinated Lenders") pursuant to the terms and conditions of those certain Subordinated Notes issued by the Parent from time to time (collectively, as to all such Subordinated Notes, the "Subordinated Notes"), which Indebtedness shall be subordinated to the Obligations as set forth therein, and (ii) in connection with the issuance of the Subordinated Notes, warrants to purchase up to 400,000 shares of common stock of the Parent (collectively, "the "Warrants"); and WHEREAS, the Borrowers have requested, and the Lender as agreed, to amend the Credit Agreement as set forth herein and on the terms and conditions set forth herein, in order to permit, among other things, the Parent to issue the Indebtedness in respect to the Subordinated Notes and to issue the Warrants and the 1 shares of common stock of the Parent in connection with the exercise of the Warrants; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree that all capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement, and further agree as follows: 1. AMENDMENTS TO ARTICLE 1. a. Article 1 of the Credit Agreement is hereby amended by adding the following definitions of "Sixth Amendment Date", Subordinated Indebtedness", "Subordinated Lenders" and "Subordinated Notes" and Warrants" in appropriate alphabetical order: " 'SIXTH AMENDMENT DATE' shall mean July 24, 1998. " 'SUBORDINATED INDEBTEDNESS' shall mean the Indebtedness issued under the Subordinated Notes. " 'SUBORDINATED LENDERS' shall mean those purchasers of the Subordinated Notes identified on Schedule 1B to this Agreement as supplemented by the Borrowers from time to time to reflect additional purchasers, if any, of Subordinated Notes. " 'SUBORDINATED NOTES' shall mean those certain Subordinated Notes issued or to be issued by Parent in favor of the Subordinated Lenders in an original principal amount not to exceed $2,000,000 in the aggregate, each in substantially the form attached hereto as EXHIBIT H-1. " 'WARRANTS' shall mean those certain Warrants, each in substantially the form attached hereto as EXHIBIT H-2, issued or to be issued to the Subordinated Lenders in connection with the issuance of the Subordinated Notes, which Warrants shall be exercisable for up to an aggregate of 400,000 shares of common stock of the Parent." 2 b. Article 1 of the Credit Agreement is hereby further amended by deleting the existing definition of "Restricted Payment" and by substituting the following in lieu thereof: " 'RESTRICTED PAYMENT' shall mean, with respect to any Person (i) the declaration of any dividend or the incurrence of any liability to make any other payment or distribution of cash or other property or assets in respect of such Person's Stock, (ii) any payment on account of the purchase, redemption or other retirement of such Person's Stock or any other payment or distribution made in respect thereof, either directly or indirectly, (iii) any payment, loan, contribution, or other transfer of funds or other property to any holder of Stock of any Borrower or any Subsidiary of any such Person except for reasonably equivalent value or (iv) any direct or indirect payment to any Person on account of the Subordinated Indebtedness." 2. AMENDMENT TO ARTICLE 4. Article 4 of the Credit Agreement is hereby amended by adding the following new Section 4.29 at the end thereof: "4.29 SUBORDINATED INDEBTEDNESS. Except as set forth on Schedule 1B attached hereto, the Parent has not issued any Subordinated Indebtedness. The original principal amount of all Subordinated Indebtedness issued or to be issued by the Parent, if any, will not exceed $2,000,000 in the aggregate." 3. AMENDMENT TO SECTION 6.8. Section 6.8 of the Credit Agreement is hereby amended by deleting such section in its entirety and by replacing it with the following: "6.8 AGREEMENTS. Parent shall perform and shall cause each of its Subsidiaries to perform within all required time periods (after giving effect of any applicable grace periods), all of its obligations and enforce all of its rights under each agreement, including, without limitation, leases, the Warrants and the Subordinated Notes, to which it is a party, where the failure to so perform and enforce would have a Material Adverse Effect. Neither Parent nor any Subsidiary of Parent shall terminate or modify in any manner adverse to any such company any provision of any agreement (including, 3 without limitation, the Warrants and Subordinated Notes) to which it is a party which termination or modification could have a Material Adverse Effect. Parent shall not, without the prior written consent of Lender, enter into any amendment of, or agree to or accept any waiver, of any of the provisions of the Warrants or the Subordinated Notes." 4. AMENDMENT TO SECTION 6.9. Section 6.9 of the Credit Agreement is hereby amended by adding the following sentence to the end thereof: "Upon the issuance of any Subordinated Indebtedness subsequent to the Sixth Amendment Date as may be permitted pursuant to Section 7.7 of this Agreement, Borrower Representative shall also provide to Lender executed copies of each Subordinated Note and each Warrant executed and delivered by Parent in connection with such issuance." 5. AMENDMENT TO SECTION 7.7. Section 7.7 of the Credit Agreement is hereby amended by deleting such section in its entirety and by replacing it with the following: "7.7 NEW INDEBTEDNESS. Parent shall not, and shall cause each Subsidiary of Parent not to, create, incur, assume or permit to exist or incur any Indebtedness except: (a) the Obligations; (b) Deferred Taxes; (c) Capital Lease Obligations and Indebtedness secured by purchase money Liens on Equipment permitted under clause (v) of the definition of "Permitted Encumbrances" in a maximum aggregate amount outstanding not to exceed $150,000 outstanding at any time; (d) Indebtedness existing on the Closing Date and set forth in SCHEDULE 7.7 and Indebtedness permitted under Section 7.8 below; (e) unsecured current obligations for trade debt incurred in the ordinary course of Parent's and such Subsidiary's business, and obligations of the Parent and its Subsidiaries for the payment of rental for any property (real, personal or mixed, tangible or intangible) under leases, subleases or similar arrangements (other than Capital Leases) incurred in the ordinary course of Parent's business; and (f) from and after the Sixth Amendment Date, unsecured Subordinated Indebtedness in an aggregate principal amount not to exceed $2,000,000, issued by Parent to the 4 Subordinated Lenders pursuant to the terms and conditions of the Subordinated Notes." 6. AMENDMENT TO SECTION 7.13. Section 7.13 of the Credit Agreement is hereby amended by deleting such section in its entirety and by replacing it with the following: "7.13 RESTRICTED PAYMENTS. Parent shall not and shall cause each Subsidiary of Parent not to make any Restricted Payments (including any refund or cancellation of subscriptions under the Rights Offering which would cause the total amount received by the Parent thereunder to be less than $3,050,000), except (a) Parent's Subsidiaries may make Restricted Payments to Parent, (b) Parent may pay dividends as required by the terms of its Series A preferred stock to the holders thereof and (c) so long as no Default or Event of Default then exists or would be caused thereby and subject to the terms of subordination contained in the Subordinated Notes, Parent may make payments of interest, whether accrued or scheduled, to the Subordinated Lenders in respect of the Subordinated Indebtedness." 7. AMENDMENT TO SECTION 9.1. Section 9.1 of the Credit Agreement is hereby amended by deleting subsection (c) thereof in its entirety and by replacing such subsection with the following: "(c) (i) There shall occur any default (which default is not or waived within any applicable cure period) under the Subordinated Notes, or any one of them or (ii) there shall occur a default by any Borrower under any other agreement, document or instrument to which any Borrower is a party or by which any Borrower or its property is bound, which default is not cured before the expiration of any applicable grace or curative period under such agreement, document or instrument or as otherwise may be granted to such Borrower by the obligee, and such default (x) involves the failure to make any payment (whether of principal, interest or otherwise) due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) in respect of any Indebtedness of such Borrower in an aggregate amount exceeding $100,000, except for payments lawfully withheld by such Borrower as a setoff in connection with a good faith dispute between such Borrower and the holder of such Indebtedness, or (y) causes (or permits any holder of such Indebtedness or a trustee to cause) such 5 Indebtedness, or a portion thereof in an aggregate amount exceeding $100,000, to become due prior to its stated maturity or prior to its regularly scheduled dates of payment; or" 8. AMENDMENT TO SCHEDULE 4.20. Schedule 4.20 to the Credit Agreement is hereby modified and amended by deleting the existing schedule in its entirety and by substituting the attached Schedule 4.20 in lieu thereof. 9. NO OTHER AMENDMENT. Except for the amendments expressly set forth above, the text of the Credit Agreement and all other Loan Documents shall remain unchanged and in full force and effect. The Borrowers acknowledge and expressly agree that the Lender reserves the right to, and does in fact, require strict compliance with all terms and provisions of the Credit Agreement and the other Loan Documents. 10. REPRESENTATION AND WARRANTIES. Each Borrower hereby represents and warrants in favor of the Lender as follows: (a) Such Borrower has the corporate power and authority (i) to enter into this Amendment and (ii) to do all acts and things as are required or contemplated hereunder to be done, observed and performed by it; (b) This Amendment has been duly authorized, validly executed and delivered by one or more authorized signatories of such Borrower, and constitutes the legal, valid and binding obligation of such Borrower, enforceable against it in accordance with its terms; (c) The execution and delivery of this Amendment and performance by such Borrower under the Credit Agreement, as amended hereby, do not and will not require the consent or approval of any regulatory authority or governmental authority or agency having jurisdiction over such Borrower which has not already been obtained, nor contravene or conflict with the charter documents of such Borrower, or the provision of any statute, judgment, order, indenture, instrument, agreement, or undertaking, to which such Borrower is party or by which any of its properties are or may become bound; 6 (d) The only Subordinated Indebtedness to be issued as of the effective date hereof is as set forth on SCHEDULE 1B to the Credit Agreement; and (e) As of the date hereof, and after giving effect to this Amendment (i) no Default or Event of Default exists under the Credit Agreement or is caused by this Amendment, and (ii) to the best of the Borrowers' knowledge, each representation and warranty set forth in Article 4 of the Credit Agreement is true and correct in all material respects, except (x) to the extent previously fulfilled in accordance with the terms of the Credit Agreement, as amended hereby, or (y) to the extent relating specifically to the Closing Date. 11. CONDITIONS PRECEDENT TO EFFECTIVENESS. This Amendment shall become effective as of the date first written above upon the receipt by the Lender of (a) a duly executed original signature page to this Amendment from the Borrowers and (b) a fully executed copy of each Subordinated Note and each Warrant, and all other documents, if any, related to the issuance of the Subordinated Indebtedness, issued and outstanding as of the date hereof. 12. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of Georgia, without reference to the conflicts or choice of law principles thereof. 13. LOAN DOCUMENT. This Amendment shall be deemed to be a Loan Document for all purposes. 14. EXPENSES. The Borrowers agree to pay all reasonable expenses of the Lender incurred in connection with this Amendment, including, without limitation, all fees and expenses of counsel to the Lender. 15. COUNTERPARTS. This Amendment may be executed by one or more of the parties hereto on any number of separate counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart hereof. 7 IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized officers or representatives to execute and deliver this Amendment as of the day and year first written above. BORROWERS: LOT$OFF CORPORATION, a Delaware corporation By: /s/ Charles J. Fuhrmann II ------------------------------------------ Charles J. Fuhrmann II President 50-OFF MULTISTATE OPERATIONS, INC., a Nevada corporation By: /s/ Charles J. Fuhrmann II ------------------------------------------ Charles J. Fuhrmann II President 50-OFF OPERATING COMPANY, a Nevada corporation By: /s/ Charles J. Fuhrmann II ------------------------------------------ Charles J. Fuhrmann II President 50-OFF TEXAS STORES, L.P., a Texas limited partnership By: 50-OFF Texas Management, Inc., a Nevada corporation, its managing general partner By: /s/ Charles J. Fuhrmann II ------------------------------------------ Charles J. Fuhrmann II President LENDER: GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Timothy C. Huban ------------------------------------------- Timothy C. Huban Senior Vice President of GE Capital Commercial Finance, Inc., being duly authorized 8 EXHIBIT "H-1" THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. THIS NOTE MAY NOT BE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND OTHER APPLICABLE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. THE PAYMENT OBLIGATIONS EVIDENCED BY THIS NOTE ARE SUBORDINATE TO THE CLAIMS OF GENERAL ELECTRICAL CAPITAL CORPORATION AS MORE COMPLETELY SET FORTH HEREIN. SENIOR SUBORDINATED NOTE LOT$OFF Corporation (the "Company") promises to pay to or registered assigns ("Holder"), the principal sum of Dollars on August 15, 2000 as evidenced by this Senior Subordinated Note (the "Note"). 1. INTEREST. The Company promises to pay interest on the principal amount at a rate per annum equal to 9.25%. Interest will accrue from the date on which this Note is issued and will be payable semi-annually commencing on February 15, 1999 and at maturity. Interest will be computed on the basis of a 365-day year. 2. REDEMPTION. This Note is not redeemable at the option of either the Company or the Holder. 3. SUBORDINATION. (a) The Holder hereby subordinates any and all claims now or hereafter owing to it by the Company under this Note or otherwise to any and all Senior Debt (including, without limitation, interest, fees, costs or other payments on the Senior Debt paid or accrued at the commencement of a bankruptcy or similar insolvency proceeding and whether or not such claims are deemed allowable or recoverable under any such bankruptcy or similar insolvency proceeding) and agrees that all Senior Debt due General Electric Capital Corporation ("GECC") shall be paid in full in cash or otherwise satisfied to the satisfaction of GECC and it's commitments to advance funds to the Company shall be terminated before any payment may be made on amounts under this Note with respect to principal, but not with respect to interest so long as no default or event of default exists and is continuing under the GECC Agreements (as that term is defined below), at which time interest and other payments may not be paid under the Note. (b) As used with respect to this Note, the term "Senior Debt" includes the principal and other amounts outstanding from time to time owing by the Company and certain of its 9 affiliates and subsidiaries to GECC as referenced by (i) that certain $15,000,000 Revolving Credit Agreement dated as of June 16, 1997 by and among the Company, 50-Off Texas Stores, L.P., 50-Off Multi-State Operations, Inc. and 50-Off Operating Company, as Borrowers, and GECC, as Lender, and (ii) that certain Agreement of Limited Partnership of W3L.P. among Giant Sequoia Corporation, as general partner, Mountain Laurel Corporation, as limited partner and GECC, as preferred limited partner (collectively as to (i) and (ii), the "GECC Agreements"), plus interest, fees, costs, expenses and other sums chargeable to the Company by GECC pursuant to the GECC Agreements (including interest, fees, costs, charges and other expenses which may accrue or may not be paid with respect to any bankruptcy or similar insolvency proceedings which may be filed by or against the Company irrespective of whether such interest, fees, costs and expenses are deemed allowed or recoverable in any such proceeding), together with any renewals, extensions, restructurings, modification, amendment, refinancing or supplements thereto, and any other obligations owing by the Company or its affiliates and subsidiaries to GECC under the GECC Agreements or otherwise. The Senior Debt due GECC is secured debt. "Senior Debt" also includes any other secured debt of the Company presently outstanding or hereafter incurred and all renewals, extensions, refundings, restructurings, amendments and modifications thereof. (c) In case any funds shall be paid or delivered to the Holder in violation of the foregoing subordination provision before the Senior Debt due GECC shall have been paid in full in cash or otherwise satisfied to GECC s satisfaction, such funds shall be held in trust by the Holder for and immediately paid and delivered to GECC. (d) The Holder agrees that the subordination of this Note to the Senior Debt shall continue during any insolvency, receivership, bankruptcy, dissolution, liquidation or other similar proceeding whether voluntary or involuntary by or against the Company. (e) Furthermore, Debt is any indebtedness, contingent or otherwise, in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of the Company or only to a portion thereof), or evidenced by bonds, notes (including this Note), debentures or similar instruments or letters of credit, or representing the balance deferred and unpaid of the purchase price of any property or interest therein, except any such balance that constitutes a trade payable, of and to the extent such indebtedness would appear as a liability upon a balance sheet of the Company prepared on a consolidated basis in accordance with generally accepted accounting principles. The Company agrees, and the Holder by accepting the Note agrees, to the subordination. 4. INDEBTEDNESS UNSECURED. All indebtedness owing pursuant to this Note and all other indebtedness of the Company owing to the Holder shall at all times be unsecured. The Holder agrees that if at any time it shall be in possession of any assets or properties of the Company, the Holder shall hold such assets or properties for the benefit of GECC with the same degree and care as the Holder holds its own property so long as any Senior Debt due GECC remains unpaid and until all commitments by GECC to make loans and advances to the Company are terminated. 10 5. PERSONS DEEMED OWNERS. The registered Holder of this Note may be treated as its owner for all purposes. 6. AMENDMENTS AND WAIVERS. This Note may be amended with the consent of the Holder, and any existing default may be waived with the consent of the Holder. Without the consent of the Holder, this Note may be amended to cure any ambiguity, defect or inconsistency, or to make any other change that does not adversely affect the rights of the Holder. 7. DEFAULTS AND REMEDIES. An Event of Default is: (i) default for 30 days in payment of interest or principal (at maturity) on this Note, or (ii) accumulation by any person or group (as such term is used in Rule 13d-5 under the Securities Act of 1934) of persons to, as a result of a tender or exchange offer, open market purchases, merger, privately negotiated purchases or otherwise, become, directly or indirectly, the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) of securities having a majority or more of the ordinary voting power of then outstanding securities of the Company. If an Event of Default occurs and is continuing, the Holder may declare this Note to be due and payable immediately but in no event before August 1, 1999. Any notice of such Event of Default shall be provided to GECC at the address set forth on Schedule 1 to this Note. Holder may not enforce this Note except as provided herein. The Company agrees to pay the Holder's reasonable costs of collection including court costs and attorney's fees. 8. NO RECOURSE AGAINST OTHERS. No director, officer, employee, stockholder, agent or representative of the Company or GECC shall have any liability for any obligation of the Company under this Note or for any claim based on, in respect of or by reason of such obligations or their creation. The Holder by accepting this Note waives and releases all such liability. Such waiver and release are part of the consideration for the issue of this Note. Dated: LOT$OFF Corporation BY: ---------------------------------------------- CHARLES J. FUHRMANN II, President 11 ASSIGNMENT FORM To Assign this Note, fill in the form below. I or we assign and transfer this Note to: Assignee's social security or tax I.D. number: Print or type assignee's name, address and zip code: and irrevocably appoint agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Your signature*: ------------------------------------ *Sign exactly as your name appears on this Note. 12 EXHIBIT "H-2" NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE ON EXERCISE OF THIS WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. NONE OF SUCH SECURITIES MAY BE TRANSFERRED IN THE ABSENCE OF REGISTRATION UNDER SUCH ACT AND OTHER APPLICABLE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO COUNSEL TO THE COMPANY TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED. LOT$OFF CORPORATION WARRANT DATED: July ____, 1998 Number of Common Shares: Holder: Address: - ---------------------------------- THIS CERTIFIES THAT the holder of this Warrant ("Holder") is entitled to purchase from LOT$OFF Corporation, a Delaware corporation (the "Company"), at the average closing bid price of the Company's common stock ("Common Stock") for the three weeks ended July 31, 1998 in no event more than $5.00 per share the number of shares set forth above. This Warrant shall expire on the fourth anniversary of the date of issuance. 1. Neither this Warrant nor the Common Stock issuable on exercise of this Warrant may be transferred, sold, assigned or hypothecated, unless registered by the Company under the Securities Act of 1933, as amended (the "Act") and other applicable securities laws or unless the Company shall have received a written opinion of counsel satisfactory to counsel to the Company to the effect that registration of the Warrant or the shares of Common Stock issued on exercise of this Warrant is not necessary in connection with such transfer, sale, assignment or hypothecation. This Warrant and the Common Stock issued upon exercise of this Warrant shall be appropriately legended to reflect this restriction and stop transfer instructions shall apply. The Holder shall through its counsel provide such information as is reasonably necessary in connection with such opinion. 13 2. The Holder is entitled to certain registration rights as set forth under a Letter Agreement dated the date hereof. 3. Any permitted assignment of this Warrant shall be effected by the Holder by (i) executing an appropriate form of assignment, (ii) surrendering the Warrant for cancellation at the office of the Company, accompanied by the opinion of counsel referred to above, and (iii) delivery to the Company of certain statements and representations by the transferee (in a form acceptable to the Company and its counsel) including, without limitation, a representation to the effect that such Warrant is being acquired by the Holder for investment only and not with a view to its distribution or resale; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder, if applicable) new Warrants representing, in the aggregate, rights to purchase the same number of shares of Common Stock as are purchasable under the Warrant surrendered. The transferor will pay all relevant transfer taxes. Replacement warrants shall bear the same legend as is borne by this Warrant. 4. The term "Holder" shall be deemed to include any permitted record transferee of this Warrant. 5. The Company covenants and agrees that all shares of Common Stock which may be issued upon exercise hereof will, upon payment of the exercise price and issuance, be duly and validly issued, fully paid and non-assessable. The Company further covenants and agrees that, during the periods within which this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for issuance upon exercise of this Warrant and all other Warrants issued in replacement hereof. 6. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. 7. In the event that as a result of a recapitalization, stock split, stock dividend or like transaction, the outstanding shares of Common Stock of the Company are at any time increased or decreased or changed into or exchanged for a different number or kind of share or other security of the Company, then appropriate adjustments in the number and kind of such securities then subject to this Warrant shall be made effective as of the date of such occurrence. Such adjustment shall be made successively whenever any event listed above shall occur, and the Company will notify the Holder of the Warrant of each such adjustment. Any fraction of a share resulting from any adjustment shall be eliminated, and the price per share of the remaining shares subject to this Warrant adjusted accordingly. 8. This Warrant may be exercised at any time prior to its expiration by (i) surrender of this Warrant (with appropriate purchase form properly executed) at the principal executive office of the Company (or such other office of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the exercise price (in cash or like principal amount of Senior Subordinated Notes of the Company) for the number of shares of Common Stock specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) the 14 delivery to the Company of certain statements and representations by the Holder (in a form acceptable to the Company and its counsel) including, without limitation, a representation to the effect that such shares of Common Stock are being acquired by the Holder for investment only and not with a view to their distribution or resale. The certificates for the Common Stock so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days after all requisite documentation has been provided, after this Warrant shall have been so exercised and shall bear a restrictive legend consistent with applicable securities laws. 9. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. The Delaware courts shall have exclusive jurisdiction over this instrument and the enforcement thereof. Service of process shall be effective if by certified mail, return receipt requested. All notices shall be in writing and shall be deemed given upon receipt by the party to whom addressed. IN WITNESS WHEREOF, LOT$OFF Corporation has caused this Warrant to be signed by its duly authorized officer and to be dated as of the date set forth above. LOT$OFF Corporation By: --------------------------------------------- CHARLES J. FUHRMANN II, President In the presence of: - -------------------------------------------------- 15 SCHEDULE 1B
- -------------------------------------------------------- SUB DEBT HOLDER AMOUNT - -------------------------------------------------------- Company #1 $250,000 Individual #1 225,000 Trust #1 200,000 Individual #2 150,000 Company #2 100,000 Company #3 50,000 Individual #3 100,000 Company #4 250,000 Individual #4 10,000 Trust #2 10,000 Trust #3 30,000 Individual #5 50,000 Trust #4 20,000 - -------------------------------------------------------- Total $1,445,000 - --------------------------------------------------------
16 SCHEDULE 4.20 There are no issued and outstanding shares of voting Stock of Parent held by any holder who or which holds at least five percent (5%) of such issued and outstanding shares on the date hereof other than the Depository Trust Company. Outstanding rights, options, warrants, or agreements pursuant to which Parent may be required to issue or sell Stock: 1. Options to purchase up to 800,000 shares of Common Stock granted or to be granted under the Stock Option Plan of LOT$OFF Corporation 2. Warrants to acquire up to 400,000 shares of Common Stock issued or to be issued in connection with the Subordinated Indebtedness 17 EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LOT$OFF CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE TWENTY-SIX WEEKS ENDED JULY 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICIAL STATEMENTS. 1,000 3-MOS JUL-31-1998 JAN-31-1998 JUL-31-1998 526 0 993 0 14,771 16,599 7,365 4,202 20,514 14,466 4,067 0 0 42 1,939 20,514 23,366 23,366 16,489 16,489 12,868 0 456 (2,239) 0 (2,239) 0 0 0 (2,239) .54 .54
-----END PRIVACY-ENHANCED MESSAGE-----