-----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, ITbJNdV90YqTPpJFpvd3nE/V9ZhJ/r7jL/b6LRaEY6KoBso3Gmng3KiNAUhU4Bpu WdMC5DmEPHPAxey+TaCw/g== 0001047469-98-043881.txt : 19981215 0001047469-98-043881.hdr.sgml : 19981215 ACCESSION NUMBER: 0001047469-98-043881 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981030 FILED AS OF DATE: 19981214 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: 98768999 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 October 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-13076 LOT$OFF CORPORATION DELAWARE 74-2640559 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1201 Austin Highway, #116, San Antonio, Texas 78209-4859 - --------------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Telephone: (210) 805-9300 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No: --- --- -------------------- 4,203,610 shares of the Registrant's common stock were outstanding at December 2, 1998 which includes 689,086 shares held in escrow and awaiting distribution to holders of allowed general unsecured claims. -------------------- FORM 10-Q INDEX
PAGE ---- PART I ITEM 1. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Balance Sheets: October 30, 1998 (unaudited); January 30, 1998; and October 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations: thirteen and thirty-nine weeks ended October 30, 1998 (unaudited); and thirteen and thirty-nine weeks ended October 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows: thirty-nine weeks ended October 30, 1998 (unaudited); and thirty-nine weeks ended October 31, 1997 (unaudited). . . . . . . . . . . . . 6 Notes to Condensed Consolidated Financial Statements (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 15 PART II ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 20 ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 21 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART I ITEM 1. FINANCIAL STATEMENTS LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
October 30, 1998 January 30, 1998 October 31, 1997 ---------------- ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents $ 556,582 $ 473,533 $ 511,137 Accounts receivable 174,012 113,463 725,436 Merchandise inventories 16,889,446 15,309,715 15,727,987 Prepayments and other current assets 254,175 265,814 747,756 ----------- ----------- ----------- TOTAL CURRENT ASSETS 17,874,215 16,162,525 17,712,316 ----------- ----------- ----------- PROPERTY AND EQUIPMENT-NET 3,235,544 3,632,965 3,831,268 OTHER ASSETS 719,370 548,464 405,275 ----------- ----------- ----------- TOTAL ASSETS $21,829,129 $20,343,954 $21,948,859 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -3- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
October 30, 1998 January 30, 1998 October 31, 1997 ---------------- ---------------- ---------------- CURRENT LIABILITIES: Credit facility $ 8,782,014 $ 6,330,598 $ 8,849,527 Accounts payable-trade 6,064,272 3,132,965 4,142,159 Accounts payable-other 2,149,337 3,333,093 1,868,505 Accrued expenses and other current liabilities 1,636,175 1,597,859 2,136,796 Bank checks outstanding 953,755 1,048,855 1,075,778 Current portion of long-term debt 215,257 131,553 42,804 ------------ ------------- ------------ TOTAL CURRENT LIABILITIES 19,800,810 15,574,923 18,115,569 ------------ ------------- ------------ LONG-TERM DEBT, less current portion 4,090,106 1,263,263 1,401,339 STOCKHOLDERS' (DEFICIT) EQUITY: Series A preferred stock - - 4,280,400 Series B preferred stock - 3,991,050 3,991,050 Common stock 42,045 25,325 8,561 Additional paid-in capital 65,139,405 60,447,467 56,147,275 Accumulated deficit (67,243,237) (60,958,074) (61,995,335) ------------ ------------- ------------ TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (2,061,787) 3,505,768 2,431,951 ------------ ------------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 21,829,129 $ 20,343,954 $ 21,948,859 ------------ ------------- ------------ ------------ ------------- ------------
See accompanying notes to these condensed consolidated financial statements. -4- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Thirteen Weeks Ended Thirty-nine Weeks Ended -------------------------------- ------------------------------ Oct. 30, 1998 Oct. 31, 1997 Oct. 30, 1998 Oct. 31, 1997 ------------- ------------- ------------- ------------- NET SALES $10,419,964 $ 9,365,822 $33,785,801 $31,665,991 COST OF SALES 7,268,611 6,376,204 23,757,617 21,583,734 ----------- ----------- ----------- ----------- GROSS PROFIT 3,151,353 2,989,618 10,028,184 10,082,257 ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, advertising, general and administrative 6,150,880 5,745,409 17,723,120 16,531,218 Depreciation and amortization 202,977 193,311 605,541 547,881 Pre-opening expenses 377,707 31,811 447,830 31,811 Store closing costs 121,629 - 844,885 - Reorganization items - - 100,000 500,000 ------------- ------------- ------------- ------------- TOTAL OPERATING EXPENSES 6,853,193 5,970,531 19,721,376 17,610,910 ------------- ------------- ------------- ------------- OPERATING INCOME (LOSS) (3,701,840) (2,980,913) (9,693,192) (7,528,653) OTHER EXPENSE (INCOME): Non-operating (income) expense (1,501) - (4,209,555) - Interest (income) expense, net 345,444 154,417 801,526 423,858 ------------- ------------- ------------- ------------- TOTAL OTHER (INCOME) EXPENSE 343,943 154,417 (3,408,029) 423,858 ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES (4,045,783) (3,135,330) (6,285,163) (7,952,511) (BENEFIT FROM) INCOME TAXES - - - - ------------- ------------- ------------- ------------- NET INCOME (LOSS) (4,045,783) (3,135,330) (6,285,163) (7,952,511) PREFERRED DIVIDENDS - (58,856) - (89,171) ------------- ------------- ------------- ------------- EARNINGS APPLICABLE TO COMMON STOCK $(4,045,783) $(3,194,186) $(6,285,163) $(8,041,682) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- INCOME (LOSS) PER COMMON SHARE: Basic $ (0.96) $ (3.73) $ (1.51) $ (1.78) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- WEIGHTED AVERAGE SHARES Basic 4,202,951 856,080 4,176,092 4,513,023 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to these condensed consolidated financial statements. -5- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Thirty-nine Weeks Ended ------------------------------------------ October 30, 1998 October 31, 1997 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(6,285,163) $(7,952,511) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 605,541 547,881 Asset impairment charges 119,912 - Reorganization items 100,000 500,000 Non-cash interest expense on long-term debt 150,909 - Changes in assets and liabilities: Accounts receivable (60,549) (7,584) Merchandise inventories (1,579,731) (2,753,029) Prepaid and other current assets 11,639 (370,256) Other assets 16,944 (46,932) Accounts payable-trade 2,931,307 2,983,190 Accounts payable-other (1,183,756) (579,496) Accrued expenses and other current liabilities (61,684) 13,286 ----------- ----------- Net cash provided by (used in) operating activities (5,234,631) (7,665,451) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (328,032) (374,363) ----------- ----------- Net cash provided by (used in) investing activities (328,032) (374,363) ----------- -----------
See accompanying notes to these condensed consolidated financial statements. -6- LOT$OFF CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (CONTINUED)
Thirty-nine Weeks Ended --------------------------------------- October 30, 1998 October 31, 1997 ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from credit facility 46,966,394 44,324,149 Payments on credit facility (44,514,978) (40,871,203) Bank checks outstanding (95,100) 508,068 Payments on long-term debt (104,298) (267,287) Proceeds from long-term debt and warrants 3,269,368 - Net proceeds from sale of Common and Preferred Stock - 4,094,783 Net proceeds from exercise of stock options 126,671 - Other increases (decreases) to paid-in capital (2,345) - Cash in escrow - 330,000 Dividend payment - (58,856) ------------ ------------ Net cash provided by (used in) financing activities 5,645,712 8,059,654 ------------ ------------ Increase in cash and cash equivalents 83,049 19,840 Cash and cash equivalents at beginning of period 473,533 491,297 ------------ ------------ Cash and cash equivalents at end of period $ 556,582 $ 511,137 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest: $ 572,409 $ 442,626 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES: Conversion of liabilities subject to compromise to: - Long-term debt $ - $ 1,444,762 - Accounts payable-other $ - $ 626,503 - Series B preferred stock $ - $ 3,991,050 - Additional paid in capital $ - $ 24,188,229 Conversion of Series B Preferred Stock to: - Common Stock $ 15,964 $ - - Additional paid-in capital $ 3,975,086 $ - Warrants issued $ 187,850 $ -
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 October 30, 1998 and October 31, 1997, the condensed consolidated statements of operations and cash flows for the thirty-nine weeks ended October 30, 1998 and October 31, 1997 and the condensed consolidated statements of cash flows for the thirteen and thirty-nine weeks ended October 30, 1998 and October 31, 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments necessary to present fairly the condensed consolidated financial position, results of operations and cash flows have been made. The results of operations for the thirty-nine week period ended October 30, 1998 are not necessarily indicative of the operating results for a full year or of future operations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Registrant's annual report on Form 10-K for the year ended January 30, 1998. The Company is a regional, extreme value retailer specializing in close-out merchandise. The actual merchandise mix fluctuates by category, by season and by store based on customer needs and buying trends, demographics and the availability of products at close-out prices. This merchandising concept is designed to appeal to value-conscious shoppers and other bargain hunters, and management is hopeful its continued implementation will lead to increased store traffic and improved operating results. The Company's business plan is focused on achieving higher gross margins, higher store contribution and controlled corporate overhead, all designed to promote overall profitability, and on being a major factor in extreme value retailing in Texas. The key elements of this strategy include the geographic consolidation of the chain and the liquidation and closing of under-performing stores and stores located outside of the reduced market area. The management team is concentrating on optimizing the contribution from store operations while maintaining only the absolute minimum amount of corporate overhead necessary to support store operations, on expanding its presence in Texas, on collecting on judgments from significant litigation (see Note 5) and on maximizing shareholder value. The Company's ability to continue as a going concern will be affected by a number of factors, including, but not limited to, the need to remain in compliance with the terms, covenants and conditions of it revolving credit facility, the degree of success in continuing to increase sales, the ability to achieve an operating profit and the ability to maintain trade credit and merchandise flows to its stores. While management believes that the downsizing of stores and the reduction in the geographic area it serves has facilitated its efforts to improve the Company's operating performance and that the recapitalization implemented upon the consummation of its Plan, coupled with the receipt of net lawsuit proceeds, the receipt of contingent claim proceeds from GECC (see Note 4) and a private note financing (see Note 4), have strengthened its financial position, no assurance can be given that the Company will be successful in its continuing efforts to return to profitability. The anticipated receipt of additional proceeds from the Company's lawsuit related to certain parties' breaches of contractual obligations, as well as certain other violations, especially conversion, related to the Company's November 1994 Regulation S offering would further strengthen the Company's financial position. -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 ("Chase"), net proceeds from the private note financing, anticipated proceeds from outstanding litigation, its operating cash flow and its cash on hand will be adequate to finance its operations. No assurance can be given, however, that such sources of capital will be sufficient (additional external financing and/or the restructuring of existing obligations may be necessary and would be necessary if anticipated proceeds from outstanding litigation are not timely received) or that the Company will be successful in its continuing efforts to attain profitability. For this reason, any investment in Common Stock should be considered speculative. The receipt of additional proceeds from the litigation brought by the Company could add significantly to the Company's liquidity and capital resources. See Notes 4 and 5. NOTE 2: On October 9, 1996 (the "Petition Date"), 50-OFF Stores, Inc. ("50-OFF") and its significant subsidiaries (together, the "Debtors") filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division (the "Court"). The filing was precipitated by the notification from 50-OFF's then asset based lender that it was in violation of the minimum gross margin and the minimum working capital financial covenants of its credit agreement and that such breaches constituted events of default under the loan documents. The lender subsequently established additional availability reserves which reduced availability, imposed certain increased fees and other charges and accelerated fees deemed earned at the initial closing, which, individually and together, substantially impacted 50-OFF's financial liquidity and, therefore, its ability to acquire and maintain much needed inventory for its stores. 50-OFF was unable to secure the resources required to cure the defaults under the loan documents and to implement its business plan and effect the changes believed necessary to improve operations and reverse its disappointing operating results without the protections afforded under the Bankruptcy Code. 50-OFF continued to manage its business as a debtor in possession pursuant to sections 1107 and 1108 of the Bankruptcy Code while management formulated and promoted a plan of reorganization. At a confirmation hearing held on June 3, 1997, United States Bankruptcy Judge Leif M. Clark entered an order confirming the Debtors' Joint Plan of Reorganization, as Amended and Modified (the "Plan"). The Plan became effective June 16, 1997 (the "Effective Date"). The Plan required that the Company's existing senior secured revolving credit facility lender, General Electric Capital Corporation ("GECC"), provide a post-confirmation revolving credit facility or be replaced by a new senior secured lender so that the Company would have a source of revolving funds to continue to operate. GECC provided such financing. See Note 4. The Plan also provided for the restructure of the Company's collateralized obligation to MetLife Capital Corporation [recently acquired by an affiliate of GECC and now known as GE Capital Business Asset Funding ("GEC-BAF")] at a face amount of $850,000; and the Plan provided for the payment of such amount over approximately seven years. GEC-BAF agreed to such treatment with the balance of its claim (approximately $3.2 million) becoming an allowed general unsecured claim. See Note 3. The Plan also provided for the cancellation of all non-priority unsecured indebtedness of the Company. Such cancellation caused the elimination of over $25 million of unsecured debt and the $3.2 million of collateralized debt which was converted to unsecured debt from the Company's balance sheet. Under the Plan, as further modified by Court order on March 19, 1998 (see Note 3), each holder of an allowed general unsecured claim will, in partial cancellation of its allowed claim ($3,991,050 in the aggregate), receive a pro rata share of 1,596,420 shares of LOT$OFF's common stock (the "Common Stock"). Certain further obligations of the Company to holders of allowed general unsecured claims are secured under the -9- Plan by a lien up to the full face amount of the balance of their allowed claims against potential net lawsuit proceeds over $3,991,050 from significant litigation being prosecuted by the Company. See Note 5. As net proceeds over $3,991,050 (net of certain items set forth in the Plan) from such litigation are received by the Company, holders of allowed general unsecured claims will receive additional shares of Common Stock and/or cash (provided that at least the Excess Net Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, will be paid in cash) as determined under the Plan. The receipt of such Common Stock and/or cash by holders of allowed general unsecured claims will result in a proportionate release of the lien. By the Company's issuing such Common Stock and/or paying such cash to allowed general unsecured creditors, such creditors will be essentially receiving the net value of the Company's significant litigation which was pending pre-Petition Date up to the full face amount of their allowed claims. See Notes 3 and 5. Finally, the Plan provided for the recapitalization of the Company through cash raised from 50-OFF's existing common stockholders (the "Rights Offering") and, potentially, as discussed above, from the litigation. Specifically, the Plan provided for the issuance to such stockholders of rights to subscribe for units, each consisting of 20 shares of Series A Preferred Stock and 20 shares of Common Stock (a "Unit"). Up to 122,009 Units and a minimum of 30,500 Units could be sold in the Rights Offering at $100.00 per Unit. The record date for determining which holders of 50-OFF common stock ("Old Common Stock") were entitled to vote on the Plan and receive such rights was March 21, 1997. Persons who acquired Old Common Stock after such record date were not entitled to vote on the Plan or subscribe for Units pursuant to the Rights Offering. The Rights Offering expired on May 22, 1997. At the confirmation hearing on June 3, 1997, the Company announced it had received more than enough subscriptions for Units for the required minimum in the Rights Offering to be met. Subscriptions received in the Rights Offering were held in escrow with Bank One, Texas N. A. pending the Effective Date of the Plan. Contemporaneously with its filing of the Plan on February 6, 1997, the Company filed the Disclosure Statement With Respect to the Debtors' Joint Plan of Reorganization ("the Disclosure Statement") setting forth more detailed information regarding the Company and the Plan. Under applicable Court rules and procedures, a hearing was held to review and approve the Disclosure Statement, which was approved as containing adequate information in accordance with section 1125 of the Bankruptcy Code on March 20, 1997. Upon approval of the Disclosure Statement by the Court, the Plan and Disclosure Statement were furnished to all creditors of the bankruptcy estates and all holders of Old Common Stock as of March 21, 1997 and were also filed with the SEC. Votes in support of the Plan were solicited, and, at the confirmation hearing on June 3, 1997, the Company announced that the Plan had been approved by both creditors and stockholders. On the Effective Date, certain key elements of the Plan were implemented, including: the Company's corporate name was changed from 50-OFF to LOT$OFF Corporation ("LOT$OFF" or the "Company"); the Old Common Stock was canceled, along with all then existing options and warrants to buy Old Common Stock; and 856,080 shares of LOT$OFF Series A Preferred Stock (each such share was convertible into two shares of Common Stock and was entitled to a 5.5%, $0.275, cumulative annual dividend) and 856,080 shares of Common Stock (LOTS: CUSIP # 545674103) were issued to subscribers to the Rights Offering for gross proceeds of $4,280,400. Also on the Effective Date, LOT$OFF entered into a $15,000,000 revolving credit agreement maturing on June 16, 2000 with GECC. See Note 4. The proceeds of the facility, together with the net proceeds from the Rights Offering, were used to refinance the Company's debtor in possession facility, also with GECC, and to provide post-confirmation working capital for increased inventories for its then 41 stores and selected other general corporate purposes, including financing LOT$OFF's exit from bankruptcy. -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. As of December 2, 1998, the Court has fixed the amount of general unsecured claims totaling approximately $19.7 million. Additional claims totaling $6.6 million are unresolved. The Company's best estimate of the maximum amount of unsecured claims which will ultimately be allowed by the Court is $24.1 million, $3,991,050 of which were satisfied by the issuance of 798,210 shares of Series B Preferred Stock (see below) under the Plan. The amount of allowed claims may differ materially from the Company's estimate; additional amounts may arise from the Court's fixing of allowed claims for disputed amounts. CONVERSION OF SERIES B PREFERRED STOCK On March 19, 1998, in response to the Company's motion to modify the Plan by consolidating certain steps to be taken pursuant to the Plan and with the support of the Class 7 agent and its counsel, representing the allowed general unsecured creditors, the Court entered an order to consolidate the treatment of Class 7 creditors by allowing the issuance of two shares of Common Stock in lieu of any single share of Series B Preferred Stock and other intermediate steps which would otherwise have been required under the Plan. The immediate effect of the order was to cause the conversion of the previously issued, but undelivered, 798,210 shares of Series B Preferred Stock into 1,596,420 shares of Common Stock and the cancellation of the Series B Preferred Stock and any obligation of the Company to issue Series A Conversion Rights (as defined in the Plan) or Series A Preferred Stock to allowed general unsecured creditors under the Plan effective March 19, 1998. Of such shares of Common Stock, 763,723, 20,001, 766 and 122,844 (907,334 shares in aggregate) were delivered to a total of 853 holders of allowed general unsecured claims in September 1998, October 1998, November 1998 and December 1998, respectively, and 689,086 were in an escrow account at Continental Stock Transfer & Trust Company as of December 2, 1998 for the benefit of holders of allowed general unsecured claims pending delivery upon the resolution of claims objections. Future obligations, if any, to the allowed general unsecured creditors (up to the full face amount of their allowed claims, depending only on Net Lawsuits' Proceeds as defined in the Plan) may be satisfied by the issuance of additional shares of Common Stock and/or cash (provided that at least the Excess Net Lawsuits' Proceeds, up to $1.5 million as defined in the Plan, must be paid in cash). -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 5.1%) plus 3%. The line of credit is collateralized by inventory, accounts receivable and other assets. The credit agreement, as amended, contains certain reserve requirements, various restrictive covenants, including restrictions on the payment of dividends on Common Stock, and various financial covenants, including minimum availability, minimum working capital ratio and minimum EBITDA. On October 30, 1998, the Company had approximately $9,601,000 available for borrowings under the credit facility (after reserves of $778,000) of which $8,869,000 was committed, leaving a net availability of $732,000, and was not in default under the credit agreement. LONG-TERM DEBT Long-term debt at October 30, 1998 consists of five general types of obligations. The furniture and fixture note, ad valorem tax notes and non-ad valorem tax notes are long-term debts settled as part of the Plan. Long-term debt consists of the following:
OCTOBER 30, 1998 JANUARY 30, 1998 ---------------- ---------------- Promissory notes collateralized by furniture, fixtures and equipment. . . . . . . . $ 806,961 $ 849,559 Notes to ad valorem taxing authorities. . . . . . . . . . . . . . . . . . . 371,354 414,698 Notes to taxing authorities, other than ad valorem taxing authorities . . . . . . . 112,203 130,559 Guarantee to GECC. . . . . . . . . . . . . . . . 1,924,598 - Senior subordinated notes. . . . . . . . . . . . 1,090,247 - Less: current portion . . . . . . . . . . . . . (215,257) (131,553) ---------- ---------- $4,090,106 $1,263,263 ---------- ---------- ---------- ----------
On April 17, 1998, as part of a corporate reorganization involving the formation of a Delaware limited partnership, the Company assigned its judgment and cause of action against Chase to such newly formed limited partnership. The limited partnership was formed on April 17, 1998 by two wholly-owned subsidiaries of the Company, as the general partner and common limited partner, and GECC, as the preferred limited partner. GECC acquired its preferred limited partnership interest for $5.8 million or 58 cents on the dollar, resulting in a gain of $3,815,737 net of certain related expenses. Such interest represents a contingent claim on a $10 million portion of the potential net proceeds from the $148,575,000 judgment against Chase. See Note 5. While the Company has no material present financial obligation to GECC or the partnership as a result of this transaction, upon receipt of net proceeds from Chase, or otherwise, attributable to the judgment, GECC could receive as much as $10,000,000 (but in no event less than a guaranteed $3,000,000) according to a scheduled payout with respect to its contingent claim. The $3,000,000 minimum is cross-collateralized to the Company's indebtedness to GECC (see Credit Facility, above) and is payable upon the sooner of the resolution of the Chase litigation, April 17, 2003 or certain other events. As of October 30, 1998, the Company reflects a $1,924,598 (discounted at 10%) liability in the condensed consolidated balance sheet for the minimum guarantee to GECC. -12- Effective July 31, 1998, the Company completed a private placement of $1,445,000 principal amount of senior subordinated notes (the "Notes") with detachable warrants to purchase up to 216,750 shares of Common Stock at $4.83 per share. The proceeds were used to facilitate and accelerate the Company's opening of additional stores in Texas and for working capital. The Notes accrue interest at 9.25%, which is paid semi-annually, and are specifically subordinated to only GECC. There is no prepayment penalty on the Notes which mature August 15, 2000 or at the option of the holder if a change in control of the Company occurs (defined as an accumulation of 51% of the Company's Common Stock by any person or group) after August 1, 1999. The warrants to purchase Common Stock expire at the end of July 2002. The Notes may be used in satisfaction of the warrant exercise price. In conjunction with the placement, the Company issued an additional 72,250 warrants and paid $77,250 for fees and expenses. NOTE 5: In November 1994, 50-OFF received subscriptions for approximately 1,810,000 shares of Old Common Stock in a Regulation S offering to qualified investors. 50-OFF received net proceeds of approximately $861,000 from the sale of 310,000 shares and recorded a subscription receivable for the purchase agreements for 1,500,000 shares for which proceeds were never received. On February 21, 1995, 50-OFF filed a lawsuit [50-OFF STORES, INC. V. BANQUE PARIBAS (SUISSE), S.A., BETAFID, S.A., YANNI KOUTSOUBOS, ANDALUCIAN VILLAS (FORTY EIGHT) LIMITED, ARNASS LIMITED, BROCIMAST ENTERPRISES LTD., DENNIS MORRIS, HOWARD WHITE, CHASE MANHATTAN BANK, N.A. AND ARIES PEAK, INC., Case No. SA-95-CA-0159] in the United States District Court in San Antonio, Texas against Banque Paribas (Suisse) S.A. ("Paribas"), Yanni Koutsoubos, Chase, Howard White and certain affiliated individuals and companies in connection with the theft of 1,500,000 shares of Old Common Stock which certain of the defendants had agreed to purchase at $3.65 per share. Among other counts, the lawsuit alleged breaches of contracts, securities fraud, conspiracy and conversion. The conversion claim related to actions of the defendants in the transferring, selling and trading of the shares despite the fact that the defendants had never paid for such shares. 50-OFF sought recovery of actual and punitive damages and pre- and post-judgment interest. On October 14, 1997, the trial of this case began before the Honorable H.F. Garcia. Defendants, Paribas, Chase and Dennis Morris, appeared and announced ready for trial. On November 14, 1997, after four weeks of evidence, the Company entered into a Settlement Agreement and Full and Final General Release with Paribas. As part of the settlement, Paribas agreed to pay the Company $2,400,000 (of which the Company received $1,800,000 after attorneys' contingency fees but before other related expenses) in exchange for which the Company agreed to dismiss all claims against Paribas with prejudice. The Company also dismissed all claims against Dennis Morris; however, such dismissal was not the result of a settlement agreement between the parties. On November 20, 1997, at the close of evidence, the Company obtained a jury verdict against Chase on its claim of conversion in the amount of $150,975,000, representing $12,975,000 in actual damages and $138,000,000 in punitive damages. On November 21, 1997, the Company moved the court to enter a final judgment against Chase in the amount of $148,575,000, which reflects the jury's verdict, minus a credit for Paribas' settlement amount. On December 4, 1997, the court entered a judgment against Chase in the Company's favor for $148,575,000 plus costs of court, pre-judgment interest on $12,975,000 at 10% per annum from November 18, 1994 until December 4, 1997 and post-judgment interest on the entire judgment amount at 5.42% from December 4, 1997. Subsequently, Chase filed five post-judgment motions with the court: motion for new trial; motion to alter or amend the judgment; renewed motion for judgment as a matter of law; motion to apply a settlement credit and motion for leave to conduct oral deposition; and motion for hearing. On February 23, 1998, the court, having considered such motions, the supplements to such motions, the response of the Company to such motions and the entire record in the cause, denied all of Chase's post-judgment motions. Chase appealed the judgment entered by the court to the Fifth Circuit Court of Appeals in New Orleans (Court of Appeals Docket #98-50288). The Fifth Circuit Court of Appeals requested and arranged a pre-hearing conference among the parties in New Orleans on May 14, 1998. The parties were unable to -13- reach a resolution at such conference, and, while discussions have continued, there is no sign of resolution by settlement. On August 7, 1998, Chase filed the appellant's brief with the Fifth Circuit Court of Appeals; on October 9, 1998, the Company filed the appellee's brief; and on November 12, 1998, Chase filed the reply brief. In addition to the verdict against Chase, the Company obtained a $30,000,000 default judgment against Yanni Koutsoubos on its claims for violation of Section 10b-5 of the Securities Exchange Act and common law fraud on November 20, 1998. Such judgment represents $10,000,000 in actual damages and $20,000,000 in punitive damages. On April 6, 1998, the court entered default judgments against Betafid S. A., Andalucian Villas (Forty-Eight) Limited, Arnass Limited, Brocimast Enterprises Limited, Howard White and Aries Peak, Inc. on the Company's claims for violations of Section 10b-5 of the Securities Exchange Act and common law fraud. Such judgments total $166,275,000, plus pre-judgment interest on $12,975,000 at 10% per annum from November 18, 1994 until April 6, 1998 and post-judgment interest on the entire amount at 5.31% from April 6, 1998. On May 19, 1998, the Company entered into a Settlement Agreement and Full and Final General Release with Howard White and Aries Peak, Inc. As part of the settlement, Howard White agreed to pay the Company $150,000 (of which the Company received $100,000 after attorneys' contingency fees but before other related expenses) in exchange for which the Company agreed to dismiss all claims against Howard White and Aries Peak, Inc. with prejudice. The Company intends to vigorously pursue the substantial judgment obtained against defendant Chase in the above matter. The Company, based upon advice from counsel, believes that it will obtain a favorable result in the appeal of the judgment against defendant Chase referenced in the above proceeding. To the extent reasonable, the Company intends to vigorously pursue the collection of the sums owing to the Company as per the judgments that have been obtained against the other defendants, especially Mr. Koutsoubos, although the collection of these judgments is uncertain. Akin, Gump, Strauss, Hauer & Feld, L.L.P. represents the Company in these matters on a contingency fee basis. The Company is party to certain other legal proceedings, none of which are believed to be material. NOTE 6: The following table shows pro forma earnings per share calculated assuming that the Company's emergence from bankruptcy and the resulting recapitalization discussed in Note 2 occurred as of the beginning of each period.
13 WEEKS ENDED 13 WEEKS ENDED 39 WEEKS ENDED 39 WEEKS ENDED OCTOBER 30, 1998 OCTOBER 31, 1997 OCTOBER 30, 1998 OCTOBER 31, 1997 ---------------- ---------------- ---------------- ---------------- Net income (loss) $(4,045,783) $(3,135,332) $(6,285,163) $(7,952,511) Weighted average number of shares 4,202,951 4,202,951 4,176,092 4,176,092 Earnings per share $(0.96) $(0.75) $(1.51) $(1.90)
-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 Thirty-nine Weeks Ended --------------------------- ------------------------- October 30, October 31, October 30, October 31, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 69.8 % 68.1 % 70.3 % 68.2 % Selling, advertising, general and administrative 59.0 % 61.3 % 52.5 % 52.2 % Depreciation and amortization 1.9 % 2.1 % 1.8 % 1.7 % Pre-opening expenses 3.6 % 0.3 % 1.3 % 0.1 % Store closing costs 1.2 % 0.0 % 2.5 % 0.0 % Reorganization items 0.0 % 0.0 % 0.3 % 1.6 % ------ ------ ------ ------ Operating income (loss) (35.5)% (31.8)% (28.7)% (23.8)% Other expense (income), net 3.3 % 1.6 % (10.1)% 1.3 % ------ ------ ------ ------ Total expenses 138.8 % 133.5 % 118.6 % 125.1 % Income (loss) before income taxes (38.8)% (33.5)% (18.6)% (25.1)% (Benefit from) income taxes 0.0 % 0.0 % 0.0 % 0.0 % Net income (loss) (38.8)% (33.5)% (18.6)% (25.1)% ------ ------ ------ ------ ------ ------ ------ ------ Percentage Change ------------------------------------------------------------ Thirteen Weeks Ended Thirty-nine Weeks Ended October 30, 1998 compared to October 30, 1998 compared to Thirteen Weeks Ended Thirty-nine Weeks Ended October 31, 1997 October 31, 1997 ---------------------------- ---------------------------- Net sales 11.3% 6.7 % Cost of sales 14.0% 10.1 % Selling, advertising, general and administrative 7.1% 7.2 % Pre-opening expenses 1,087.3% 1,307.8 % Store closing costs NA NA Depreciation and amortization 5.0% 10.5 % Reorganization items NA (80.0)% Operating income (loss) 24.2% 28.8 % Other expense (income), net 122.7% NC Total expenses 15.7% 1.1 % Income (loss) before income taxes 29.0% (21.0)% (Benefit from) income taxes 0.0% 0.0 % Net income (loss) 29.0% (21.0)%
-15- THIRTEEN WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 31, 1997: The net sales increase of 11.3% for the thirteen weeks ended October 30, 1998 compared to the thirteen weeks ended October 31, 1997 is attributable to an 11.0% increase in the weighted average number of stores in operation (from 41.6 stores to 46.2 stores) and an 8.4% increase in comparable store merchandise sales partially offset by lower non-merchandise revenues. Cost of sales as a percentage of net sales increased from 68.1% for the thirteen weeks ended October 31, 1997 to 69.8% for the thirteen weeks ended October 31, 1998, due primarily to lower non-merchandise sales as compared to the comparable period in fiscal 1998. Selling, advertising, general and administrative expenses decreased from 61.3% of net sales for the thirteen weeks ended October 31, 1997 to 59.0% of net sales for the thirteen weeks ended October 30, 1998 due primarily to higher sales and partially offset by increased advertising expenses. The 7.1% increase in the amount of selling, advertising, general and administrative expense compared to the thirteen weeks ended October 31, 1997 was the result of the 11.0% increase in the weighted average number of stores in operation. Depreciation and amortization increased by 5.0% in the thirteen weeks ended October 30, 1998 compared to the comparable period of the prior year, due primarily to the 11.0% increase in the weighted average number of stores in operation partially offset by re-deploying fixtures from stores closed in prior periods. Other expense, net, increased to $343,943 in the thirteen weeks ended October 30,1998 compared to $154,417 in the comparable period of the prior year, due primarily to increased interest expense attributable to non-cash interest charges associated with the $1,445,000 private placement and the Company's $3,000,000 guarantee to GECC. See Note 4 of Notes to Condensed Consolidated Financial Statements. The increase in the Company's loss before income taxes for the thirteen weeks ended October 30, 1998 compared to the thirteen weeks ended October 31, 1997 is primarily due to higher selling, advertising, general and administrative (primarily advertising) and interest expenses. Income tax benefits related to the losses for the thirteen weeks ended October 30, 1998 were not recognized because the utilization of such benefits is not assured. Such benefits, if any, are available for recognition in future years. See "Income Tax," below. THIRTY-NINE WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED OCTOBER 31, 1997: The net sales increase of 6.7% for the thirty-nine weeks ended October 30, 1998 compared to the thirty-nine weeks ended October 31, 1997 is attributable to a 7.6% increase in the weighted average number of stores in operation (from 41.4 stores to 44.6 stores) and a 5.4% increase in comparable store merchandise sales partially offset by a decline in non-merchandise revenues. Cost of sales as a percentage of net sales increased from 68.2% for the thirty-nine weeks ended October 31, 1997 to 70.3% for the thirty-nine weeks ended October 30, 1998, due primarily to inventory markdowns taken primarily in April 1998 as part of an effort to liquidate aged merchandise, especially apparel inconsistent with the Company's current merchandising philosophy. Excluding the $342,091 of revenue realized on the sale of such aged merchandise and the related cost of sales of $761,281 (including $423,400 of markdowns), the cost of sales as a percentage of net sales would have been 68.3%. Selling, advertising, general and administrative expense increased from 52.2% of net sales for the thirty-nine weeks ended October 31, 1997 to 52.5% of net sales for the thirty-nine weeks ended October 30, 1998 due primarily to a substantial increase in advertising expenses from approximately $1,908,000 (approximately 6.0% of sales) for the thirty-nine weeks ended October 31, 1997 to $3,058,000 (approximately 9.1% of sales) for the thirty-nine weeks ended October 30, 1998. The 7.2% increase in the amount of selling, advertising, general and administrative expense compared to the thirty-nine weeks ended October 31, 1997 was the result of the 7.6% increase in the weighted average number of stores in operation and the substantial increase in advertising expenses. -16- Depreciation and amortization expense increased by 10.5% in the thirty-nine weeks ended October 30, 1998 compared to the comparable period of fiscal 1998, due primarily to capital expenditures associated with the increased number of stores in operation. Other (income) expense improved $3,832,000 from an expense of $424,000 in the thirty-nine weeks ended October 31, 1997 to income of approximately $3,408,000 in the comparable period of fiscal 1999, due primarily to the corporate reorganization described in Note 4 of Notes to Condensed Consolidated Financial Statements and the related receipt of $5.8 million of proceeds from GECC partially offset by higher interest expense caused by non-cash interest charges associated with a private placement and the Company's $3,000,000 guarantee to GECC in the fiscal 1999 period (see Note 4 of Notes to Condensed Consolidated Financial Statements) and by the cessation of interest accrual on liabilities subject to compromise through June 16, 1997 of the fiscal 1998 period. The decrease in the loss before income taxes for the thirty-nine weeks ended October 30, 1998 compared to the loss for the thirty-nine weeks ended October 31, 1997 is due to the corporate reorganization in Note 4 to Notes to Condensed Consolidated Financial Statements. Income tax benefits related to the losses for the fiscal 1998 and 1999 periods were not recognized because the utilization of such benefits is not assured. Such benefits, if any, are available for recognition in future years. See "Income Tax," below. INCOME TAX As of January 30, 1998, the Company had a federal tax net operating loss ("NOL") carryforward of approximately $58,549,000 expiring through 2014, an alternative minimum tax credit carryforward of approximately $337,000, which is available to offset regular federal income taxes in the future until fully utilized, and a targeted jobs credit carryforward of approximately $178,000 expiring in 2006 through 2009. As a result of the bankruptcy proceedings and the related Plan, the NOL carryforward, tax credit carryforward and other tax attributes of the Company will be reduced (perhaps significantly) as a result of debt forgiveness income in accordance with section 108(b) of the Internal Revenue Code ("IRC") and/or the receipt of substantial net lawsuit proceeds in excess of such debt. In addition, IRC section 382 limits a NOL and a tax credit carryforward when an ownership change of more than fifty percent of the value of stock in a loss corporation occurs within a three year period. Under the Plan and through subsequent transactions by investors in the Company's Common Stock, the ownership of the Company may be deemed to have changed by more than fifty percent. Accordingly, to the extent NOL and tax credit carryforwards remain after reduction under IRC section 108(b) and/or the receipt of any net lawsuit proceeds, the ability to utilize remaining NOL and tax credit carryforwards may be significantly restricted. -17- STORE DEVELOPMENT The Company will concentrate near term principally on developing existing stores to full maturity. It has been management's intention to refine the Company's regional presence to an increased emphasis on Texas through the openings of stores in Texas and closings of certain stores through negotiated lease cancellations or lease expirations. The new stores are smaller than the older stores which average approximately 26,000 square feet.
New Stores Closed/Closing Stores - -------------------------------------------------- -------------------------------------------------------------- Location Size (Sq. Ft.) Date Location Size (Sq. Ft.) Date - ---------------------- -------------- -------- --------------------- -------------- --------------------- San Angelo, TX 13,800 06/06/98 Lawton, OK 24,000 04/25/98 Lubbock, TX 19,200 07/25/98 Shreveport, LA 28,505 07/23/98 Killeen, TX 6,493 08/14/98 Lubbock, TX 27,580 07/22/98 Carrollton, TX* 8,041 09/12/98 Amarillo, TX 26,000 09/23/98 Mesquite, TX* 8,506 09/12/98 Baton Rouge, LA 25,122 12/31/98 (projected) Dallas, TX* 11,020 09/26/98 Baton Rouge, LA 25,399 12/31/98 (projected) Bedford, TX* 12,616 09/29/98 Houston, TX 25,000 01/29/99 (projected) San Antonio, TX 15,143 10/10/98 Albuquerque, NM 25,600 01/29/99 (projected) Irving, TX* 11,200 10/10/98 Oklahoma City, OK 30,224 01/29/99 (projected) ------- Dallas, TX* 12,548 10/22/98 Total: 237,430 Lewisville, TX* 15,000 10/27/98 Average: 26,381 ------- Total: 133,567 Average: 12,142 *Dallas/Ft. Worth Metroplex
A c t u a l P r o j e c t e d ------------------------------------------ ------------------------------- 01/30/98 Opened Closed 10/30/98 Opening Closing 01/29/99 -------- ------ ------ -------- ------- ------- -------- Texas 31 11 2 40 0 1 39 Oklahoma 4 0 1 3 0 1 2 New Mexico 3 0 0 3 0 1 2 Louisiana 5 0 1 4 0 2 2 Tennessee 1 0 0 1 0 0 1 -- -- -- -- -- -- -- 44 11 4 51 0 5 46
LIQUIDITY AND CAPITAL RESOURCES The Company began fiscal 1998 with cash of $473,533. During the thirty-nine weeks ended October 30, 1998, the Company generated $5,645,712 from financing activities ($126,671 from the exercise of stock options under the Company's stock option plan, $1,824,369 from the obligation to GECC related to the corporate reorganization discussed in Note 4 of Notes to Condensed Consolidated Financial Statements, $1,445,000 from the private placement of notes and warrants also discussed in Note 4 and $2,451,416 from an increase in the Company's outstanding balance under its credit agreement with GECC, net of a $95,100 decrease in bank checks outstanding and $104,298 in payments on long term debt), used $5,234,631 in operating activities, including $1,292,715 in pre-opening expenses and store closing costs, used $328,032 for capital expenditures and ended the period with cash on hand of $556,582. -18- On June 16, 1997, the Company entered into a credit agreement with GECC providing the Company with a revolving credit facility through June 16, 2000 of up to $15,000,000. The credit facility bears interest at a floating rate equal to the published rate for thirty-day commercial paper issued by major corporations (5.1% at December 2, 1998) plus 3% per annum and provides for an unused facility fee of 0.5% per annum. Borrowings under the facility are available in aggregate amounts up to 65% of LOT$OFF's eligible inventory for the period from August 15 through December 15 and up to 60% for the period from December 16 through August 14, subject to certain required reserves. The credit facility is collateralized by inventory, accounts receivable and other assets. The credit agreement, as amended, contains certain reserve requirements, various restrictive covenants, including restrictions on the payment of dividends on Common Stock, and various financial covenants, including minimum EBITDA, minimum working capital and minimum availability. See Notes 1 and 4 of Notes to Condensed Consolidated Financial Statements. As of December 11, 1998, LOT$OFF had approximately $10,174,000 available for borrowings under the credit facility (after reserves of $874,000) of which $8,927,000 was committed, leaving a net availability of $1,247,000. Management believes that borrowings available under its revolving credit facility, available trade credit, anticipated proceeds from outstanding litigation, its operating cash flow and its cash on hand will be adequate to finance its operations through fiscal 1999. No assurance can be given, however, that such sources of capital will be sufficient or, in the case of anticipated proceeds from outstanding litigation, timely received, and additional external financing and/or the restructuring of existing obligations may be necessary. The receipt of proceeds from Chase from the significant litigation brought by the Company (see Note 5 of Notes to Condensed Consolidated Financial Statements and "Significant Litigation," below) could add significantly to the Company's liquidity and capital resources; such proceeds, if any, are not expected in the fiscal year ending January 29, 1999. Should such proceeds not be forthcoming or timely received, additional external financing and/or the restructuring of existing obligations would be necessary to finance the Company's operations through fiscal 2000. Also, no assurance can be given that the Company will be successful in its continuing efforts to attain profitability. For these reasons, any investment in Common Stock should be considered speculative. SIGNIFICANT LITIGATION The Company has received a jury verdict and substantial judgments in its favor from a lawsuit, under appeal, related to certain parties' breaches of contractual obligations to purchase 1,500,000 shares of Old Common Stock and actions in misappropriating and removing these shares from an escrow account prior to payment for such shares. The Company intends to vigorously pursue all reasonable available avenues to effect the receipt of payment for actual and punitive damages. The matter is being handled by counsel on a contingency fee basis. The Company, based upon advice of counsel, believes that it will obtain a favorable result in this lawsuit. See Note 5 of Notes to Condensed Consolidated Financial Statements for further discussion of this matter. SEASONALITY AND QUARTERLY FLUCTUATIONS As with most retailers, highest net sales and operating income are experienced during the fourth quarter, which includes the Christmas/holiday selling season. Otherwise, LOT$OFF's business is heaviest on weekends (Friday through Sunday) and at the beginning of each month. Any adverse trend in net sales for the fourth quarter could have a material adverse effect upon the Company's results of operations for an entire fiscal year. In addition to seasonality, the Company's results of operations may fluctuate from quarter to quarter as a result of the timing of store openings and/or closings, including the level of advertising and pre-opening expenses associated with store openings and inventory markdowns and other expenses associated with store closings, as well as other factors. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -19- YEAR 2000 COMPLIANCE The Company has been evaluating its information systems for Year 2000 compliance, which refers to its having information systems that will accurately process date and time data for the Year 2000 and beyond. The Company currently expects to replace certain software programs, modify other software programs and complete testing of all programs prior to July 1999 in order to achieve Year 2000 compliance. While a complete cost analysis cannot be done prior to completion of the evaluation phase, the Company does not currently expect these costs to have a material adverse effect on the Company's financial condition, results of operations or liquidity. The Company has communicated with its suppliers of products and services in order to assess the extent of those companies' Year 2000 compliance. To date, such suppliers have assured the Company that they will be in compliance. FORWARD-LOOKING INFORMATION This Form 10-Q, including Management's Discussions and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, contains various forward-looking statements and information that are based on management's beliefs as well as assumptions made by and information currently available to management. When used in this document, the words "believe," "expect," "anticipate" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions including those set forth below and identified elsewhere herein. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition to the other risk factors set forth above and in Note 1 of Notes to Condensed Consolidated Financial Statements, among the key factors that may have a direct bearing on the Company's results are competitive practices in the close-out merchandising industry generally and particularly in the Company's targeted market, the result and timing of resolution of significant litigation the Company is pursuing and the ability of the Company to fund its continuing operations in the event of disappointing operating performance or adverse industry or economic conditions, including economic conditions along the border of Texas and Mexico. PART II ITEM 1. LEGAL PROCEEDINGS See Note 5 of Notes to Condensed Consolidated Financial Statements regarding a lawsuit filed in February 1995. Such lawsuit was also reported in the Company's annual reports on Form 10-K for the fiscal years ended February 3, 1995, February 2, 1996, January 31, 1997 and January 30, 1998 and was the subject of a report on Form 8-K dated December 9, 1997. The Company is a party to certain other legal proceedings arising in the ordinary course of business, none of which are believed to be material. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. -20- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: LOT$OFF CORPORATION By: /s/ CHARLES J. FUHRMANN II ------------------------------------------------------- Charles J. Fuhrmann II, Chairman, President and Chief Executive Officer (Principal Executive Officer) By: /s/ JEFF SEIDEL ------------------------------------------------------- Jeff Seidel, Vice President-Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -21- EXHIBIT INDEX
Page ---- Exhibit 27 - Financial Data Schedule . . . . . . . . . . . . . . . . . . 22
22 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LOT$OFF STORES CORPORATION FINANCIAL STATEMENTS AS OF AND FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS OCT-30-1998 JAN-30-1998 OCT-30-1998 557 0 174 0 16,889 17,874 7,604 4,368 21,289 19,801 4,090 0 0 42 (2,104) 21,289 33,786 33,786 23,758 23,758 19,721 0 802 (6,285) 0 (6,285) 0 0 0 (6,285) (1.51) (1.51)
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