<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 4, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _________________ to _________________
Commission file number 0-19994
---------------------------------------------
SOLO SERVE CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74 - 2048057
------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1610 Cornerway Blvd., San Antonio, Texas 78219
----------------------------------------------
(Address of principal executive offices)
(210) 662-6262
--------------
(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
---------- ----------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 2, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
---------- ----------
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of the issuer's Common Stock, par value $.01 per share,
and Preferred Stock, par value $.01 per share, outstanding as of April 30,
1996, were 2,856,126 and 1,388,889 shares, respectively.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1. Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets, April 29, 1995 (unaudited),
February 3, 1996 and May 4, 1996 (unaudited) . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations, thirteen weeks ended
April 29, 1995 (unaudited) and May 4, 1996 (unaudited) . . . . . . . . . . 4
Consolidated Statements of Cash Flows, thirteen weeks ended
April 29, 1995 (unaudited) and May 4, 1996 (unaudited) . . . . . . . . . . 5
Notes to Consolidated Financial Statements
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 6. Exhibits and Reports on Form 8 - K . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
PART I
ITEM I. Financial Statements
SOLO SERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 29, FEBRUARY 3, MAY 4,
ASSETS 1995 1996 1996
-------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 9,789,807 $ 771,527 $ 1,344,773
Inventory 22,290,623 14,210,180 15,459,253
Other current assets 2,151,616 2,273,630 2,255,850
-------------------------------------------------
Total current assets 34,232,046 17,255,337 19,059,876
Property and equipment, net 17,386,726 15,634,267 15,071,813
Goodwill and service marks, net 499,999 410,000 380,000
Receivables from factors 1,590,205 - -
-------------------------------------------------
TOTAL ASSETS $ 53,708,976 $ 33,299,604 $ 34,511,689
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 683,951 $ 696,141
Accounts payable 7,098,573 3,426,821 4,334,776
Accrued expenses 3,916,726 3,210,010 3,816,412
-------------------------------------------------
Total current liabilities 11,015,299 7,320,782 8,847,329
Long-term debt 5,000 15,135,885 16,259,862
Postretirement benefit obligation 501,300 565,200 560,200
LIABILITIES SUBJECT TO COMPROMISE 32,679,653 460,612 -
-------------------------------------------------
TOTAL LIABILITIES 44,201,252 23,482,479 25,667,391
-------------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock - 13,889 13,889
Common stock 57,123 28,562 28,562
Capital in excess of par value 21,895,618 24,410,290 24,410,290
Retained deficit (12,445,017) (14,635,616) (15,608,443)
-------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 9,507,724 9,817,125 8,844,298
-------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,708,976 $ 33,299,604 $ 34,511,689
=================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SOLO SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
APRIL 29, MAY 4,
1995 1996
-----------------------------
<S> <C> <C>
Net Sales $ 25,176,461 $ 22,259,970
Cost of goods sold (including buying and distribution, excluding depreciation
shown below) 19,094,138 15,744,332
-----------------------------
Gross Profit 6,082,323 6,515,638
Selling, general, and administrative expenses 7,427,190 6,476,008
Depreciation and amortization expenses 757,267 643,895
-----------------------------
Operating loss (2,102,134) (604,265)
Interest expense 165,205 368,562
-----------------------------
Loss before reorganization items and taxes (2,267,339) (972,827)
-----------------------------
Reorganization items
Provision for other reorganization expenses 496,146 0
Interest earned on accumulated cash resulting from Chapter 11 proceedings (122,844) 0
-----------------------------
373,302 0
-----------------------------
Loss before taxes (2,640,641) (972,827)
Income tax expense (benefit)
Current 0 0
Deferred 0 0
-----------------------------
0 0
-----------------------------
Net loss $ (2,640,641) $ (972,827)
=============================
Loss per common share $ (.93) $ (.34)
=============================
Weighted average common shares outstanding 2,849,867 2,856,126
=============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SOLO SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
APRIL 29, 1995 MAY 4, 1996
--------------------------------
<S> <C> <C>
NET LOSS $ (2,640,641) $ (972,827)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH FROM OPERATIONS:
Depreciation and Amortization 757,267 643,895
Changes in Assets and Liabilities:
(Increase) decrease in Inventory (7,341,793) (1,249,073)
(Increase) decrease in Other Current Assets 303,533 17,780
(Increase) decrease in Other Non-Current Assets 72,730
Increase (decrease) in Accounts Payable 2,128,381 907,955
Increase (decrease) in Accrued Expenses (314,852) 606,402
Increase (decrease) in Non Current Liabilities - (5,000)
--------------------------------
Total adjustments (4,394,734) 921,959
--------------------------------
Net cash used by operations before reorganization items (7,035,375) (50,868)
OPERATING CASH FLOW FROM REORGANIZATION ITEMS:
Provision for other reorganization expenses 496,146 (460,612)
Payments on allowed claims (589,902) -
--------------------------------
Net cash used by operations: (7,129,131) (511,480)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Property & Equipment (102,265) (51,442)
--------------------------------
CASH USED IN INVESTING ACTIVITIES (102,265) (51,442)
--------------------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Borrowings under line of credit agreement 24,887,129
Payments under line of credit agreement - (23,577,129)
Payments on long-term debt (62,354) (173,832)
--------------------------------
Net cash provided (used) by finance activities (62,354) 1,136,168
--------------------------------
NET INCREASE (DECREASE) IN CASH (7,293,750) 573,246
CASH AT BEGINNING OF YEAR 17,083,557 771,527
--------------------------------
CASH AT END OF PERIOD $ 9,789,807 $ 1,344,773
================================
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 165,434 $ 360,735
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SOLO SERVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1:
The financial statements as of April 29, 1995 and May 4, 1996, and for the
thirteen week periods ended April 29, 1995 and May 4, 1996 are unaudited and
reflect all adjustments which are, in the opinion of management, necessary for
a fair presentation of the financial position of Solo Serve Corporation (the
"Company") as of May 4, 1996, and the results of operations and cash flows for
the periods presented. Such adjustments are of a normal and recurring nature
except for the adjustment resulting from the reorganization discussed in Note
2. The results of operations for the thirteen week period is not necessarily
indicative of the operating results for a full year or of future operations.
These unaudited financial statements should be read in conjunction with
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 3, 1996.
With respect to the unaudited financial information of the Company as of April
29, 1995 and May 4, 1996 and for the thirteen weeks ended April 29, 1995 and
May 4, 1996, Price Waterhouse LLP has made a review (based on procedures
adopted by the American Institute of Certified Public Accountants) and not an
audit, as set forth in their separate report appearing as Exhibit 99.
NOTE 2:
On July 21, 1994 (the "Petition Date"), the Company filed a petition (the
"Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United
States Bankruptcy Court for the Western District of Texas (the "Bankruptcy
Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed Plan of
Reorganization (the "Plan") jointly sponsored by the Official Committee of
Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which
became effective on July 18, 1995. Under the Plan, the Unsecured Creditors
agreed to a distribution of 72.5% of pre-petition unsecured allowed claims.
The total amount of pre-petition unsecured allowed claims was $15.6 million.
Additionally, the Plan allowed for cash distributions for certain secured and
priority claims which totaled $2.2 million. On the effective date of the Plan,
the Company issued 1,388,889 shares of convertible Preferred Stock for an
aggregate consideration of $2.5 million. All of the Preferred Stock was
purchased by General Atlantic Corporation ("GAC"), the Company's largest
stockholder. On July 31, 1995, the Company disbursed $10.2 million to its
creditors in accordance with the First Distribution as proposed by the Plan.
The second and final distribution, which occurred on December 20, 1995, was
approximately $3.5 million. The second distribution was financed in part by
$2.5 million of funds in escrow which were the proceeds from the sale of the
Company's Preferred Stock. On April 17, 1996, the Bankruptcy Court entered the
Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy
case.
Pursuant to the Plan the Company's existing common stock was subject to a
one-for-two reverse split. The Preferred Stock issued in connection with the
Plan has a liquidation value of $1.80 per share, is convertible to an equal
number of common shares, has voting rights on an as converted basis, and pays
no preferential dividends. With the issuance of Preferred Stock mentioned
above, GAC has increased its percentage ownership of the voting shares of the
Company to approximately 62% from its pre-reorganization interest of
approximately 44%.
The settlement of the Company's pre-petition liabilities reduced the Company's
net operating loss carryforwards and other tax credit carryforwards by
approximately $4.2 million. The above mentioned equity infusion by GAC has not
caused an ownership change that would limit the future utilization of the
Company's remaining net operating loss carryforwards and other tax credit
carryforwards. However, future ownership changes could result in such
limitations.
In an effort to improve the Company's financial performance and in connection
with the Company's bankruptcy reorganization, the Company reduced the number of
stores, implemented expense reductions commensurate with the downsizing of the
total stores in operation, and improved liquidity by restructuring its
pre-petition debt and obtaining a new credit facility. Since the effective
date of the Plan, the Company has continued to experience lower than
anticipated sales and continuing operating losses. The Company's business
continues to be affected by a number of factors, including, but not limited to,
the continuing weakness in the apparel industry, unfavorable economic
conditions in the Company's principal markets and other business risks, many of
which are not within the Company's control. In addition, the Company continues
to experience increased competitive pressure on both price points and market
share. Increased competitive pricing and promotional strategies have put
significant downward pressure on price points, and competitors have opened
additional store locations in the Company's principal markets. While the
Company has maintained inventory at planned levels, continuing unfavorable
business conditions and financial performance have heightened vendor and factor
concern regarding the Company's creditworthiness, which could adversely affect
the Company's ability to receive sufficient trade credit support to acquire
adequate levels of inventory in the future.
6
<PAGE> 7
For 1996, management has developed and is implementing a business strategy
which seeks to achieve higher gross margins on lower comparable store sales
than in fiscal 1995. The key elements of this strategy are lower average store
inventories, quick price reduction on slower moving merchandise, constant flow
of fresh merchandise, less promotional activity , selectively higher initial
markups and a reduced expense structure. Although management believes the
current business strategy is appropriate in light of business conditions and
recent sales trends, the Company has continued to experience operating losses
and no assurance can be given that the Company will be successful in its
efforts to improve sales and operations and reverse recent operating trends.
NOTE 3:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 29, 1995 FEBRUARY 3, 1996 MAY 4, 1996
---------------------------------------------------
<S> <C> <C> <C>
Notes payable to bank, interest at prime plus 1/2%
(8.75% at May 4, 1996) secured by properties - $ 5,437,572 $ 5,361,302
Note payable to insurance company, interest at 8%; secured by
equipment and properties - 1,006,861 921,297
Mortgage notes payable to insurance companies, interest at 9.5%;
secured by the distribution center - 5,810,403 5,798,404
Congress Loan Agreement, interest at prime plus 1%
(9.25% at May 4, 1996); secured primarily by inventory 5,000 3,565,000 4,875,000
---------------------------------------------------
5,000 15,819,836 16,956,003
Less current portion - 683,951 696,141
---------------------------------------------------
Long-term portion $ 5,000 $ 15,135,885 $ 16,259,862
===================================================
</TABLE>
As part of its Plan of Reorganization, the Company restructured its
pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8
million mortgage note, secured by the Company's corporate office and
distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.46% per annum and requires monthly payments of $49,773 until
December 2002, when the balance is due. The Company also modified and assumed
a note payable to MetLife Capital Corporation ("MetLife"), which is secured by
various equipment and fixtures located at the corporate office and certain
stores. The MetLife note carries an interest rate of 8.0% and requires equal
monthly payments, including principal and interest, of $35,044. The Company
also entered into a term note payable to TCB which carries an interest rate of
prime plus one-half percent and is due in equal monthly installments of
principal and interest of $64,117 until January 1999, when the balance is due.
The Company entered into a loan agreement with Congress Financial Corporation
(Southwest) ("Congress") on June 20, 1995, which became effective on the
effective date of the Plan. Under the terms of the loan agreement, which is in
effect until July 1998, the Company may borrow up to its borrowing base as
calculated pursuant to the loan agreement, which may not exceed $15.0 million.
The proceeds of the loan may be used for letters of credit, working capital,
and general corporate purposes. The loan as amended is a revolving loan with a
borrowing base formula which limits the amount of available credit to 52% of
the Company's eligible inventory during the period of September 1st to December
20th of each year and to 42% of the Company's eligible inventory during any
other period less (i) a percentage of undrawn amounts on letters of credit and
(ii) availability reserves established from time to time by the lender. The
loan bears interest at prime plus 1%. In addition, the Company pays a
commitment fee equal to 1/2% per annum of the amount of the unused facility.
The loan is secured by substantially all the assets of the Company other than
those subject to other existing liens.
7
<PAGE> 8
The Company and Congress have amended certain financial covenants in the loan
agreement to the following:
<TABLE>
<CAPTION>
Millions of Dollars
-------------------
Fiscal 1996 Fiscal 1997 Fiscal 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum working capital $ 7.2 $ 9.0 $ 9.0
Minimum net worth 7.5 10.7 10.7
Limitation on capital expenditures* 2.5 2.5 2.5
</TABLE>
*Net of insurance or other proceeds resulting from the disposal or sale of
fixed assets.
Under the loan agreement, Congress may establish and revise availability
reserves in its sole discretion to cover risks or events it perceives may
affect its security under the loan or the business or prospects of the Company.
As of the balance sheet date, the availability reserve under the loan agreement
approximates $1.4 million. As a result of the formula by which the borrowing
base is calculated, an increase in availability reserves restricts the
Company's access to borrowings under the credit facility.
8
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NUMBER OF STORES
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------- -----------
<S> <C> <C>
Beginning of year 30 29
First Quarter Additions 0 0
First Quarter Dispositions 0 0
----------- -----------
END OF FIRST QUARTER 30 29
=========== ===========
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company expressed
as a percentage of net sales for the thirteen weeks (first quarter) ended April
29, 1995 and May 4, 1996.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
APRIL 29, 1995 MAY 4, 1996
-----------------------------
<S> <C> <C>
Net Sales 100.0% 100.0%
Cost of goods sold, including buying and distribution costs 75.8 70.7
-----------------------------
Gross Margin 24.2 29.3
Selling, general and administrative expenses 29.5 29.1
Depreciation and amortization 3.0 2.9
-----------------------------
Operating Income (Loss) (8.3) (2.7)
Interest expense .7 1.7
-----------------------------
(Loss) before reorganization items and taxes (9.0) (4.4)
Reorganization items 1.5 -
-----------------------------
(Loss) before provision for taxes (10.5) (4.4)
Provision for income taxes - -
-----------------------------
Net (Loss) (10.5) (4.4)
=============================
</TABLE>
9
<PAGE> 10
THIRTEEN WEEKS (FIRST QUARTER) ENDED APRIL 29, 1995 VERSUS
THIRTEEN WEEKS ENDED MAY 4, 1996
Plan of Reorganization
On July 21, 1994 (the "Petition Date"), the Company filed a petition (the
"Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United
States Bankruptcy Court for the Western District of Texas (the "Bankruptcy
Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed Plan of
Reorganization (the "Plan") jointly sponsored by the Official Committee of
Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which
became effective on July 18, 1995. Under the Plan, the Unsecured Creditors
agreed to a distribution of 72.5% of pre-petition unsecured allowed claims.
The total amount of pre-petition unsecured allowed claims was $15.6 million.
Additionally, the Plan allowed for cash distributions for certain secured and
priority claims which totaled $2.2 million. On the effective date of the Plan,
the Company issued 1,388,889 shares of convertible Preferred Stock for an
aggregate consideration of $2.5 million. All of the Preferred Stock was
purchased by General Atlantic Corporation ("GAC"), the Company's largest
stockholder. On July 31, 1995, the Company disbursed $10.2 million to its
creditors in accordance with the First Distribution as proposed by the Plan.
The second and final distribution, which occurred on December 20, 1995, was
approximately $3.5 million. The second distribution was financed in part by
$2.5 million of funds in escrow which were the proceeds from the sale of the
Company's Preferred Stock. On April 17, 1996, the Bankruptcy Court entered the
Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy
case.
Pursuant to the Plan the Company's existing common stock was subject to a
one-for-two reverse split. The Preferred Stock issued in connection with the
Plan has a liquidation value of $1.80 per share, is convertible to an equal
number of common shares, has voting rights on an as converted basis, and pays
no preferential dividends. With the issuance of Preferred Stock mentioned
above, GAC has increased its percentage ownership of the voting shares of the
Company to approximately 62% from its pre-reorganization interest of
approximately 44%.
The settlement of the Company's pre-petition liabilities reduced the Company's
net operating loss carryforwards and other tax credit carryforwards by
approximately $4.2 million. The above mentioned equity infusion by GAC has not
caused an ownership change that would limit the future utilization of the
Company's remaining net operating loss carryforwards and other tax credit
carryforwards. However, future ownership changes could result in such
limitations.
In an effort to improve the Company's financial performance and in connection
with the Company's bankruptcy reorganization, the Company reduced the number of
stores, implemented expense reductions commensurate with the downsizing of the
total stores in operation, and improved liquidity by restructuring its
pre-petition debt and obtaining a new credit facility. Since the effective
date of the Plan, the Company has continued to experience lower than
anticipated sales and continuing operating losses. The Company's business
continues to be affected by a number of factors, including, but not limited to,
the continuing weakness in the apparel industry, unfavorable economic
conditions in the Company's principal markets and other business risks, many of
which are not within the Company's control. In addition, the Company continues
to experience increased competitive pressure on both price points and market
share. Increased competitive pricing and promotional strategies have put
significant downward pressure on price points, and competitors have opened
additional store locations in the Company's principal markets. While the
Company has maintained inventory at planned levels, continuing unfavorable
business conditions and financial performance have heightened vendor and factor
concern regarding the Company's creditworthiness, which could adversely affect
the Company's ability to receive sufficient trade credit support to acquire
adequate levels of inventory in the future.
10
<PAGE> 11
Recent Developments
For 1996, management has developed and is implementing a business strategy
which seeks to achieve higher gross margins on lower comparable store sales
than in fiscal 1995. The key elements of this strategy are lower average store
inventories, quick price reduction on slower moving merchandise, constant flow
of fresh merchandise, less promotional activity, selectively higher initial
markups and a reduced expense structure. The Company has implemented cost
reduction programs designed to increase labor productivity, reduce advertising
costs, and restructure associate benefit plans. The Company is continuing to
evaluate additional opportunities to reduce expenses. Although management
believes the current business strategy is appropriate in light of business
conditions and recent sales trends, the Company has continued to experience
operating losses and no assurance can be given that the Company will be
successful in its efforts to improve sales and operations and, reverse recent
operating trends.
As part of its business strategy, management has reduced promotional activity
in fiscal 1996. This change in promotional activity may be one of the factors
contributing to lower comparable store sales during comparable periods with
heavy promotional activity in the prior year. However, sales during the first
quarter of fiscal 1996 and for May 1996 have been below management's
expectations. Comparable store sales were down 10.8% for the first quarter and
10.2% during the seventeen weeks ended June 1, 1996.
Since the close of the first quarter, Timothy L. Grady, the Company's Chief
Operating Officer and principal financial officer, and Janet S. Pollock, the
Company's Vice-President-Human Resources, resigned to accept other job
opportunities. Mr. Grady's duties have been assumed by the Controller and
various management personnel in different functional areas of the Company, and
Ms. Pollock's duties have been assumed by the Director of Human Resources. The
Company has historically operated with very few officer-level executives. The
Company has initiated efforts to identify a candidate for Chief Financial
Officer and on an interim basis may seek additional management support from
consultants or other non-employee resources. The loss of additional management
personnel and/or buying staff could further impede the Company's efforts to
improve operating performance.
Results of Operations
The Company's net sales for the first quarter ended May 4, 1996 were $22.3
million as compared to $25.1 million during the first quarter of fiscal 1995.
The majority of the sales decrease is attributable to a decline in comparable
store sales of 10.8%. Management attributes the comparable store sales decrease
principally to increased competitive pressures in its market areas, continuing
unfavorable economic conditions in the Company's principal markets, less
promotional activity, and lower inventories than in the comparable periods of
fiscal 1995.
Gross margin for the first quarter of 1996 increased by $433,000 to $6.5
million from $6.1 million in the first quarter of the prior year. Gross margin
as a percentage of net sales increased to 29.3% from 24.2% during the
comparable period of the prior year. The increased gross margin during the
first quarter of 1996 resulted principally from reduced promotional activity,
selectively higher initial markups, and lower inventories than in the
comparable periods of fiscal 1995.
For the first quarter of fiscal 1996, selling, general and administrative
expenses decreased $951,000 to $6.5 million from $7.4 million in 1995. This is
principally a result of reduced advertising costs and other cost reductions in
labor and benefits. Selling, general and administrative expenses as a
percentage of sales decreased to 29.1% from 29.5% for the comparable period of
the prior year.
Depreciation and amortization in the first quarter of 1996 decreased 15% to
$644,000 from $757,000 in 1995 due to certain assets becoming fully depreciated
during 1995 and operating one less store in the first quarter of fiscal 1996.
The Company recorded an operating loss of $604,000 during the first quarter of
fiscal 1996 as compared to $2.1 million in 1995.
The Company recorded net interest expense for the first quarter of 1996 of
$369,000 as compared to $165,000 during the first quarter of 1995. As a result
of the Chapter 11 filing, the Company did not accrue interest on unsecured pre-
petition indebtedness. After July 18, 1995, the effective date upon which the
Company's Plan was adopted, interest expense has accrued on all interest
bearing obligations.
11
<PAGE> 12
Liquidity and Capital Resources
During the first quarter of 1996, $511,000 of cash was used for operating
activities. Capital expenditures were $51,000 and consisted primarily of
replenishment and refurbishment of existing equipment and facilities.
As part of its Plan of Reorganization, the Company restructured its
pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8
million mortgage note, secured by the Company's corporate office and
distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.46% per annum and requires monthly payments of $49,773 until
December 2002, when the balance is due. The Company also modified and assumed
a $1.2 million note payable to MetLife Capital Corporation ("MetLife"), which
is secured by various equipment and fixtures located at the corporate office
and certain stores. The MetLife note carries an interest rate of 8.0% and
requires equal monthly payments, including principal and interest, of $35,044.
The Company also entered into a $5.6 million term note payable to TCB which
carries an interest rate of prime plus one-half percent and is due in equal
monthly installments of principal and interest of $64,117 until January 1999,
when the balance is due.
The Company entered into a loan agreement with Congress Financial Corporation
(Southwest) ("Congress") on June 20, 1995, which became effective on the
effective date of the Plan. Under the terms of the loan agreement, which is in
effect until July 1998, the Company may borrow up to its borrowing base as
calculated pursuant to the loan agreement, which may not exceed $15.0 million.
The proceeds of the loan may be used for letters of credit, working capital,
and general corporate purposes consistent with past practices. The loan as
amended is a revolving loan with a borrowing base formula which limits the
amount of available credit to 52% of the Company's eligible inventory during
the period of September 1st to December 20th of each year and to 42% of the
Company's eligible inventory during any other period less (i) a percentage of
undrawn amounts on letters of credit and (ii) availability reserves established
from time to time by the lender. The loan bears interest at prime plus 1%. In
addition, the Company pays a commitment fee equal to 1/2% per annum of the
amount of the unused facility. The loan is secured by substantially all the
assets of the Company other than those subject to other existing liens.
The Company and Congress have amended certain financial covenants in the loan
agreement to require minimum working capital of $7.2 million, minimum net worth
of $7.5 million, and a $2.5 million limitation on capital expenditures, net of
insurance or other proceeds resulting from the disposal or sale of fixed
assets, for the remainder of fiscal 1996. Under the loan agreement, Congress
may establish and revise availability reserves in its sole discretion to cover
risks or events it perceives may affect its security under the loan or the
business or prospects of the Company. As a result of the formula by which the
borrowing base is calculated, an increase in availability reserves restricts
the Company's access to borrowings under the credit facility. The current
availability reserve under the loan agreement approximates $1.5 million.
The Company increases its inventory levels periodically in anticipation of key
selling periods. Inventory peaks in late November, in anticipation of the
Christmas selling season. Short-term trade credit represents a significant
source of financing for merchandise inventories. Trade credit arises from the
willingness of the Company's vendors to grant payment terms for inventory
purchases and is either financed by the vendor or a third-party factor. One of
the key elements of the Company's business strategy for fiscal 1996 is lower
average store inventories. At the end of April 1996, the Company had
comparable store inventories 18.5% below April 1995. Additionally, the Company
has decreased the Packaway inventories at the San Antonio distribution center
by $2.7 million from April 1995. While the Company has maintained inventory at
planned levels, continuing unfavorable business conditions and financial
performance have heightened vendor and factor concern regarding the Company's
creditworthiness, which could adversely affect the Company's ability to receive
sufficient trade credit support to acquire adequate levels of inventory in the
future. In this event, the Company would initially seek to reduce its level of
inventory purchases, including Packaways, and might increase its promotional
activity in an effort to increase cash receipts. In order to enhance
liquidity, the Company is seeking access to additional borrowings and, if
necessary, would also consider additional measures designed to enhance
liquidity, which could include, but not be limited to, reducing its current
scale of operations and selling non-essential assets, principally real estate.
No assurance can be given that the Company will be successful in these efforts.
Although management believes the current business strategy is appropriate in
light of business conditions and recent sales trends, the Company has continued
to experience operating losses and no assurance can be given that the Company
will be successful in its efforts to improve sales and operations and reverse
recent operating trends. In addition to continuing efforts to improve
operating results, the Company, with the assistance of its financial advisor,
continues to evaluate strategic alternatives, which could include, among other
things, a reduction in the current scale of operations by closing or selling
stores in certain markets or a sale of the Company.
12
<PAGE> 13
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. In the
opinion of management, the outcome of this litigation will not have a material
effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits are incorporated by reference to the filing
indicated or are included following the Index to Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
2.1 First Amended Plan of Reorganization of Solo Serve Corporation dated May 17, 1995 (6)
2.2 Non-material Modifications to First Amended Plan of Reorganization of Solo Serve
Corporation, entered July 6, 1995 (6)
3.1 Restated Certificate of Incorporation of the Company (7)
3.2 Certificate of Designation of Rights and Preferences of Preferred Stock (7)
3.3 Bylaws of the Company, as amended and restated (9)
4.1 Specimen Certificate for Common Stock of the Registrant (representing shares of common
stock of the Company after giving effect to the previously reported 2-for-1 reverse
split effected July 18, 1995) (9)
10.1 Registration Rights Agreement among General Atlantic Corporation, Robert J. Grimm and
the Company (1)
10.2 Agreement Regarding Tax Consequences of Deconsolidation between the Company and General
Atlantic Corporation (1)
10.3 Tax Allocation Agreement between the Company and General Atlantic Corporation (1)
10.4 Form of Indemnity Agreement between Directors, Executive Officers and the Company (1)
10.5 Associate Stock Purchase Plan of the Company (2)
10.6 Retirement Savings Plan and Trust of the Company (2)
10.7 Mortgage Note A, dated November 20, 1992, in principal amount of $4,940,000, with the
Company as Maker and Nationwide Life Insurance Company as Holder (2)
10.8 Mortgage Note B, dated November 20, 1992, in principal amount of $1,000,000, with the
Company as Maker and Employers Life Insurance Company of Wausau as Holder (2)
10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc. (3)
10.10 Employment Agreement between the Company and David P. Dash (4)
10.11 Employment Agreement between the Company and Robert J. Grimm, as amended (5)
10.12 Subscription Agreement between the Company and General Atlantic Corporation (7)
10.13 Solo Serve Corporation 1995 Stock Incentive Plan (8)
10.14 Solo Serve Corporation Director Stock Option Plan (8)
10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce Bank, National
Association, Borrower, General Atlantic Corporation and the Official Committee of
Unsecured Creditors of Solo Serve Corporation (7)
10.16 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve
Corporation and Congress Financial Corporation (Southwest) (7)
10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve
Corporation and MetLife Capital Corporation (8)
10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation,
Nationwide Life Insurance Company, and Employers Life Insurance Company (8)
10.19 Promissory Note, dated July 31, 1995, in principal amount of $5,565,000, with the
Company as Maker, and Texas Commerce Bank National Association as Holder (8)
10.20 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C>
Corporation and Congress Financial Corporation (Southwest) (9)
10.21 Employment Agreement between the Company and Timothy L. Grady (9)
10.22 Employment Agreement between the Company and Janet Pollock (9)
10.23 Consulting Services Agreement between the Company and Robert J. Grimm (10)
10.24 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between
Solo Serve Corporation and Congress Financial Corporation (Southwest) (11)
10.25 Letter Agreement dated January 23, 1996 by and between the Company and MetLife Capital
Corporation modifying the Loan and Security Agreement between the Company and etLife
Capital Corporation, as amended on July 18, 1995 (11)
15 Independent Accountant's Awareness Letter *
27 Financial Data Schedule *
99 Review Report of Price Waterhouse *
</TABLE>
- -----------------------------
* Filed herewith.
(1) Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (No. 33- 46324), as filed
on March 11, 1992, and amended by Amendment No. 1, filed on
March 26, 1992, Amendment No. 2, filed on April 20, 1992, and
Amendment No. 3, filed on April 24, 1992.
(2) Incorporated by reference to the Exhibits to the Company's
Annual Report on Form 10-K for the Fiscal year ended January
30, 1993.
(3) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
July 30, 1994.
(4) Incorporated by reference to the Exhibits filed to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
January 28, 1995.
(5) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
April 29, 1995.
(6) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for July 6, 1995.
(7) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for July 18, 1995.
(8) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
July 29, 1995.
(9) Incorporated by reference to the Exhibits filed to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
October 28, 1995.
(10) Incorporated by reference to the Exhibits filed to the
Company's Annual Report on Form 10-K for the Fiscal Year ended
February 3, 1996.
(11) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for February 8, 1996.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during the period covered by this report:
A report on Form 8-K was filed for February 8, 1996, announcing that the
Company had been notified by NASDAQ that the Company's common stock would no
longer be available for trading on The Nasdaq Stock Market effective
February 9, 1996, and that the Company's financing arrangement with Congress
Financial Corporation (Southwest) was amended to modify certain loan covenants.
14
<PAGE> 15
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:
SOLO SERVE CORPORATION
By: /s/ David P. Dash
-----------------------------------------------
David P. Dash,
President and Chief Executive Officer
By: /s/ Timothy L. Grady
-----------------------------------------------
Timothy L. Grady,
Chief Operating Officer and Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------- ---------------------- ----
<S> <C> <C>
2.1 First Amended Plan of Reorganization of Solo Serve Corporation dated May 17, 1995 *
2.2 Non-material Modifications to First Amended Plan of Reorganization of Solo Serve *
Corporation, entered July 6, 1995
3.1 Restated Certificate of Incorporation of the Company *
3.2 Certificate of Designation of Rights and Preferences of Preferred Stock *
3.3 Bylaws of the Company, as amended and restated *
4.1 Specimen Certificate for Common Stock of the Registrant (representing shares of common *
stock of the Company after giving effect to the previously reported 2-for-1 reverse split
effected July 18, 1995)
10.1 Registration Rights Agreement among General Atlantic Corporation, Robert J. Grimm and the *
Company
10.2 Agreement Regarding Tax Consequences of Deconsolidation between the Company and General *
Atlantic Corporation
10.3 Tax Allocation Agreement between the Company and General Atlantic Corporation *
10.4 Form of Indemnity Agreement between Directors, Executive Officers and the Company *
10.5 Associate Stock Purchase Plan of the Company *
10.6 Retirement Savings Plan and Trust of the Company *
10.7 Mortgage Note A, dated November 20, 1992, in principal amount of $4,940,000, with the *
Company as Maker and Nationwide Life Insurance Company as Holder
10.8 Mortgage Note B, dated November 20, 1992, in principal amount of $1,000,000, with the *
Company as Maker and Employers Life Insurance Company of Wausau as Holder
10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc. *
10.10 Employment Agreement between the Company and David P. Dash *
10.11 Employment Agreement between the Company and Robert J. Grimm, as amended *
10.12 Subscription Agreement between the Company and General Atlantic Corporation *
10.13 Solo Serve Corporation 1995 Stock Incentive Plan *
10.14 Solo Serve Corporation Director Stock Option Plan *
10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce Bank, National *
Association, Borrower, General Atlantic Corporation and the Official Committee of
Unsecured Creditors of Solo Serve Corporation
10.16 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve *
Corporation and Congress Financial Corporation (Southwest)
10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve *
Corporation and MetLife Capital Corporation
10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation, *
Nationwide Life Insurance Company, and Employers Life Insurance Company
10.19 Promissory Note, dated July 31, 1995, in principal amount of $5,565,000, with the Company *
as Maker, and Texas Commerce Bank National Association as Holder
10.20 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve *
Corporation and Congress Financial Corporation (Southwest)
10.21 Employment Agreement between the Company and Timothy L. Grady *
10.22 Employment Agreement between the Company and Janet Pollock *
10.23 Consulting Services Agreement between the Company and Robert J. Grimm *
10.24 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between *
Solo Serve Corporation and Congress Financial Corporation (Southwest)
10.25 Letter Agreement dated January 23, 1996 by and between the Company and MetLife Capital *
Corporation modifying the Loan and Security Agreement between the Company and MetLife
Capital Corporation, as amended on July 18, 1995
15 Independent Accountant's Awareness Letter 17
27 Financial Data Schedule 18
99 Review Report of Price Waterhouse 19
</TABLE>
*=Incorporated by reference. See page 14 for references.
16
<PAGE> 1
INDEPENDENT ACCOUNTANTS' AWARENESS LETTER
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Sirs:
We are aware that Solo Serve Corporation has included our report dated June 14,
1996 (issued pursuant to the provisions of Statement on Auditing Standards No.
71) by reference in the prospectus constituting part of its Registration
Statements on Form S-8 (No. 33-55490) filed on December 8, 1992, and on Forms
S-8 (Nos. 33-99666 and 33-99670) filed on November 20, 1995. We are also aware
of our responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Antonio, Texas
June 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT SET FORTH IN REGISTRANT'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED 5-4-96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> MAY-04-1996
<CASH> 1,344,773
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,459,253
<CURRENT-ASSETS> 19,059,876
<PP&E> 15,071,813
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,511,689
<CURRENT-LIABILITIES> 8,847,329
<BONDS> 16,259,862
<COMMON> 28,562
0
13,889
<OTHER-SE> 8,801,847
<TOTAL-LIABILITY-AND-EQUITY> 34,511,689
<SALES> 22,259,970
<TOTAL-REVENUES> 22,259,970
<CGS> 15,744,332
<TOTAL-COSTS> 15,744,332
<OTHER-EXPENSES> 7,119,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 368,562
<INCOME-PRETAX> (972,827)
<INCOME-TAX> 0
<INCOME-CONTINUING> (972,827)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (972,827)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
REPORT ON REVIEW OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Solo Serve Corporation
We have reviewed the interim consolidated financial information included in
Form 10-Q of Solo Serve Corporation (the Company) as of May 4, 1996 and April
29, 1995 and for the thirteen week periods then ended. This financial
information is the responsibility of the management of the Company.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
The accompanying consolidated financial information has been prepared assuming
that the Company will continue as a going concern. As described in Note 2, on
July 21, 1994, the Company filed a petition for reorganization relief under
Chapter 11 of the United States Bankruptcy Code. The Company's Plan of
Reorganization was approved by the creditors and shareholders and confirmed by
the United States Bankruptcy Court on July 6, 1995 and became effective on July
18, 1995. The Company's recurring operating losses raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to future operations are described in Note 2. The consolidated
financial information does not include any adjustments that might result from
the outcome of this uncertainty.
We previously audited in accordance with generally accepted auditing standards,
the consolidated balance sheet as of February 3, 1996, and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows for the year then ended (not presented herein), and in our report
dated March 28, 1996 (which contains an explanatory paragraph with respect to
the substantial doubt of the Company's ability to continue as a going concern)
we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying balance sheet
information as of February 3, 1996, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Antonio, Texas
June 14, 1996
