1
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 August 1, 1997

( ) 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.)

8750 Tesoro Drive, San Antonio, Texas 78217-0555
- ---------------------------------------- ----------------------------
(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:

--------

856,080 shares of the Registrant's common stock were outstanding at August 1,
1997. On June 15, 1997, the date immediately preceding the Effective Date of
the Registrant's Plan of Reorganization, as amended and modified, there were
12,200,915 shares of the Registrant's old common stock outstanding, all of
which were cancelled on the Effective Date.

--------

There are 119 pages in the sequentially numbered, manually signed original. The
exhibit index is located on page 20 .

FORM 10-Q INDEX

PAGE
PART I

ITEM 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Condensed Consolidated Balance Sheets: August 1, 1997 (unaudited);
January 31, 1997; and August 2, 1996 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Condensed Consolidated Statements of Operations: thirteen and twenty-six weeks
ended August 1, 1997 (unaudited); and thirteen and twenty-six weeks ended August 2, 1996
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Condensed Consolidated Statements of Cash Flows: twenty-six weeks
ended August 1, 1997 (unaudited); and twenty-six weeks ended August 2, 1996 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ITEM 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 18

ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

PART I

ITEM 1. FINANCIAL STATEMENTS

LOT$OFF CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

ASSETS

August 1, January 31, August 2,
1997 1997 1996
----------- ----------- -----------

CURRENT ASSETS:
Cash and cash equivalents $ 453,388 $ 491,297 $ 592,931
Cash in escrow - 330,000 -
Accounts receivable 616,469 717,852 712,593
Merchandise inventories 11,075,402 12,974,958 28,915,488
Prepaid and other current assets 548,792 393,526 942,334
----------- ----------- -----------
TOTAL CURRENT ASSETS 12,694,051 14,907,633 31,163,346
----------- ----------- -----------

PROPERTY AND
EQUIPMENT-NET 3,816,739 3,988,760 23,391,382

OTHER ASSETS 431,184 358,343 1,203,941
----------- ----------- -----------

TOTAL ASSETS $16,941,974 $19,254,736 $55,758,669
=========== =========== ===========

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

August 1, 1997 January 31, 1997 August 2, 1996
-------------- ---------------- --------------

CURRENT LIABILITIES:
Credit facility $ - $ 5,396,580 $ 16,967,884
Accounts payable-trade 1,483,017 1,381,708 14,542,527
Accounts payable-other 2,858,546 2,032,512 3,089,379
Accrued expenses and
other current liabilities 1,855,394 1,757,468 3,609,661
Current portion of closed store
costs - - 899,196
Current portion of long-term debt - 266,667 4,770,798
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 6,196,951 10,834,935 43,879,445

CREDIT FACILITY 3,400,369 - -
LONG-TERM DEBT, less
current portion 1,444,762 - -

LIABILITIES SUBJECT TO
COMPROMISE - 30,250,544 -

STOCKHOLDERS' (DEFICIT)
EQUITY:
Series A preferred stock 4,280,400 - -
Series B preferred stock 3,991,050 - -
Common stock 8,561 122,009 122,009
Additional paid-in capital 56,147,275 36,022,264 36,022,264
Subscription receivable - (3,991,050) (3,991,050)
Accumulated deficit (58,527,400) (53,983,966) (20,273,999)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,899,886 (21,830,743) 11,879,224
------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,941,974 $ 19,254,736 $ 55,758,669
============ ============ ============

See accompanying notes to these condensed consolidated financial statements.

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LOT$OFF CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

Thirteen Weeks Ended Twenty-six Weeks Ended
--------------------------------------------------------------
August 1, 1997 August 2, 1996 August 1, 1997 August 2, 1996
-------------- -------------- -------------- --------------

NET SALES $ 10,381,017 $ 31,708,019 $ 22,300,169 $ 64,123,428
COST OF SALES 7,213,237 22,349,660 14,933,784 45,583,056
------------ ------------ ------------ ------------

GROSS PROFIT 3,167,780 9,358,359 7,366,385 18,540,372
------------ ------------ ------------ ------------

OPERATING EXPENSES:
Selling, advertising, general
and administrative 4,980,380 12,787,621 10,785,809 25,548,943
Depreciation and amortization 177,285 966,597 354,570 1,937,074
Reorganization items 200,000 - 500,000 -
------------ ------------ ------------ ------------

TOTAL OPERATING EXPENSES 5,357,665 13,754,218 11,640,379 27,486,017
------------ ------------ ------------ ------------

OPERATING INCOME (LOSS) (2,189,885) (4,395,859) (4,273,994) (8,945,645)

OTHER EXPENSE (INCOME):
Interest income (17,476) (20,573) (42,190) (40,239)
Interest expense 144,701 623,081 311,629 994,235
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE
(INCOME) 127,225 602,508 269,439 953,996
------------ ------------ ------------ ------------

INCOME (LOSS) BEFORE INCOME
TAXES (2,317,110) (4,998,367) (4,543,433) (9,899,641)

(BENEFIT FROM) INCOME TAXES - - - -
------------ ------------ ------------ ------------

NET INCOME (LOSS) $ (2,317,110) $ (4,998,367) $ (4,543,433) $ (9,899,641)
============ ============ ============ ============

INCOME (LOSS) PER SHARES OF
COMMON STOCK $ (0.37) $ (0.41) $ (0.49) $ (0.81)
============ ============ ============ ============

WEIGHTED AVERAGE SHARES 6,341,495 12,200,915 9,271,205 12,200,915
============ ============ ============ ============

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
--------------------------------------
August 1, 1997 August 2, 1996
------------------- -----------------

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $(4,543,433) $(9,899,641)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 354,570 1,937,074
Reorganization items 500,000 -
Non-cash interest expense on long-term debt - 117,981
Changes in assets and liabilities:
Accounts receivable 101,383 417,011
Merchandise inventories 1,899,556 (1,161,523)
Prepaid and other current assets (155,266) (505,108)
Other assets (72,841) (311,698)
Accounts payable-trade 101,309 5,947,281
Accounts payable-other (600,469) (1,148,744)
Accrued expenses and other
current liabilities 97,926 329,568
Closed store costs - (269,017)
----------- -----------

Net cash provided by (used in) operating
activities (2,017,265) (4,546,816)
----------- -----------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures (182,549) (433,350)
---------- -----------
Net cash provided by (used in) investing activities (182,549) (433,350)
---------- -----------

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
------------------------------
August 1, 1997 August 2, 1996
-------------- --------------

CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from credit facility 28,251,967 47,791,460
Payments on credit facility (30,248,178) (42,041,627)
Payments on long-term debt (266,667) (518,070)
Net proceeds from sale of common and
preferred stock 4,094,783 -
Cash in escrow 330,000 -
------------ ------------

Net cash provided by (used in) financing
activities 2,161,905 5,231,763
------------ ------------

Increase (decrease) in cash and cash equivalents $ (37,909) $ 251,597
Cash and cash equivalents at
beginning of period 491,297 341,334
------------ ------------

Cash and cash equivalents at
end of period $ 453,388 $ 592,931
============ ============

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 311,629 $ 876,254
Income taxes - -

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCIAL ACTIVITIES:
Conversion of liabilities subject to compromise to
long-term debt $ 1,444,762 -
Conversion of liabilities subject to compromise to
accounts payable-other $ 626,503 -
Conversion of liabilities subject to compromise to
Series B preferred stock $ 3,991,050 -
Conversion of liabilities subject to compromise to
additional paid in capital $ 24,188,229 -

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 31, 1997
has been condensed from the audited consolidated balance
sheet of 50-OFF Stores, Inc. (debtor-in-possession) at
January 31, 1997.

The condensed consolidated balance sheets at August 1, 1997
and August 2, 1996 and the condensed consolidated statements
of operations and cash flows for the thirteen and twenty-six
weeks ended August 1, 1997 and the thirteen and twenty-six
weeks ended August 2, 1996 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 August 1, 1997 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 31,
1997.

A plan of reorganization ("the Plan" or "Plan of
Reorganization") was filed on February 26, 1997, amended on
March 27, 1997, confirmed by the Bankruptcy Court on June 3,
1997 and implemented on June 16, 1997 (the "Effective Date").
See Note 2. Through the reorganization, management has
restructured the operations and capitalization of the Company
in order to strengthen the Company's financial position and
implement its business plan.

- 8 -
9

NOTE 2: On the Effective Date, certain key elements of the Plan were
implemented, including the changing of the Company's
corporate name from 50-OFF Stores, Inc. to LOT$OFF
Corporation ("LOT$OFF") and the cancellation of all common
stock in 50-OFF Stores, Inc. The Plan provided for the
recapitalization of the Company, partially through cash
raised from the Company's existing common stockholders.
Specifically, the Plan provided for the issuance to existing
common stockholders of rights to purchase units, consisting
of 20 shares of LOT$OFF Series A Preferred Stock and 20
shares of LOT$OFF Common Stock, with a minimum aggregate
purchase amount of $3,050,000. Contemporaneously with filing
the Plan, the Company filed a related disclosure statement
("the Disclosure Statement") setting forth more detailed
information regarding the Company and the Plan. Under
applicable Bankruptcy Court rules and procedures, a hearing
was held to review and approve the Disclosure Statement which
was approved March 20, 1997. Upon approval of the Disclosure
Statement by the Bankruptcy Court, the Plan and Disclosure
Statement were furnished to creditors and stockholders, and
votes in support of the Plan were solicited. The Plan was
approved by both creditors and stockholders, and a Bankruptcy
Court order confirming the Plan was entered on June 3, 1997.
At the confirmation hearing on June 3, 1997, the Company
announced it had received more than enough subscriptions for
the required minimum to be met. On June 16, 1997, the Plan
went effective, and the Company issued 856,080 shares of
LOT$OFF Series A Preferred Stock (each such share has a
liquidation preference of $5.00, is convertible into two
shares of LOT$OFF Common Stock and is entitled to a 5.5%,
$0.275, cumulative annual dividend; LOTSP: CUSIP #545674202)
and 856,080 shares of LOT$OFF Common Stock (LOTS: CUSIP #
545674103) to subscribers to its rights offering for gross
proceeds of $4,280,400.

On the Effective Date, LOT$OFF also entered into a
$15,000,000 revolving credit agreement maturing on June 16,
2000 with General Electric Capital Corporation ("GECC"). The
proceeds of the facility, together with the net proceeds from
the rights offering, were used to refinance the Company's
debtor-in-possession facility, also with GECC, and to provide
post-confirmation working capital for increased inventories
for its 41 continuing stores and selected other general
corporate purposes, including financing LOT$OFF's exit from
bankruptcy. See Note 3.

The Company's Plan of Reorganization also provided for the
cancellation of all non-priority unsecured indebtedness of
the Company. Such cancellation caused the elimination of
approximately $24.9 million of unsecured debt and $3.3
million of collateralized debt, which was initially converted
to an unsecured claim, from the Company's balance sheet. Each
holder of an allowed general unsecured claim will, in
cancellation of its claim, receive a pro rata share of
LOT$OFF's Series B Preferred Stock (798,210 shares, having a
liquidation preference of $3,991,050, in the aggregate). Each
share of Series B Preferred Stock is convertible into two
shares of LOT$OFF Common Stock. Certain obligations of the
Company to such holders of Series B Preferred Stock will be
secured by two liens against potential net lawsuit proceeds
from significant litigation being prosecuted by the Company.
See Note 4. As net proceeds (net of certain items set forth
in the Plan) from such litigation are received by the
Company, holders of Series B Preferred Stock will receive (i)
Series A Conversion Rights, which provide for the conversion
of Series B Preferred Stock to Series A Preferred Stock,
until net proceeds reach $3,991,050 and (ii) Series A
Preferred Stock for net proceeds in excess of $3,991,050
(provided that "excess" net proceeds, as defined in the Plan,
will be paid in cash). The receipt of Series A Conversion
Rights, Series A Preferred Stock and/or cash by holders of
Series B Preferred Stock will result in a proportionate
release of the liens. By issuing such Series B Preferred
Stock to general unsecured creditors, such creditors are
essentially receiving the net value of the Company's
litigation which was pending pre-Petition Date.

- 9 -

Management has been redirecting the Company's retail
activities from 50-OFF's off-price retailing concept to
LOT$OFF's close-out retailing concept. Coincident and
consistent with this change has been a change in the mix of
products, historically a majority in family apparel, to a
majority in non-apparel merchandise, principally through the
addition of new product categories to the Company's
historical non-apparel offerings which include cosmetics,
housewares and giftware, home furnishings, shelf-stable food
products, toys, luggage, footwear, stationery and health and
beauty aids. New categories include sporting goods,
automotive, greeting cards, jewelry, books, party goods,
seasonal, pet supplies and hardware, among others. The
Company will continue to maintain a healthy showing of basic
family apparel products in the LOT$OFF stores. The actual
merchandise mix will fluctuate by category, by season and by
store based on customer needs and buying trends, demographics
and the availability of products at close-out prices. This
merchandise concept is designed to appeal to value-conscious
shoppers and other "bargain hunters," and management is
hopeful its continued implementation will lead to higher
initial mark-ups, less promotional pricing, fewer markdowns,
low inventory shrinkage, increased store traffic and improved
operating results.

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 comply with the terms, covenants and
conditions of its post-confirmation credit facility, the
degree of success in reversing the Company's recent business
trends (by increasing sales and operating profits) and the
ability to alleviate trade credit concerns and restore
merchandise flows to adequate levels. While management
believes that the recent closings of stores and the
implementation of expense cuts commensurate with the
downsizing of the total stores in operation (from 101 to 41
stores) facilitates its efforts to improve the Company's
operating performance and that the recapitalization
implemented on the Effective Date of its Plan of
Reorganization should strengthen its financial position and
alleviate concerns of credit and merchandise suppliers [the
anticipated judgment and receipt of proceeds from the
Company's lawsuits (see Note 4) should further strengthen its
financial position], no assurance can be given that the
Company will be successful in its continuing efforts to
reverse negative business trends, which have continued
through August 1997, and return to profitability. For this
reason, any investment in LOT$OFF's Common and Series A
Preferred Stocks should be considered speculative.

If the Company's plans to improve operations are not
successful, management will consider, among other
alternatives, strategic and/or financial alliances with third
parties and the merger, sale or liquidation of all or a part
of the Company.

NOTE 3: On May 13, 1996, the Company entered into a credit facility
with two financial corporations providing the Company with a
line of credit through May 1998 of up to $22,500,000. The
line of credit was collateralized by inventory, accounts
receivable and other assets. The credit agreement contained
various restrictive covenants, including financial covenants.
On August 8, 1996, the Company was notified that it was in
violation of the minimum gross margin (disputed) and the
minimum working capital financial covenants and that such
breaches constituted events of default under the loan
documents. The Company was unable to secure the resources
required to cure the defaults under the loan documents
without the protections afforded under Chapter 11. As of
November 1, 1996, the Company had approximately $7,335,000
outstanding under the credit facility and, with the support
and by order of the Bankruptcy Court, was using cash
collateral for working capital needs. This facility was paid
off in November 1996 (after the Company's Filing).

On November 18, 1996, the Company, with the approval of the
Bankruptcy Court, entered into a credit agreement with GECC
providing the Company with a line of credit through November

- 10 -

1997 of up to $15,000,000. The line of credit was
collateralized by inventory, accounts receivable and other
assets. The credit agreement contained various restrictive
covenants, including financial covenants. This facility was
paid off on June 16, 1997 (the Effective Date of the Plan).

On June 16, 1997, LOT$OFF, with the approval of the
Bankruptcy Court, entered into a credit agreement with GECC
(amended August 28, 1997) providing LOT$OFF with a revolving
credit facility through June 16, 2000 of up to $15,000,000.
The new credit facility bears interest at a floating rate
equal to the published rate for thirty-day commercial paper
issued by major corporations (5.58% at August 1, 1997) plus
3% per annum and provides for an unused facility fee of 0.5%
per annum. Borrowings under the facility are available in
aggregate amounts up to 65% of LOT$OFF's eligible inventory
at cost 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 line of credit is
collateralized by inventory, accounts receivable and other
assets. The credit agreement contains various restrictive
covenants, including restrictions on the payment of dividends
on common stock. The agreement also contains minimum gross
margin, minimum EBITDA, minimum inventory, minimum working
capital and maximum capital expenditure financial covenants.
As of August 1, 1997, LOT$OFF had approximately $5,530,000
available for borrowings under the line (after reserves of
approximately $899,000), of which approximately $3,400,000
was committed, leaving a net availability of approximately
$2,130,000.

NOTE 4: On February 21, 1995, the Company filed a lawsuit [50-Off
Stores, Inc. v. Banque Paribas (Suisse), S.A., Betafid, S.A.,
Yanni Koutsoubos, Andalucian Villas (Forty Eight) Limited,
Arnass Limited, Brocimast Enterprises Ltd., Dennis Morris,
Howard White, 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"), Betafid S.A., Chase Manhattan Bank, N.A.
("Chase") and certain affiliated individuals and companies in
connection with the theft of 1,500,000 shares of the
Company's old common stock which certain of the defendants
had agreed to purchase. Among other counts, the lawsuit
alleges securities fraud, conspiracy and conversion. The
conversion claim relates to actions of the defendants in
transferring, selling and trading the shares even though the
defendants have never paid for such shares. The Company seeks
recovery of actual and punitive damages, pre- and
post-judgment interest, attorneys' fees and such other
remedies to which the company may show itself entitled.

Paribas, Chase, Morris and White answered the complaint.
Defaults were entered against Arnass, Andalucian Villas,
Brocimast, Betafid and Koutsoubos for failure to appear or
answer.

Paribas moved to dismiss the action for lack of personal
jurisdiction, failure to state a claim and for forum non
conveniens. The District Court referred all pre-trial matters
to U.S. Magistrate Judge John W. Primomo, who denied each of
Paribas' motions to dismiss. U.S. District Judge H.F. Garcia
has adopted Judge Primomo's rulings in their entirety.

On March 20, 1997, Paribas answered the Company's complaint
asserting a number of affirmative defenses, including
contributory negligence. Paribas also asserted a counterclaim
against the Company for defamation. The Company has moved to
dismiss this counterclaim and strike Paribas' affirmative
defenses. Judge Primomo has recommended such dismissal and
the striking of the affirmative defenses. Judge Garcia again
adopted Judge Primomo's rulings in their entirety.

- 11 -

On June 23, 1997, Paribas moved for summary judgment. Judge
Primomo recently recommended that the Company be permitted to
proceed against Paribas on counts of securities fraud,
conversion and conspiracy. The Court also recommended that
the Company be permitted to proceed against Chase for
conversion. The parties have largely completed all discovery
and are currently preparing a joint pretrial order. This
matter is currently set for jury trial on October 14, 1997.

On January 9, 1996, the Company filed another lawsuit [50-OFF
Stores, Inc. v. Jefferies & Company, Inc. and Jefferies
International, Ltd., Cause No. 96-CI-00349] in Bexar County
District Court in San Antonio, Texas against the Company's
placement agents in the securities offering referenced in the
lawsuit discussed above. Among other things, the suit alleges
that the defendants breached their contracts with the Company
and breached their fiduciary duties to the Company in failing
to investigate properly the qualifications of the purchasers
they introduced to the Company. The Company seeks to recover
actual and exemplary damages in excess of $10,000,000, pre-
and post-judgment interest, costs and attorney's fees. Both
defendants have answered the petition and raised the
affirmative defense of contributory negligence. Additionally,
Jefferies & Company filed a cross-claim against Howard White.
Discovery is proceeding.

Soon after the Company filed for protection under the
Bankruptcy Code, Jefferies and White removed this case to the
Bankruptcy Court. The United States District Court granted
the Company's motion to abstain from hearing the case and
remanded the case back to the Bexar County District Court.

One June 26, 1997, the defendants moved for summary judgment
on all claims. Judge Peeples denied the defendant motion as
to the Company's breach of contract and breach of fiduciary
duty claims.

This matter has been specially set for jury trial on March
23, 1998. The Bexar County District Court ordered the parties
to conduct mediation of the case. On August 9, 1997, the
parties in both lawsuits conducted a mediation. Although the
parties were unable to resolve the lawsuits at that time,
settlement discussions have continued among the parties.

The Company will continue to prosecute these cases
vigorously. The Company believes its claims against these
defendants are meritorious. The Company, based upon advice of
counsel, believes that it will obtain a favorable judgment
against one or more of the defendants referenced in the
preceding two lawsuits. The Company intends to vigorously
pursue all remedies to collect the sums owing to the Company
as per any judgment obtained against one or more of the
defendants.

The Company is party to certain other legal proceedings
arising in the ordinary course of business, none of which are
believed to be material.

- 12 -
13

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
-------------------- ----------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
--------- --------- --------- ---------

Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 69.5 70.5 67.0 71.1
Selling, advertising, general and
administrative 48.0 40.4 48.4 39.9
Depreciation and amortization 1.7 3.0 1.6 3.0
--- --- --- ---
Operating income (loss) before
reorganization items (19.2) (13.9) (17.0) (13.9)
Reorganization items 1.9 - 2.2 -
Operating income (loss) (21.1) (13.9) (19.2) (13.9)
Other expense, net 1.2 1.9 1.2 1.5
--- --- --- ---
Total expenses 122.3 115.8 120.4 115.4
--- --- --- ---
Income (loss) before income taxes (22.3) (15.8) (20.4) (15.4)
(Benefit from) income taxes - - - -
--- --- --- ---
Net income (loss) (22.3)% (15.8)% (20.4)% (15.4)%
===== ===== ===== =====

Percentage Change
---------------------------------------------------------
Thirteen Weeks Ended Twenty-six Weeks Ended
August 1, 1997 compared to August 1, 1997 compared to
Thirteen Weeks Ended Twenty-six Weeks Ended
August 2, 1996 August 2, 1996
-------------------------- -------------------------

Net sales (67.3)% (65.2)%
Cost of sales (67.7) (67.2)
Selling, advertising, general
and administrative (61.2) (57.8)
Depreciation and amortization (81.7) (81.7)
Operating income (loss) before
reorganization items (45.6) (42.2)
Reorganization items N/A N/A
Operating income (loss) (50.2) (45.2)
Other expense, net (78.9) (71.8)
Income (loss) before income taxes (53.6) (54.1)
(Benefit from) income taxes - -
Net income (loss) (53.6)% (54.1)%

- 13 -

Thirteen weeks ended August 1, 1997 compared to thirteen weeks ended
August 2, 1996:

The net sales decrease of 67.3% for the thirteen weeks ended August 1, 1997
compared to the thirteen weeks ended August 2, 1996 is attributable to a 59.1%
decrease in the weighted average number of stores in operation (from 100.3
stores to 41.0 stores) and a decrease in comparable store sales (due primarily
to inventory imbalances among the 41 continuing stores and the lack of
resources to effectively promote customer traffic to such stores). Also
contributing to this decrease were the increased net sales pertaining to
liquidations of inventory at thirteen 50-OFF stores in the process of
converting to LOT$OFF stores during the thirteen weeks ended August 2, 1996.

Cost of sales as a percentage of net sales decreased from 70.5% for the
thirteen weeks ended August 2, 1996 to 69.5% for the thirteen weeks ended
August 1, 1997, due primarily to lower markdowns as a percentage of net sales
as compared to the comparable period of the prior year when an approximately
$2,218,000 write-down of inventories in anticipation of 37 store liquidations
scheduled to begin in September was taken.

Selling, advertising, general and administrative expenses increased from 40.4%
of net sales for the thirteen weeks ended August 2, 1996 to 48.0% of net sales
for the thirteen weeks ended August 1, 1997 due primarily to lower sales. The
61.2% decrease in the amount of selling, advertising, general and
administrative expense compared to the thirteen weeks ended August 2, 1996 was
the result of the 59.1% decrease in the weighted average number of stores in
operation.

Depreciation and amortization decreased by 81.7% in the thirteen weeks ended
August 1, 1997 compared to the comparable period of the prior year, due
primarily to the substantial decrease in the number of stores in operation and
to substantial prior write-downs of fixed assets. In connection with the
Filing, the Company recorded as a reorganization expense in later periods of
fiscal 1997 the write-down to fair value, as determined by the Company's lender
based on the value of certain assets liquidated by the lender and on the
Company's, the lender's and an independent party's strategic review, of certain
equipment and leasehold improvements. . Other expense, net, decreased to
approximately $127,000 in the thirteen weeks ended August 1, 1997 compared to
approximately $603,000 in the comparable period of the prior year, due
primarily to decreased interest expense attributable to decreased borrowings
under the Company's line of credit, a substantially lower effective interest
rate on such borrowings and the Company's discontinuing the accrual of interest
on certain of its other obligations through June 16, 1997. . The decrease in
the Company's loss before income taxes for the thirteen weeks ended August 1,
1997 compared to the thirteen weeks ended August 2, 1996 is primarily due to
higher maintained margins (higher initial markups, less promotional pricing,
fewer markdowns and less inventory shrinkage) and lower depreciation,
amortization and interest expenses, offset, in part, by $200,000 of
reorganization expenses.

Income tax benefits related to the losses for the thirteen weeks ended August
1, 1997 and August 2, 1996 were not recognized because the utilization of such
benefits is not assured. Such benefits, if any, remaining after the Company's
reorganization, are available for recognition in future years.

- 14 -

Twenty-six weeks ended August 1, 1997 compared to twenty-six weeks ended
August 2, 1996:

The net sales decrease of 65.2% for the twenty-six weeks ended August 1, 1997
compared to the twenty-six weeks ended August 2, 1996 is attributable to a
58.9% decrease in the weighted average number of stores in operation (from
100.4 stores to 41.3) and a decrease in comparable store sales (due primarily
to inventory imbalances among the 41 continuing stores and the lack of
resources to effectively promote customer traffic to such stores). Also
contributing to this decrease were the increased net sales pertaining to
liquidations of inventory at Oklahoma and Dallas area 50-OFF stores in the
process of converting to LOT$OFF stores during the thirteen weeks ended August
2, 1996.

Cost of sales as a percentage of net sales decreased from 71.1% for the
twenty-six weeks ended August 2, 1996 to 67.0% for the twenty-six weeks ended
August 1, 1997, due primarily to lower markdowns as a percentage of net sales
(i.e., higher maintained margins) as compared to the comparable period of the
prior year when substantial write-downs of inventories in the stores liquidated
in connection with the conversions discussed above and scheduled for late May
1996 through early July 1996 or in the 37 stores scheduled to be liquidated and
closed in September 1996 were taken.

Selling, advertising, general and administrative expenses increased to 48.4% of
net sales for the twenty-six weeks ended August 1, 1997 from 39.9% of net sales
for the twenty-six weeks ended August 2, 1996 due primarily to lower sales. The
57.8% decrease in the amount of selling, advertising, general and
administrative expense compared to the twenty-six weeks ended August 2, 1996
was the result of the 58.9% decrease in the weighted average number of stores
in operation.

Depreciation and amortization decreased by 81.7% in the twenty-six weeks ended
August 1, 1997 compared to the comparable period of the prior year, due to the
substantial decrease in the number of stores in operation and to substantial
prior write-downs of fixed assets. In connection with the Filing, the Company
recorded as a reorganization expense in later periods of fiscal 1997 the
write-down to fair value, as determined by the Company's lender based on the
value of certain assets liquidated by the lender and on the Company's, the
lender's and an independent party's strategic review, of certain equipment and
leasehold improvements.

Other expense, net decreased to approximately $269,000 in the twenty-six weeks
ended August 2, 1996 compared to approximately $954,000 in the comparable
period of the prior year, due primarily to decreased interest expense
attributable to decreased borrowings under the Company's line of credit, a
substantially lower effective interest rate on such borrowings and the
Company's discontinuing the accrual of interest on certain of its other
obligations through June 16, 1997.

The decrease in the Company's loss before income taxes for the twenty-six weeks
ended August 1, 1997 compared to the twenty-six weeks ended August 2, 1996 is
primarily due to higher maintained margins (higher initial markups, less
promotional pricing, fewer markdowns and less inventory shrinkage) and lower
depreciation, amortization and interest expenses, offset, in part, by $500,000
of reorganization expenses.

Income tax benefits related to the losses for the twenty-six weeks ended August
1, 1997 and August 2, 1996 were not recognized because the utilization of such
benefits is not assured. Such benefits, if any, remaining after the Company's
reorganization, are available for recognition in future years. As of August 1,
1997, the Company had federal tax net operating loss carryforwards of
approximately $52,875,000 expiring through 2013, alternative minimum tax credit
carryforwards of approximately $337,000 which are available to offset regular
federal income taxes in the future until fully utilized, and targeted jobs
credit carryforwards of approximately $178,000 expiring in 2006 through 2009.
As a result of the Chapter 11 proceedings and the related Plan of
Reorganization, the net operating loss (NOL) carryforwards, tax credit
carryforwards and other tax attributes of the Company will be reduced (perhaps
significantly) as a result of debt forgiveness income in accordance with

- 15 -

section 108(b) of the Internal Revenue Code (IRC). In addition, IRC section 382
limits NOL and tax credit carryforwards when an ownership change of more than
fifty percent of the value of stock in a loss corporation occurs within a three
year testing period. Under the Plan of Reorganization, the ownership of the
Company may 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), the ability to utilize such remaining NOL and tax credit
carryforwards may be significantly restricted.

Store Conversion Program

The Company is proceeding with its store conversion program, from an off-price
("50-OFF") to a close-out ("LOT$OFF") retailing concept, at 17 store locations
in 13 markets. The week of August 25, 1997, such conversions were implemented
at the Company's store locations in Brownsville, Harlingen, Pharr, McAllen,
Roma and Laredo, Texas with "Grand Re-Openings" on Saturday, August 30, and
running through Labor Day weekend. The balance of the conversions (in
Albuquerque, Baton Rouge, Bossier City, El Paso, Memphis, New Orleans and
Shreveport) are scheduled for the week of September 28 with "Grand Re-Openings"
planned for Saturday, October 4. Upon completion of these conversions, the
Company will have all 41 of its stores (Texas, Louisiana, Oklahoma, New Mexico
and Tennessee) converted to the Company's new store name ("LOT$OFF") and
retailing concept.

Liquidity and Capital Resources

The Company began fiscal 1998 with cash of $491,297. During the twenty-six
weeks ended August 1, 1997, the Company decreased borrowings by a net of
$1,932,878, used $2,017,265 in operating activities, used $182,549 for capital
expenditures in refurbishing existing stores and converting ten 50-OFF stores
to LOT$OFF stores, received net proceeds of $4,094,783 from its rights offering
and ended the period with cash on hand of $453,388.

On June 16, 1997, LOT$OFF, as part of its Plan of Reorganization and with the
approval of the Bankruptcy Court, entered into a credit agreement with GECC
(amended August 28, 1997) providing LOT$OFF with a revolving credit facility
through June 16, 2000 of up to $15,000,000. See Note 3 of "Notes to Condensed
Consolidated Financial Statements," above. As of September 8, 1997, LOT$OFF had
approximately $6,270,000 available for borrowings under the line (after
reserves of approximately $895,000), of which approximately $4,361,000 was
committed, leaving a net availability of approximately $1,909,000.

The Company believes borrowings available under its revolving credit facility,
trade credit, its restructuring of certain obligations under the Plan, its
operating cash flow and its cash on hand, together with the net proceeds from
the rights offering (see Note 1 of "Notes to Condensed Consolidated Financial
Statements," above), will be adequate to finance its operations, including
increased inventories for its 41 continuing stores, to convert the remaining 17
50-OFF stores to LOT$OFF stores and for other general corporate purposes,
including financing the balance of the Company's exit from bankruptcy
(estimated to require, as of September 8, 1997, approximately $735,000,
approximately $500,000 of which will be paid over approximately four months)
through the remainder of fiscal 1998. 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 reverse recent business trends and
return to profitability. The receipt of proceeds from the significant
litigation brought by the Company could add significantly to the Company's
capital resources and liquidity (see "Significant Litigation," below).

If the Company's plans to improve operations are not successful, management
will consider, among other alternatives, strategic and/or financial alliances
with third parties and the merger, sale or liquidation of all or a part of the
Company. See Note 2 of "Notes to Condensed Consolidated Financial Statements,"
above.

- 16 -

Significant Litigation

The Company has filed a lawsuit related to certain parties' breaches of
contractual obligations to purchase 1,500,000 shares of the Company's 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 prosecute this matter and to pursue all available avenues to effect
the receipt of payment for such shares, plus actual and punitive damages. The
Company, based upon advice of counsel, believes that it will obtain a favorable
judgment or result in this court action. See Note 4 of "Notes to Condensed
Consolidated Financial Statements," above, for further discussion of this
matter and information pertaining to a related lawsuit filed by the Company
against the placement agents. Both suits are being handled by counsel on a
contingency basis.

Seasonality

Historically (excluding fiscal 1997), the Company's highest net sales and
operating income have been experienced during the fourth fiscal quarter, which
includes the holiday selling season. Any adverse trend in sales or shortage of
merchandise during such period could have a material adverse effect upon the
Company's overall profitability and adversely affect its results of operations
for the entire fiscal year.

PART II

ITEM 1. LEGAL PROCEEDINGS

See Note 4 of "Notes to Condensed Consolidated Financial Statements," herein,
regarding lawsuits filed in February 1995 and January 1996. Such lawsuits were
also reported in the Company's annual reports on Form 10-K for the fiscal years
ended February 3, 1995, February 2, 1996 and January 31, 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

On October 9, 1996 (the "Petition Date"), the Company and its significant
subsidiaries filed petitions (the "Filing") for relief under Chapter 11 of the
Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the
Western District of Texas (the "Bankruptcy Court"). A plan of reorganization
("the Plan" or "Plan of Reorganization") was filed on February 26, 1997,
amended on March 27, 1997, confirmed by the Bankruptcy Court on June 3, 1997
and implemented on June 16, 1997 (the "Effective Date"). On the Effective Date
certain key elements of the Plan were implemented, including the changing of
the Company's corporate name from 50-OFF Stores, Inc. to LOT$OFF Corporation
("LOT$OFF") and the cancellation of all common stock in 50-OFF Stores, Inc. The
Plan provided for the recapitalization of the Company, partially through cash
raised from the Company's existing common stockholders. On June 16, 1997, the
Plan went effective, and the Company issued 856,080 shares of LOT$OFF Series A
Preferred Stock (each such share has a liquidation preference of $5.00, is
convertible into two shares of LOT$OFF Common Stock and is entitled to a 5.5%,
$0.275, cumulative annual dividend; LOTSP: CUSIP #545674202) and 856,080 shares
of LOT$OFF Common Stock (LOTS: CUSIP # 545674103) to subscribers in its rights
offering for gross proceeds of $4,280,400. The Company's Plan of Reorganization
also provided for the cancellation of all non-priority unsecured indebtedness
of the Company. Such cancellation caused the elimination of approximately $24.9
million of unsecured debt and $3.3 million of collateralized debt, which was
initially converted to an unsecured claim, from the Company's balance sheet.
Each holder of an allowed general unsecured claim will, in cancellation of its
claim, receive a pro rata share of LOT$OFF's Series B Preferred Stock (798,210
shares, having a liquidation preference of $3,991,050, in the aggregate). Each
share of Series B Preferred Stock is convertible into two shares of

- 17 -

LOT$OFF Common Stock. Certain obligations of the Company to such holders of
Series B Preferred Stock will be secured by two liens against potential net
lawsuit proceeds from significant litigation being prosecuted by the Company.
See Note 4 to "Notes to Condensed Consolidated Financial Statements," herein.
As net proceeds (net of certain items set forth in the Plan) from such
litigation are received by the Company, holders of Series B Preferred Stock
will receive (i) Series A Conversion Rights, which provide for the conversion
of Series B Preferred Stock to Series A Preferred Stock, until net proceeds
reach $3,991,050 and (ii) Series A Preferred Stock for net proceeds in excess
of $3,991,050 (provided that "excess" net proceeds, as defined in the Plan,
will be paid in cash). The receipt of Series A Conversion Rights, Series A
Preferred Stock and/or cash by holders of Series B Preferred Stock will result
in a proportionate release of the liens.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

On October 9, 1996, the Company and its significant subsidiaries filed
petitions under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the Western District of Texas. A Plan of Reorganization
was filed on February 26, 1997, amended on March 27, 1997, confirmed by the
Bankruptcy Court on June 3, 1997 and implemented on June 16, 1997.

ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

Exhibit 10.6 - General Electric Capital Corporation Revolving
Credit Agreement
Exhibit 10.7 - First Amendment to General Electric Capital
Corporation Revolving Credit Agreement
Exhibit 27.0 - Financial Data Schedule

No other exhibits are required to be filed by the Registrant under Item 601 of
Regulation S-K with this report on Form 10-Q.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended August 1,
1997.

- 18 -

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 and Financial Officer

By: /s/ James G. Scogin
-----------------------------
James G. Scogin, Vice-President,
Controller, Chief Accounting
Officer, Treasurer and Secretary

- 19 -

EXHIBIT INDEX

Page

Exhibit 10.6 - General Electric Capital Corporation Revolving Credit Agreement . . . . . . . . . 21
Exhibit 10.7 - First Amendment to General Electric Capital Corporation
Revolving Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Exhibit 27.0 - Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119