<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 AUGUST 3, 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 August 28,
1996, were 2,856,126 and 1,388,889 shares, respectively.
Page 1 of 46 pages; Exhibit Index appears on page 16.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1. Consolidated Financial Statements ............................................. 3
Consolidated Balance Sheets, July 29, 1995 (unaudited),
February 3, 1996 and August 3, 1996 (unaudited)................................ 3
Consolidated Statements of Operations, thirteen and twenty-six weeks ended
July 29, 1995 (unaudited) and August 3, 1996 (unaudited)....................... 4
Consolidated Statements of Cash Flows, twenty-six weeks ended
July 29, 1995 (unaudited) and August 3, 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
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<S> <C> <C>
ITEM 1. Legal Proceedings.............................................................. 13
ITEM 6. Exhibits and Reports on Form 8 - K............................................. 13
Signatures..................................................................... 15
</TABLE>
2
<PAGE> 3
PART I
ITEM I. Financial Statements
SOLO SERVE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 29, FEBRUARY 3, AUGUST 3,
ASSETS 1995 1996 1996
--------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 7,875,861 $ 771,527 $ 1,716,647
Restricted Cash 2,500,000 0 0
Inventory 22,209,400 14,210,180 15,001,347
Other current assets 3,633,342 2,273,630 2,950,302
--------------------------------------------
Total current assets 36,218,603 17,255,337 19,668,296
Property and equipment, net 16,530,471 15,634,267 14,600,115
Goodwill and service marks, net 469,999 410,000 350,000
--------------------------------------------
TOTAL ASSETS $ 53,219,073 $ 33,299,604 $ 34,618,411
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Current portion of long-term debt $ 682,583 $ 683,951 $ 711,836
Pre-petition unsecured indebtedness 14,358,836 0 0
Accounts payable 5,861,070 3,426,821 4,853,592
Accrued expenses 4,717,665 3,210,010 4,105,127
--------------------------------------------
Total current liabilities 25,620,154 7,320,782 9,670,555
Long-term debt 11,919,404 15,135,885 16,769,629
Postretirement benefit obligation 538,250 565,200 555,200
LIABILITIES SUBJECT TO COMPROMISE 1,315,921 460,612 0
--------------------------------------------
TOTAL LIABILITIES 39,393,729 23,482,479 26,995,384
--------------------------------------------
STOCKHOLDERS' EQUITY:
Preferred stock 13,888 13,889 13,889
Common stock 28,562 28,562 28,562
Capital in excess of par value 24,410,291 24,410,290 24,410,290
Retained earnings (deficit) (10,627,397) (14,635,616) (16,829,714)
--------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 13,825,344 9,817,125 7,623,027
--------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 53,219,073 $ 33,299,604 $ 34,618,411
============================================
</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 TWENTY-SIX WEEKS ENDED
----------------------------------------------------------------------------
JULY 29, 1995 AUGUST 3, 1996 JULY 29, 1995 AUGUST 3, 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $28,271,408 $26,069,877 $53,447,868 $48,329,847
Cost of goods sold (including buying and
distribution, excluding depreciation
shown below) 20,958,956 18,501,996 40,053,094 34,246,327
----------------------------------------------------------------------------
Gross Profit 7,312,452 7,567,881 13,394,774 14,083,520
Selling, general, and administrative
expense 7,374,868 7,764,277 14,802,220 14,240,293
----------------------------------------------------------------------------
Loss before depreciation and amortization (62,416) (196,396) (1,407,446) (156,773)
Depreciation and amortization expenses 708,861 624,964 1,466,128 1,268,859
----------------------------------------------------------------------------
Operating loss (771,277) (821,360) (2,873,574) (1,425,632)
Interest expense 168,724 399,788 333,929 768,350
----------------------------------------------------------------------------
Loss before reorganization items, taxes
and extraordinary item (940,001) (1,221,148) (3,207,503) (2,193,982)
----------------------------------------------------------------------------
Reorganization items
Loss on disposal of stores 553,222 0 553,222 0
Other reorganization expenses 925,608 0 1,421,754 0
Interest earned on accumulated
cash resulting from Chapter 11
Proceedings (65,439) 0 (188,283) 0
----------------------------------------------------------------------------
Reorganization items 1,413,391 0 1,786,693 0
----------------------------------------------------------------------------
Loss before taxes and extraordinary
item (2,353,392) (1,221,148) (4,994,196) (2,193,982)
----------------------------------------------------------------------------
Income tax expense (benefit)
Current 0 0 0 0
Deferred (1,418,200) 0 (1,418,200) 0
----------------------------------------------------------------------------
(1,418,200) 0 (1,418,200) 0
----------------------------------------------------------------------------
Income before extraordinary item (935,192) (1,221,148) (3,575,996) (2,193,982)
Extraordinary item: gain on discharge of
debt (net of tax effect of $1,418,200) 2,752,975 0 2,752,975 0
----------------------------------------------------------------------------
Net income (loss) $1,817,783 ($1,221,148) ($823,021) ($2,193,982)
============================================================================
Income (loss) per common share
before extraordinary item ($.031) ($0.43) ($1.22) ($0.77)
Gain on discharge of debt per common
share 0.91 0 0.94 0
----------------------------------------------------------------------------
Net income (loss) per common share $0.60 ($0.43) ($0.28) ($0.77)
----------------------------------------------------------------------------
Weighted average common shares
outstanding 3,024,014 2,856,126 2,940,070 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>
TWENTY-SIX WEEKS ENDED
JULY 29, 1995 AUGUST 3, 1996
---------------------------------------
<S> <C> <C>
NET LOSS ($823,021) ($2,193,982)
Gain on discharge of debt 2,752,975 0
---------------------------------------
Loss before gain on discharge of debt (3,575,996) (2,193,982)
---------------------------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH FROM OPERATIONS:
Depreciation and Amortization 1,466,128 1,268,860
Provision (benefit) from deferred taxes (1,418,200) 0
Loss on disposition of leasehold improvements, property and equip. 208,070 0
Changes in Assets and Liabilities:
(Increase) decrease in Inventory (7,260,571) (791,167)
(Increase) decrease in Other Current Assets (1,178,193) (676,672)
(Increase) decrease in Other Non-Current Assets 1,662,935 0
Increase (decrease) in Accounts Payable 890,879 1,426,655
Increase (decrease) in Accrued Expenses 166,387 895,117
Increase (decrease) in Non Current Liabilities 36,950 (10,000)
---------------------------------------
Total adjustments (5,425,615) 2,112,793
---------------------------------------
Net cash provided (used) by operations before reorganization items (9,001,611) (81,189)
OPERATING CASH FLOW FROM REORGANIZATION ITEMS:
Payments made on reorganization costs (754,370) 0
Non cash items from reorganization (790,180) 0
Loss on disposal of facilities 553,222 0
Provision for other reorganization expenses 1,421,754 0
Payment on allowed claims 0 (460,612)
---------------------------------------
Net cash provided (used) by operations (8,571,185) (541,801)
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Property & Equipment (484,715) (174,709)
CASH FLOWS FROM INVESTING ACTIVITIES RELATED TO REORGANIZATION
Investment in Restricted Cash (2,500,000) 0
---------------------------------------
CASH PROVIDED (USED) IN INVESTING ACTIVITIES: (2,984,715) (174,709)
---------------------------------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Borrowings under line of credit agreement 0 52,798,998
Payments under line of credit agreement 0 (50,788,998)
Payments on long-term debt 0 (348,370)
---------------------------------------
Net cash provided (used) by finance activities before 0 1,661,630
reorganization
FINANCING CASH FLOWS FROM REORGANIZATION ITEMS:
Payments on Long Term Debt (151,796) 0
Sale of Preferred Stock 2,500,000 0
---------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,348,204 1,661,630
---------------------------------------
NET INCREASE (DECREASE) IN CASH (9,207,696) 945,120
CASH AT BEGINNING OF YEAR 17,083,557 771,527
---------------------------------------
CASH AT END OF PERIOD $7,875,861 $1,716,647
=======================================
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 333,929 $752,696
Income Taxes 0 0
</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 July 29, 1995 and August 3, 1996, and for the
thirteen and twenty-six week periods ended July 29, 1995 and August 3, 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 August 3, 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 and
the twenty-six week period may not necessarily be 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 July
29, 1995 and August 3, 1996 and for the thirteen and twenty-six weeks ended
July 29, 1995 and August 3, 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 and other business risks, many of which are
not within the Company's control. In addition, the Company continues to
experience increased competitive pressure and competitors have opened
additional store locations in the Company's principal markets. While the
Company has maintained inventory at planned levels, continuing unfavorable
conditions and financial performance could heighten 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 pricing, 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 losses.
NOTE 3:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JULY 29, 1995 FEBRUARY 3, 1996 AUGUST 3, 1996
--------------------------------------------------------
<S> <C> <C> <C>
Notes payable to bank, interest at prime plus 1/2%
(8.75% at August 3, 1996) secured by properties $ 5,565,000 $ 5,437,572 $5,286,335
Note payable to insurance company, interest at 8%; secured by
equipment and properties 1,200,000 1,006,861 834,013
Mortgage notes payable to insurance companies, interest at 9.5%;
secured by the distribution center 5,836,987 5,810,403 5,786,117
Congress Loan Agreement, interest at prime plus 1%
(9.25% at August 3, 1996); secured primarily by inventory 0 3,565,000 5,575,000
--------------------------------------------------------
12,601,987 15,819,836 17,481,465
Less current portion 682,583 683,951 711,836
--------------------------------------------------------
Long-term portion $11,919,404 $ 15,135,885 $16,769,629
========================================================
</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 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 based on a
percent of the Company's eligible inventory, 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.
On July 2, 1996, the Company amended its credit facility with Congress to,
among other things, increase the advance rate, which is a key factor in
calculating the borrowing base. As a result of the amendment, the advance rates
under the credit facility have been increased to sixty percent (60%) of the
value of eligible inventory for any date from July 1 through December 10 and
fifty-five percent (55%) of the value of eligible inventory for any other date.
The increased advance rates compare to previous allowances of up to fifty-two
percent (52%) of the value of eligible inventory for any date from September 1
through December 10 and forty-two percent (42%) for any other date of
determination. Under the loan agreement, eligible inventory is reduced by the
availability reserve, which may be established and revised by Congress in its
discretion to cover risks or events it perceives may
7
<PAGE> 8
affect its security under the loan. As of the end of August, the availability
reserve under the loan agreement is approximately $1 million. In addition to
the adjustments to the advance rates described above, the Company and Congress
have amended the credit facility in certain other respects, including, as of
July 1996, a reduction in the Company's adjusted net worth requirement from
$7.5 million for the remainder of fiscal 1996 to $4.25 million for the
remaining term of the loan, and, as of September 1996, a reduction of minimum
required working capital from $7.2 million for the remainder of fiscal 1996 to
$4.5 million for the remaining term of the loan. The loan continues to be
secured by a first lien on substantially all of the assets of the Company,
including inventory and accounts receivable.
In order to facilitate the amendments to the credit facility, General Atlantic
Corporation, the Company's principal stockholder, furnished to Congress a
standby letter of credit in the amount of $1.5 million to serve as additional
collateral for the loan. The Company agreed, among other things, to reimburse
General Atlantic for any amounts drawn under the letter of credit and to grant
General Atlantic a second lien security interest (behind Congress) on
substantially all of the assets of the Company.
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
Second Quarter Additions 0 0
Second Quarter Dispositions 1 0
-- --
END OF SECOND QUARTER 29 29
== ==
</TABLE>
On August 24, 1996, the Company closed a store, reducing its number of stores
to 28. The effect of this closing did not have a material impact on the
Company's operating results for the twenty-six weeks ended August 3, 1996, and
this store closing is not expected to have a material impact on future
operating results.
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 and twenty-six weeks ended
July 29, 1995 and August 3, 1996.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 29, 1995 AUGUST 3, 1996 JULY 29, 1995 AUGUST 3, 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, including buying and
distribution costs 74.1 71.0 74.9 70.9
-------------------------------------------------------------
Gross Profit 25.9 29.0 25.1 29.1
Selling, general and administrative expenses 26.1 29.8 27.7 29.5
Depreciation and amortization 2.5 2.4 2.8 2.5
-------------------------------------------------------------
Operating Income (Loss) (2.7) (3.2) (5.4) (2.9)
Interest expense .6 1.5 .6 1.6
-------------------------------------------------------------
(Loss) before reorganization items, taxes and
extraordinary item (3.3) (4.7) (6.0) (4.5)
Reorganization items 5.0 0 3.3 0
-------------------------------------------------------------
(Loss) before provision for taxes and
extraord. item (8.3) (4.7) (9.3) (4.5)
Provision for income taxes 5.0 0 2.6 0
-------------------------------------------------------------
(Loss) before extraordinary item (3.3) (4.7) (6.7) (4.5)
Extraordinary item: gain on debt discharge 9.7 0 5.2 0
-------------------------------------------------------------
Net Income (Loss) 6.4% (4.7)% (1.5)% (4.5)%
=============================================================
</TABLE>
9
<PAGE> 10
THIRTEEN WEEKS (SECOND QUARTER) AND TWENTY-SIX WEEKS (YEAR-TO-DATE) ENDED
AUGUST 3, 1996 VERSUS THIRTEEN WEEKS AND
TWENTY-SIX WEEKS ENDED JULY 29, 1995
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, and other business risks, many of which are
not within the Company's control. In addition, the Company continues to
experience increased competitive pressure and competitors have opened
additional store locations in the Company's principal markets. While the
Company has maintained inventory at planned levels, continuing unfavorable
conditions and financial performance could heighten 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.
Recent Developments
Since the close of the second quarter, David Dash, the Company's Chief
Executive Officer and President, resigned. Charles M. Siegel, a founder and
former Chief Executive Officer of 50-Off Stores, Inc., has been hired to fill
that position. During the second quarter, the Company hired Ross E. Bacon as
Chief Financial Officer to replace the former Chief Operating Officer/Chief
Financial Officer, who had resigned. Mr. Bacon has recently assumed the duties
of Chief Operating Officer and has been named Executive Vice President.
Management is continuing to implement 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 pricing, and a reduced expense structure. The
Company has implemented cost reduction programs designed to increase labor
10
<PAGE> 11
productivity, reduce advertising costs, and restructure associate
benefit plans. Recently, current management reorganized the duties and
reporting responsibility of certain Company employees and eliminated other
positions, which in the aggregate is expected to result in approximately $1.1
million in savings on an annualized basis. Although the Company's initial plan
for the current fiscal year had targeted expense reductions of approximately $3
million, the Company now expects to realize approximately $2 million in savings
for the current fiscal year. Although targeted reductions have been achieved in
certain areas, unanticipated increases in other expense categories have
mitigated the aggregate effect of the targeted reductions. 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.
Results of Operations
The Company's net sales for the second quarter and year-to-date period ended
August 3, 1996 were $26.0 million and $48.3 million, respectively, as compared
to $28.2 million and $53.4 million in the prior year. The majority of the
year-to-date sales decrease is attributable to a decline in comparable store
sales of 11.4% for the period. 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,
and less promotional activities than in the comparable periods of fiscal 1995.
Gross profit for the second quarter of 1996 increased by $255,000 to $7.5
million from $7.3 million in the second quarter of the prior year. Gross profit
for the first half of 1996 increased $689,000 to $14.0 million from $13.4
million during the comparable period of the prior year. The increased gross
profit during the first half of 1996 resulted principally from reduced
promotional activity and selectively higher initial markups than in the
comparable periods of fiscal 1995.
For the second quarter of fiscal 1996, selling, general and administrative
expenses increased $389,000 to $7.8 million from $7.4 million in 1995. This is
due primarily to an increase in professional and consulting fees which were
classified as reorganization expenses in 1995. For the first half of fiscal
1996, selling, general and administrative expenses decreased $562,000 to $14.2
million from $14.8 million in 1995. This is principally a result of reduced
advertising costs. Selling, general and administrative expenses as a percentage
of sales increased to 29.4% from 27.7% for the comparable twenty-six weeks
period of the prior year. This is primarily due to the decrease in net sales.
Depreciation and amortization in the second quarter of 1996 decreased 12% to
$625,000 from $709,000 for the same period in 1995. Depreciation and
amortization for the twenty-six weeks ended August 3, 1996, decreased 14% to
$1.2 million from $1.5 million during the comparable period in 1995. This is
due to certain assets becoming fully depreciated in 1995.
The Company recorded an operating loss of $821,000 and $1.4 million for the
thirteen and twenty-six weeks ended August 3, 1996, respectively. This is
compared to the operating loss of $771,000 and $2.9 million for the thirteen
and twenty-six weeks ended July 29, 1995.
The Company recorded net interest expense for the second quarter of 1996 of
approximately $400,000 as compared to $169,000 during the second quarter of
1995. As a result of the Chapter 11 filing, the Company did not accrue interest
on unsecured pre-petition indebtedness during the reorganization period. After
July 18, 1995, the effective date upon which the Company's Plan was adopted,
the Company commenced accruing interest expense on all interest bearing
obligations.
Liquidity and Capital Resources
During the first half of 1996, $542,000 of cash was used for operating
activities. Capital expenditures were $175,000, the majority of which were for
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
11
<PAGE> 12
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 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 a percentage of the Company's eligible inventory
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.
On July 2, 1996, the Company amended its credit facility with Congress to,
among other things, increase the advance rate, which is a key factor in
calculating the borrowing base. As a result of the amendment, the advance rates
under the credit facility have been increased to sixty percent (60%) of the
value of eligible inventory for any date from July 1 through December 10 and
fifty-five percent (55%) of the value of eligible inventory for any other date.
The increased advance rates compare to previous allowances of up to fifty-two
percent (52%) of the value of eligible inventory for any date from September 1
through December 10 and forty-two percent (42%) for any other date of
determination. Under the loan agreement, eligible inventory is reduced by the
availability reserve, which may be established and revised by Congress in its
discretion to cover risks or events it perceives may affect its security under
the loan. As of the end of August, the availability reserve under the loan
agreement is approximately $1 million. The July amendment also reduced the
Company's required minimum net worth to $4.25 million from $7.5 million, and a
further amendment in September 1996 reduced the minimum required working
capital from $7.2 million to $4.5 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 July 1996, the Company had decreased
the comparable store inventories by 20.5% below July 1995. Additionally, the
Company has decreased the packaway inventories at the San Antonio distribution
center by 72% from July 1995. These decreases in store and distribution center
inventory levels are a part of the Company's business strategy for fiscal
1996. Certain vendors and factors have limited the Company's access to trade
credit, and while the Company has maintained inventory at planned levels,
continuing unfavorable conditions and financial performance could heighten
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 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.
As described above, the Company has recently experienced changes in its two
most senior management positions, Chief Executive Officer and Chief Operating
Officer/Chief Financial Officer. The Company has terminated its arrangement with
a financial advisor that was assisting in the evaluation of strategic
alternatives for the Company. Although current management believes the Company's
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 losses.
Forward-looking Statements
Forward-looking statements in this Quarterly Report are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
There are certain important factors that could cause results to differ
materially from those anticipated by some of the statements made above.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. In addition to the factors discussed above, among the other
factors that could cause actual results to differ materially are the following:
market dynamics, availability of financing, relationships with vendors and
competition. Additional information concerning those and other factors are
contained in the Company's Securities and Exchange Commission filings,
including but not limited to the Form 10-K, copies of which are available from
the Company without charge.
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:
Exhibit
Number Description of Exhibit
- ------ ----------------------
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 Corporation and Congress Financial Corporation (Southwest)
(9)
10.21 Employment Agreement between the Company and Timothy L. Grady (9)
13
<PAGE> 14
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 MetLife Capital Corporation, as
amended on July 18, 1995 (11)
10.26 Amendment No. 3 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of June 26, 1996 (12)
10.27 Letter of Credit and Security Agreement between Solo Serve
Corporation and General Atlantic Corporation dated as of June 26,
1996 (12)
10.28 Intercreditor and Subordination Agreement between Congress Financial
Corporation (Southwest) and General Atlantic Corporation dated as of
June 26, 1996, as acknowledged and agreed to by Solo Serve
Corporation (12)
10.29 Consulting Agreement between the Company and Charles M. Siegel *
10.30 Employment Agreement between the Company and Charles M. Siegel *
10.31 Amendment No. 4 to Loan and Security Agreement by and between Solo
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of September 1, 1996 *
15 Independent Accountant's Awareness Letter *
27 Financial Data Schedule *
99 Review Report of Price Waterhouse *
- --------------
* 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.
(12) Incorporated by reference to the Exhibits filed to the Company's
Current Report on Form 8-K for July 2, 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 July 2, 1996, announcing that the
Company's financing arrangement with Congress Financial Corporation (Southwest)
was amended to modify certain loan covenants and to increase availability under
the loan. The report also described a letter of credit provided by the
Company's principal stockholder to Congress to serve as additional collateral
for the Congress loan facility, and the Company's agreements to Congress in
exchange for such letter, including the grant to General Atlantic of a second
lien security interest (behind Congress) on substantially all the assets of the
Company.
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/ Charles M. Siegel
------------------------------------------
Charles M. Siegel,
President and Chief Executive Officer
By: /s/ Ross E. Bacon
------------------------------------------
Ross E. Bacon,
Vice President and Chief Financial Officer
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description of Exhibit Page No.
- ------ ---------------------- ----------
<S> <C> <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 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 MetLife Capital Corporation, as
amended on July 18, 1995 (11)
10.26 Amendment No. 3 to Loan and Security Agreement by and between Solo *
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of June 26, 1996 (12)
10.27 Letter of Credit and Security Agreement between Solo Serve *
Corporation and General Atlantic Corporation dated as of June 26,
1996 (12)
</TABLE>
<PAGE> 17
<TABLE>
<S> <C> <C>
10.28 Intercreditor and Subordination Agreement between Congress Financial *
Corporation (Southwest) and General Atlantic Corporation dated as of
June 26, 1996, as acknowledged and agreed to by Solo Serve
Corporation (12)
10.29 Consulting Agreement between the Company and Charles M. Siegel * 18
10.30 Employment Agreement between the Company and Charles M. Siegel * 27
10.31 Amendment No. 4 to Loan and Security Agreement by and between Solo 41
Serve Corporation and Congress Financial Corporation (Southwest)
dated as of September 1, 1996 *
15 Independent Accountant's Awareness Letter * 44
27 Financial Data Schedule * 45
99 Review Report of Price Waterhouse * 46
</TABLE>
* Incorporated by reference--see page 15 for references.
<PAGE> 1
EXHIBIT 10.29
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made and entered into
as of this 26th day of June, 1996, by and between Charles M. Siegel d/b/a
Consulting Management Services ("Consultant") and Solo Serve Corporation, a
Delaware corporation (the "Company") (Consultant and Company are sometimes
collectively referred to as the "Parties").
WITNESSETH:
WHEREAS, the Company desires to engage Consultant to perform certain
consulting services pursuant to this Agreement and to employ the Consultant as
an independent contractor; and
WHEREAS, Consultant desires to provide consulting services to the
Company on the terms and conditions set forth below as an independent
contractor;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the Parties agree as follows:
1. Consulting Engagement. The Company hereby engages Consultant to
serve the duties and functions of the Chief Operating Officer for the term of
this Agreement, which duties shall include, but are not limited to, managing
store operations, real estate, the Distribution Center, risk management, loss
prevention, and, until the Company hires a new Chief Financial Officer, assist
the Company in overseeing the financial functions of the Company during the term
of this Agreement. The Consultant's engagement hereunder is with the
understanding of the Company that the engagement, while not exclusive, will
require a significant amount of the Consultant's time. It will not be a breach
of this Agreement for the Consultant to be involved in other engagements so long
as those engagements: (i) do not interfere in any material respect with the
performance of Consultant's duties hereunder, including his ability to be
available to render services to the Company during the Company's normal
corporate office and store hours and (ii) are not competitive with the business
conducted by the Company, i.e., the marketing, distribution and sale of apparel
and other goods as an off-price retailer; provided, however, that the Consultant
shall provide written notice to the Chief Executive Officer and to the Board of
Directors of the Company prior to commencing such activities and such
notification shall contain such information as is reasonably required to enable
the Company to determine that such activity is not inconsistent with the
obligations of Consultant under this Agreement, and the Company and its Board of
Directors shall keep such information strictly confidential and shall not
disclose any such information to any third party excepting only as actually
required (i) by law or (ii) by order of a governmental agency or court of
competent jurisdiction, in which case the Company will give Consultant prior
<PAGE> 2
written notice that such disclosure is required with a full and complete
description regarding such requirement.
2. Independent Contractor. Consultant shall act at all times under
this Agreement as an independent contractor and is not an employee of Company
for the purposes of this Agreement, the Social Security Act, the income
withholding provisions of the Internal Revenue Code of 1986, as amended, or
other federal or state laws relating to compensation, insurance, unemployment or
workers' compensation. Nothing contained in this Agreement shall be construed
to create the relationship of principal and agent, or employer and employee,
between the Company and Consultant or any of its employees or agents. The
Company and Consultant acknowledge that Consultant will not be entitled to any
insurance, pension, profit sharing, retirement or other employee or fringe
benefits which the Company may provide to its employees during the term of this
Agreement. The Agreement shall not be construed as creating a partnership,
joint venture, agency or employment relationship or as granting a franchise
under either federal or state law.
3. Term. The term of this Agreement shall commence on the date of
this Agreement and shall terminate on January 31, 1997, unless sooner terminated
pursuant to Section 13 hereof.
4. Duties. During the term of this Agreement, Consultant agrees to
provide consultation and advice to the Company concerning issues relating to
store operations, the Distribution Center, real estate, risk management, loss
prevention, assisting management in identifying, evaluating and pursuing
strategic alternatives for the Company, and assist in overseeing the financial
functions of the Company and shall provide such other consulting services as the
Chief Executive Officer shall assign in his discretion from time to time. The
Consultant agrees to devote substantially all of his full time, attention and
energies to this engagement. In the performance of the Consultant's duties
under this Agreement, the Consultant shall report directly to the Chief
Executive Officer of the Company and will at all times coordinate the
performance of his duties hereunder with the Chief Executive Officer. Consultant
agrees to perform the consulting services in a diligent and business-like manner
during working hours normally provided by a Chief Operating Officer of an
off-priced retailer and be reasonably available to the Chief Executive Officer
at other times as business may require. Consultant shall be based in San
Antonio, Texas but acknowledges that performance of his duties hereunder will
require periodic travel consistent with the needs of the Company. Any
obligations incurred by the Consultant which may impose any obligations on the
Company will require prior approval of the CEO.
5. Consulting Fees. During the term of this Agreement, the Company
shall pay to Consultant a fee in the amount of One Hundred Fifty Thousand and
no/100 Dollars ($150,000.00), payable in 7 equal installments of $21,428.57
2
<PAGE> 3
each, the first such installment being due upon execution of this Agreement,
and the remaining 6 installments being paid on the first day of each month,
commencing the 1st day of August, 1996, through the 1st day of January, 1997.
If the Consultant is unable to provide any of the services required under this
Agreement because the Consultant is taking time off because of illness, injury,
vacation or any other personal leave, the total fee shall not be reduced or
adjusted for the first ten (10) working days during which Consultant is not
performing duties as set forth herein (which days' absences for reasons other
than illness shall be approved in advance by the Chief Executive Officer); but
after Consultant has failed to so provide such services for ten (10) working
days, thereafter for each working day that Consultant is unable to provide such
services, the fee payable hereunder will be reduced on a per diem basis (based
upon business (week) days only), over the period from July 1, 1996 through
January 31, 1997, and such adjustment will be made in the next installment due,
or in the case of missed days in January, Consultant shall reimburse the
Company accordingly within thirty (30) days following the termination of this
Agreement.
6. Stock Options. Within ten (10) days of the execution hereof, the
Company agrees to grant Consultant stock options (the "Option"), in
substantially the form of "EXHIBIT A" attached hereto, to purchase an aggregate
of up to 25,000 shares of common stock, par value $.01 per share, of the Company
at an exercise price equal to fair market value on the date of grant.
7. Expenses; Benefits. The Company shall reimburse Consultant for all
reasonable expenses incurred on behalf of, and pre-approved in writing by, the
Chief Executive Officer of the Company incurred by the Consultant in connection
with the performance of Consultant's obligations hereunder, which shall be paid
in accordance with the then existing reimbursement policies applicable to its
employees; provided, however, that prior approval of expenses by the Chief
Executive Officer shall not be required for any expenses incurred during any
month aggregating less than $200. During the term of this Agreement, the
Consultant shall receive no other benefits other than the consulting fees and
Option provided for under this Agreement.
8. Confidentiality and Competitive Activities.
(a) Confidentiality. In view of the fact that Consultant's work
as a consultant to the Company will bring him into close contact with
many confidential affairs of the Company and its subsidiaries and
affiliates, including matters of a business nature such as information
about costs, profits, markets, sales, trade secrets, business ideas,
customer lists, loan agreements, credit arrangements, financial data
and information, plans and strategies for future developments and
information of any other kind not known generally in the Company's
industry (hereinafter, collectively, "Confidential Matters"),
Consultant agrees.
3
<PAGE> 4
(i) to keep secret all Confidential Matters of the Company and of
any subsidiaries and affiliates of the Company, and not to disclose
those matters to anyone outside the Company or its subsidiaries or
affiliates, or otherwise use the Confidential Matters or his knowledge
of that information for his own benefit, including, without limitation,
use of trade names or trade marks of the Company or use of said
information in connection with any purchase or sale of the Company's
common stock or any of the assets or liabilities of the Company, either
during or after the term of this Agreement, except with the Company's
prior written consent; but notwithstanding the forgoing, (A) Consultant
shall not be restricted from disclosing any such information it
actually required (x) by law or (y) by order of a governmental agency
or court of competent jurisdiction, in which case Consultant shall give
the Company prior written notice that such disclosure is required with
a full and complete description regarding such requirements, and (B)
the Company recognizes the extensive experience and substantial
expertise of Consultant in off-priced retailing, and (C) nothing herein
will restrict Consultant from using any information of any nature which
Consultant developed prior to the term of the Agreement or which
Consultant derived from any source other than the Company, and nothing
in this Agreement shall in any way require Consultant to disclose to
the Company any information of a confidential nature which Consultant
derived from his prior employer; and
(ii) to deliver promptly to the Company at the termination of
this Agreement, or at any time the Company may request, all memoranda,
notices, records, reports, and other documents (and all copies thereof)
relating to the business of the Company or any of its subsidiaries or
affiliates, including, but not limited to Confidential Matters which he
may then possess or have under his control.
(b) Competitive Activities. During the term of this Agreement,
Consultant shall not directly or indirectly (whether for compensation or
otherwise), alone or as an officer, director, stockholder (excepting not more
than 5% stockholdings for investment purposes in securities of publicly held and
traded companies), partner, associate, employee, agent, principal, trustee,
salesman, consultant, or in any capacity whatsoever take any action in or
participate with or become interested in or associated with any person, firm,
partnership, corporation or other entity whatsoever engaged in any manner in the
off-priced retail business. The obligations of Consultant set forth in this
subsection 8(b) shall continue
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<PAGE> 5
through January 31, 1997, whether or not this Agreement is terminated
prior to that date.
If any covenant contained in this subsection 8(b), or any part thereof,
is hereinafter construed to be invalid or unenforceable, the same shall
not effect the remainder of the covenants which shall be given full
effect, with regard to the invalid portion or portions.
9. Procedures to Insure Confidentiality. To the extent the Consultant
needs assistance in connection with the performance of his obligations under
this Agreement, he shall use only designated Company employees to assist him in
this regard when such assistance would require the disclosure of Confidential
Matters.
10. Confidentiality of Agreement. Neither consultant nor the Company
shall disclose the terms of this Agreement without the other party's prior
written consent, unless such disclosure is actually required: (i) by law or
regulation or (ii) by order of a governmental agency or court of competent
jurisdiction, in which case Consultant shall give the Company prior written
notice that such disclosure is required with a full and complete description
regarding such requirement.
11. Warranty. Consultant represents and warrants that Consultant is
capable of fulfilling the terms of this Agreement and that Consultant is not
bound in any manner, whether by written or oral agreement, contract or other
obligation, which would prevent Consultant from providing the services to the
Company contemplated under this Agreement. Specifically, Consultant represents
and warrants that he is not bound by any non-competition agreement or other
covenant which would prevent or interfere with his abilities to perform the
functions required under this Agreement. Consultant agrees that if litigation
is commenced by a prior employer of Consultant which would challenge the legal
right of Consultant to enter into this Agreement or to perform the functions
required under this Agreement, such action shall constitute cause under Section
13 for termination of this Agreement.
12. Remedies for Breach of Confidentiality and Competitive Activities.
If Consultant breaches, or threatens to breach, any of the provisions of Section
8 hereof, the Company shall have the following rights and remedies, in addition
to any others, each of which shall be independent of the other and severally
enforceable:
(i) The right to have the provisions of Section 8 of this
Agreement specifically enforced by any court having equity
jurisdiction, including the right to certain emergency injunctive
relief, it being acknowledged and agreed that any such breach or
threatened breach will cause irreparable injury to the Company and that
money damages will not provide an adequate remedy to the Company;
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<PAGE> 6
(ii) The right and remedy to require Consultant to account for
and pay over to the Company an amount equal to the monetary damages
sustained by the Company as a result of the breach; provided, however,
except with regard to any purchase or sale of the Company's common
stock and/or any of the assets or liabilities of the Company,
Consultant shall not be required to pay over to the Company pursuant to
this provision an amount in excess of all compensation, profits,
monies, accruals, increments or other benefits (hereinafter
collectively the "Benefits") derived or received by Consultant pursuant
to this Agreement, and Consultant hereby agrees to the extent of the
damages incurred by the Company to pay over said Benefits to the
Company; and
(iii) The right to terminate Consultant's engagement hereunder
pursuant to Section 13 hereof.
13. Termination of Agreement.
(i) Death or Disability. This Agreement shall automatically
terminate upon the death or disability of Consultant. Under the terms
of this Agreement, disability shall mean an infirmity preventing
Consultant from performing his duties for more than 30 substantially
consecutive days. During the term, if Consultant's engagement hereunder
is terminated due to his death or disability, Consultant or
Consultant's estate, as the case may be, shall not be entitled to any
post-termination compensation.
(ii) Termination For Cause. The Company may terminate this
Agreement at any time for "Cause" in accordance with the procedures
provided below. Termination by the Company of this Agreement for
"Cause" shall mean termination upon (a) the substantial neglect or
inattention by Consultant of his duties under this Agreement after
written notice accordingly from CEO to Consultant and failure of
Consultant to cure such omission within three (3) business days after
receipt of such notice, (b) charged with a felony crime, or (c) a
material breach of his obligations under this Agreement after written
notice accordingly from CEO to Consultant and failure of Consultant to
cure such omission within three (3) business days after receipt of such
notice. In the event of termination of Consultant's engagement for
Cause, or the Consultant resigns or terminates the Agreement,
Consultant shall be entitled to be paid only the compensation accrued
on a daily, pro-rata basis through the date of termination, and he
shall not be entitled to any other compensation, the grant of the
Option as provided for in Section 6 or any other benefits (except as
required by law).
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<PAGE> 7
(iii) Other Termination. The Company may terminate
this Agreement at any time without Cause. In the event of such
termination without Cause, Consultant shall nevertheless be entitled
to receive the compensation set forth in Section 5 hereof. The timing
and manner of payment of such compensation shall be in accordance with
the compensation payment arrangements in effect prior to such
termination. Also, Consultant shall be entitled to the grant of the
Option provided for in Subsection 6 hereof. However, the Consultant
shall not be entitled to any other benefits on a prospective basis
(except as required by law). Other than as set forth in this Section,
Consultant shall not have any other rights which have not previously
accrued upon termination of this Agreement.
14. Communications. All notices, requests, demands, and
other communications under this Agreement shall be in writing and, unless
otherwise provided herein, shall be deemed to have been duly given upon
hand-delivery or upon deposit in the United States Mail, postage prepaid,
certified or registered mail, return receipt requested, as follows:
<TABLE>
<S> <C>
If to the Company: Solo Serve Corporation
1610 Cornerway Blvd.
San Antonio, TX 78219
Attention: Mr. David P. Dash
With a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, TX 78205
Attention: Ms. Donna K. McElroy
If to Consultant: Charles M. Siegel
1403 Fortune Hill
San Antonio, Texas 78258
with a copy to: Davis, Adami & Cedillo
Harte-Hanks Tower, Suite 400
7710 Jones-Maltsberger
San Antonio, TX 78216-6950
Attention: Mr. J. Russell Davis
</TABLE>
or at such other address as shall have been furnished to the other in writing
in accordance herewith, except that such notice of such change shall be
effective only upon receipt.
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<PAGE> 8
15. No Implied Rights or Remedies. Except as otherwise
expressly provided herein, nothing in this Agreement, expressed or implied, is
intended or shall be construed to confer upon or to give any person, firm, or
corporation, other than the Parties and their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
16. Agreement of Further Cooperation. Each of the
Parties agrees to execute and deliver such further documents and to cooperate
in such manner as may be necessary to implement and give effect to the
agreements contained herein.
17. Amendments. This Agreement may be amended or
modified only by a written instrument executed by the parties hereto.
18. Binding Effect. This Agreement shall be binding
upon, and shall inure to the benefit of, Consultant; the obligations of
Consultant hereunder are personal and this Agreement may not be assigned by
Consultant. This Agreement shall be binding upon, and shall inure to the
benefit of, the Company and shall also bind and inure to the benefit of any
successor of the Company by merger or consolidation or any assignee of all or
substantially all of its properties, but, except to any such successor or
assignor of the Company, this Agreement may not be assigned by the Company.
19. Applicable Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
20. Severability. If any provision of this Agreement
shall, to any extent, be invalid or unenforceable, the remainder of this
Agreement shall not be affected, and each term hereof shall be valid and shall
be enforced to the extent permitted by law.
21. Entire Agreement. This Agreement shall constitute the
entire agreement between the parties superseding all prior agreements, and may
not be modified or amended, and no waiver shall be effective, unless by written
document signed by both parties hereto.
22. Arbitration of Disputes. Should any dispute or
controversy arise between the parties, including without limitation, any
dispute relating to this Agreement, or termination of this Agreement, the
Parties specifically stipulate and agree to submit any such dispute to final
and binding arbitration. Such arbitration shall be conducted before a single
arbitrator pursuant to the Commercial Arbitration Rules then in effect of the
American Arbitration Association, except to the extent such rules are
inconsistent with this Section. Exclusive venue for such arbitration shall be
in San Antonio, Bexar County, Texas. The arbitration shall apply the laws of
the state of Texas (without regard
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<PAGE> 9
to conflict of law rules) in determining the substance of the dispute,
controversy or claim and shall decide same in accordance with the applicable
usages and terms of trade. Evidentiary questions shall be governed by the
Federal Rules of Evidence. The arbitrator's award shall be in writing and set
forth the findings and conclusions upon which the award is based, with the
costs of such arbitration to be split equally between the parties; provided,
however, that upon conclusion of the arbitration, the prevailing party in the
arbitration shall be entitled to reimbursement of its reasonable costs of
arbitration from the non-prevailing party, including attorneys' fees, costs and
expenses. Any award pursuant to such arbitration shall be final and binding
upon the Parties, and judgment on the award may be entered in any federal or
state court in Bexar County, Texas, or any other court having jurisdiction.
The terms of this Section shall survive the termination of this Agreement. By
execution of this Agreement, Consultant, with an adequate opportunity to
consult with legal counsel, knowingly and voluntarily waives any right to trial
by jury of any dispute pertaining to or relating in any way to Consultant's
employment with the Company, this Agreement or termination thereof, the
provisions of any federal, state or local law, regulation or ordinance
notwithstanding. Notwithstanding the foregoing provisions, if you breach any
of the non-disclosure or non-competition provisions of this Agreement, the
Company shall have the right to seek immediate injunctive relief in the form of
a temporary, preliminary or permanent mandatory or restraining injunction,
enjoining you from such further breach of those provisions of this Agreement.
23. No Waiver of Remedies. No delay or omission by the
Company or Consultant in exercising any right or remedy under any of the terms
of this agreement shall operate as a waiver of any rights or remedies which the
Company or Consultant may have under this Agreement, either at law or in
equity, and no single or partial exercise of any such right shall preclude any
other or further exercise thereof or of the exercise of any other right or
remedy.
EXECUTED effective as of the day and year first above written.
SOLO SERVE CORPORATION
By: /s/ David P. Dash
------------------------------
Title: President
----------------------------
/s/ Charles M. Siegel
-----------------------------------
Charles M. Siegel, Consultant
Address: 1403 Fortune Hill
-------------------------
San Antonio, Texas 78258
-------------------------
9
<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
AGREEMENT, effective as of the 8th day of August, 1996 (the "Effective
Date") by and between SOLO SERVE CORPORATION, a Delaware corporation (the
"Company"), and CHARLES M. SIEGEL ("Employee") (the Company and the Employee
are sometimes collectively referred to as the "Parties").
WHEREAS, the Parties desire and intend to terminate the Consulting
Agreement dated June 26, 1996, executed by and between them (the "Consulting
Agreement");
WHEREAS, the Company desires to employ the Employee; and
WHEREAS, the Employee desires to be employed by the Company;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the Parties agree as follows:
1. Definitions. As used herein, the following terms shall have the
meanings set forth below.
"Agreement" shall mean this Employment Agreement executed between the
Employee and the Company.
"Cause" shall have the meaning set forth in Section 8(b).
"Disability" means the Employee is unable to perform his duties as
required by the terms of this Agreement for a period of more than 60
consecutive days or more than 120 non-consecutive days during any 12-month
period.
"Employment Commencement Date" shall be the Effective Date of this
Agreement.
"Employment Termination Date" means the date this Agreement terminates
as provided in Section 8.
<PAGE> 2
2. Employment and Term. The Company hereby employs the Employee,
and the Employee hereby accepts such employment by the Company, for the
purposes and upon the terms and conditions contained in this Agreement. The
term of such employment shall be until February 1, 1999, or until such earlier
date as this Agreement is terminated pursuant to Section 8 (the "Term").
3. Compensation. For all services rendered by the Employee
during the Term, the Company shall pay the Employee as follows:
(a) The Employee shall be paid an annual base salary of
$300,000 in semi-monthly payments of 1/24th of that base salary. All
salary and bonuses, as well as any other payments to Employee so
classified under applicable IRS Regulations, paid to the Employee or
his designee, shall be subject to withholding for applicable taxes,
including F.I.C.A., federal income taxes, and any taxes required by
state or local law;
(b) Notwithstanding paragraph (a) above, the Employee's
base salary for August 1996 shall be reduced by the amount of
compensation received by the Employee under his Consulting Agreement
for the month of August 1996.
(c) The Company may, in its sole discretion, increase
Employee's salary during the term hereof;
(d) Upon execution of this Agreement by the Company and
Employee, the Company shall pay to the Employee $100,000 as a one-time
signing bonus;
(e) Employee shall be granted options for 75,000
shares of Common Stock, par value $.01 per share, of the Company
pursuant to the terms of the Incentive Stock Option Agreement attached
hereto as Exhibit "A" and made a part hereof.
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<PAGE> 3
4. Insurance and Other Benefits. During the term of this
Agreement, the Employee shall be eligible for all medical, life insurance and
retirement benefits as set forth in the Company's existing policies for senior
executives and/or employees in general, whichever are greater. Except as may
be provided for in this Agreement, the Employee shall be eligible for
vacations, sick leave and other personal time in accordance with the Company's
existing policies and procedures for senior executives. Upon the Employment
Commencement Date, the Employee shall be eligible for a minimum of 5 weeks
vacation per annum. This vacation time shall not accrue from year to year and
any unused vacation time shall not be paid to the Employee upon the Employment
Termination Date. The Company shall take such actions as shall be necessary or
appropriate to cause Employee to be covered by the Company's current director's
and officer's liability insurance policy and any successor policy that the
Company may secure.
5. Duties.
(a) During the Term of this Agreement, the Employee shall be employed
as the President and Chief Executive Officer of the Company, and as such his
duties shall be the overall direction, supervision and management of the
Company and its business. As President and Chief Executive Officer, Employee
shall report directly to the Board of Directors of the Company and, if there
shall be one, the Chairman of the Board of Directors.
(b) The Employee shall have such other duties and responsibilities
as the Board of Directors of the Company may from time to time determine.
(c) During the Term of this Agreement, the Employee shall devote
his full time and attention to the business affairs of the Company, except for
such vacations as shall be provided pursuant to this Agreement.
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<PAGE> 4
However, subject to Section 12 hereof, nothing in this Agreement shall
preclude the Employee from (a) being a passive investor in other business
enterprises and/or (b) in a manner consistent with any policies or procedures
the Company may have and/or implement, devoting a reasonable amount of his time
and efforts to civic, community, charitable, personal, professional and trade
association affairs and matters. Notwithstanding the foregoing, the Employee
shall not become a member of any board of directors without the prior written
approval of the Company's Board of Directors. The Employee has the approval of
the Company's Board of Directors to join the International Mass Retailers
Association and become a member of the Board of Directors of that organization,
so long a serving in that function does not interfere with the Employee's
duties as provided for in this Section 5.
6. Working Facilities. The Company shall furnish the Employee in
San Antonio, Texas with an office, equipment and such other facilities and
services as are suitable for the performance of the Employee's duties and in
keeping with Employee's position as President and Chief Executive Officer of
the Company.
7. Reimbursement of Expenses. The Company shall pay or reimburse
the Employee for reasonable expenses paid or incurred by the Employee on behalf
of the Company in accordance with the existing policies and procedures of the
Company, as such may be amended from time to time by the Company.
8. Termination. The Employee's employment by the Company shall
terminate effective upon the first to occur of the following:
(a) The expiration of the Term or a date mutually agreed
to in writing by the Company and the Employee, which date shall be the
Employment Termination Date.
4
<PAGE> 5
(b) The date on which Employee receives notice of his
termination for cause, which date shall be the Employment Termination Date.
The Board of Directors of the Company may terminate Employee's employment with
the Company at any time "for Cause" upon notice to the Employee. As used in
this Agreement, "Cause" shall mean the occurrence of any one or more of the
following events:
(i) the Employee has engaged in willful misconduct in the
performance of his duties, functions and responsibilities, as
prescribed from time to time by the Board of Directors of the Company;
(ii) the Employee has breached a policy or procedure of
the Company which is generally applicable to officers of the Company,
which breach is material and continues for a period of thirty (30) days
after being given written notice of such breach by the Company;
(iii) the Employee has failed in any material respect to
perform his duties as reasonably prescribed and amended from time to
time by the Board of Directors of the Company which failure continues
for a period of thirty (30) days after being given notice of such
breach by the Company;
(iv) the Employee has been charged by a governmental
agency or department with any violation of law, regulation or ordinance
of a governmental entity (other than traffic violations and similar
minor offenses) which violation, if proven, would result in a felony
conviction of Employee; or the Employee has violated any judicial
decree applicable to the Company or the Employee; or
(v) the Employee has materially breached any of the terms
of this Agreement or any other written agreement between Employee and
the Company which breach continues for a period of thirty (30) days
after being given written notice of such breach by the Company.
(c) The death or Disability of the Employee (in which case the
Employment Termination Date shall be the date of death or the date on which
the Disability is determined as the case may be).
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<PAGE> 6
(d) A date specified by the Company to the Employee for
any reason other than a reason specified in the above-referenced subparagraphs,
which specified date shall be the Employment Termination Date.
(e) A date specified by the Employee to the Company for
any reason so long as the Employee provides the Company with sixty (60) days
notice of the termination. The date so specified upon sixty (60) days notice
shall be the Employment Termination Date.
From and after the Employment Termination Date, the Employee shall have no
obligation or duty to be employed by the Company in any capacity and the
Company shall have no obligation to employ the Employee in any capacity.
9. Termination Payments. The Company shall pay to the Employee
the respective amounts provided below on the Employment Termination Date.
(a) If the Employee's employment is terminated pursuant
to Section 8(a), (b), (c), or (e) hereof, then the Company shall pay the
Employee his base salary compensation through the Employment Termination Date
and the Company shall have no further obligations to the Employee, except with
respect to his vested and exercisable options.
(b) If the Employee is terminated under Section 8(d) and
the Employment Termination Date occurs prior to February 1, 1999, then the
Company shall pay the Employee a lump sum payment equal to 6 months of his base
compensation, less all deductions required by law, payable within three (3)
business days of the Employment Termination Date.
10. Warranty. Employee represents and warrants that Employee is
capable of fulfilling the terms of this Agreement and that Employee is not
bound in any manner, whether by written or oral agreement, contract or other
obligation, which would prevent
6
<PAGE> 7
Employee from providing the services to the Company contemplated under this
Agreement. Specifically, Employee represents and warrants that he is not bound
by any non-competition agreement or other covenant which would prevent or
interfere with his abilities to perform the functions required under this
Agreement. Employee agrees that if litigation is commenced by a prior employer
of Employee which would challenge the legal right of Employee to enter into
this Agreement or to perform the functions required under this Agreement, such
action shall constitute cause under Section 8 for termination of this
Agreement.
11. Confidentiality. The Employee acknowledges that by reason of
the nature of the Employee's duties, the Employee will or may have access to
and become informed of confidential and secret information which is a
competitive asset of the Company, including without limitation (i) customer
information such as names, addresses, sales histories, purchasing habits,
credit status, and pricing levels, (ii) certain prospective customer
information and lists, (iii) merchandise and product information, (iv)
merchandise and product suppliers, and prospective suppliers' names, addresses
and contacts, (v) future corporate planning data, (vi) marketing strategies,
(vii) the Company's financial results and business condition, and (viii) any of
the foregoing which belong to any other person or company but to which the
Employee has had access by reason of his employment with the Company
(collectively, "Confidential Information"). The Employee agrees to keep in
strict confidence, and not, either directly or indirectly, including through
other entities, corporations, partnerships or limited liability companies, to
make known, divulge, reveal, furnish, make available or use (except for use in
the regular course of the Employee's duties hereunder), any Confidential
Information. The Employee acknowledges that all sales manuals, instructions
books, catalogs, price lists, information and records, technical manuals and
documentation, drafts of instructions, guides and manuals, and other sales or
technical
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<PAGE> 8
information and aids relating to the Company's business and any and all other
documents containing Confidential Information furnished the Employee by any
employee of the Company or otherwise acquired or developed by the Employee
shall at all times be the property of the Company. Upon termination of the
Employee's employment with the Company, the Employee shall return to the
Company any materials containing Confidential Information which are in the
Employee's possession, custody or control. The Employee's obligations under
this Section shall survive such termination of the Employee's employment with
the Company, but shall not be applicable to (i) any such Confidential
Information which becomes, through no fault of the Employee, generally known to
the trade, (ii) information which the Employee can demonstrate was known to him
prior to commencing his employment with the Company, (iii) information in the
public domain, (iv) information required to be disclosed under or by subpoena
or lawful court order or by direction of the Board of Directors, and (v)
information which the Employee needs to disclose to his personal financial or
legal advisors. The Employee's obligations under this Section are in addition
to, and not in limitation or pre-emption of, all other obligations of
confidentiality which the Employee may have to the Company under general common
law or pursuant to other legal or equitable principles.
12. Non-Competition.
(a) For the purposes of this Section 12, Entity shall
include, without limitation, a person, firm, partnership, limited liability
company, corporation or any other form of business enterprise.
(b) The Employee acknowledges that during the term of
this Agreement, the Employee's access to the Confidential Information will
enable the Employee to benefit from the Company's goodwill and know-how. To
protect these vital interests of the Company, the Employee agrees that during
the term of this Agreement
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<PAGE> 9
and for a period of twenty-four (24) months following the Employment
Termination Date, the Employee will not, without the prior written consent of
the Company, directly or indirectly, whether as a director, officer, employee,
agent, consultant, shareholder, partner, inventor or otherwise:
(i) invest (except as a five percent
(5%) or less shareholder of any publicly
traded corporation) or become employed by or
associated with 50-OFF Stores, Inc. or accept
employment with or render services to 50-OFF
Stores, Inc.; or
(ii) actively solicit the employment or
hiring by any Entity of any employee of the
Company.
(c) This covenant not to compete shall apply
whether the Employee acts as an individual or for his own account, or as a
partner, employee, agent, salesman, distributor, consultant or representative
of any other Entity.
13. Remedies for Breach of Confidentiality and Competitive
Activities. If Employee breaches, or threatens to breach, any of the
provisions of Section 12 hereof, the Company shall have the following rights
and remedies, in addition to any others, each of which shall be independent of
the other and severally enforceable:
(i) The right to have the provisions of Section 12 of this
Agreement specifically enforced by any court having equity jurisdiction,
including the right to certain emergency injunctive relief, it being
acknowledged and agreed that any such breach or threatened breach will
cause irreparable injury to the Company and that money damages will not
provide an adequate remedy to the Company;
(ii) The right to immediately cease making any payments required
under Section 9 and the right to recover any sums previously paid under
such provision.
(iii) The right and remedy to require Employee to account for and
pay over to the Company an amount equal to the monetary damages sustained
by the Company as a result of the breach; provided, however, except with
regard to any purchase or sale of the Company's common stock and/or any of
the assets or liabilities of the Company, Employee shall not be required to
pay over to the Company pursuant to this provision an amount in excess of
all compensation, profits, monies, accruals, increments or other benefits
(hereinafter collectively
9
<PAGE> 10
the "Benefits") derived or received by Employee pursuant to this Agreement,
and Employee hereby agrees to the extent of the damages incurred by the
Company to pay over said Benefits to the Company; and
(iv) If this Agreement is still in effect, the right to terminate
this Agreement for Cause pursuant to Section 8 hereof.
14. Additional Remedies - Arbitration of Disputes. Should any
dispute arise between the Parties relating to this Agreement, including without
limitation, any dispute relating to Employee's employment or termination of
employment from the Company, the Parties specifically stipulate and agree to
submit any such dispute to final and binding arbitration conducted under the
auspices of the American Arbitration Association, with the costs of such
arbitration to be split equally between the Parties; provided, however, that
upon conclusion of the arbitration, the prevailing party in the arbitration
shall be entitled to reimbursement of its costs of arbitration from the non-
prevailing party. Employee, with an adequate opportunity to consult with legal
counsel, knowingly and voluntarily waives any right to trial by jury of any
dispute pertaining to or relating in any way to Employee's employment with or
termination from the Company, including any matters relating to this Agreement,
the provisions of any federal, state or local law, regulation or ordinance
notwithstanding. Notwithstanding the foregoing provisions, if the Employee
breaches any of the non-disclosure or non-competition provisions of this
Agreement, the Company shall have the right to seek immediate injunctive relief
in the form of a temporary, preliminary or permanent mandatory or restraining
injunction, enjoining the Employee from such further breach of those provisions
of this Agreement.
No delay or omission by the Company or the Employee in exercising any
right or remedy under any of the terms of this Agreement shall operate as a
waiver of any rights or remedies which the Company or Employee may have under
this Agreement, either at
10
<PAGE> 11
law or in equity, and no single or partial exercise of any such right shall
preclude any other or further exercise thereof or of the exercise of any other
right or remedy.
15. Consent to Jurisdiction. For the purposes of obtaining a
temporary, preliminary, or permanent injunction or restraining injunction,
order or decree to enforce the non-disclosure or non-compete provisions of this
Agreement, such action shall be filed and prosecuted solely and exclusively in
a state or federal court sitting in San Antonio, Bexar County, Texas, and
Employee irrevocably accepts the jurisdiction of the courts of the State of
Texas, and the federal courts located in such State. Employee expressly
submits and consents in advance to such jurisdiction in any action or suit
commenced in any such court, and Employee hereby irrevocably waives any
objection which Employee may have based upon personal jurisdiction, improper
venue or forum non-conveniens and hereby irrevocably consents to the granting
of such legal or equitable relief as is deemed appropriate by such court. The
Employee and the Company, each with an adequate opportunity to consult with
counsel, hereby irrevocably waives any right to a trial by jury in any
injunction or arbitration proceeding. Any injunctive relief obtained by the
Company under this Agreement shall be in addition to any other relief to which
the Company may be entitled to assert in the arbitration proceeding, at law or
in equity. This Agreement was entered into and is performable in San Antonio,
Bexar County, Texas. Employee covenants to Company and Company covenants to
Employee that no litigation arising out of or relating to this Agreement will
ever be commenced in any court other than a court sitting in San Antonio, Bexar
County, Texas. The Parties further agree and covenant that the sole and
exclusive venue for any court or arbitration proceeding shall be in San
Antonio, Bexar County, Texas.
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<PAGE> 12
16. Governing Law. This Agreement has been negotiated, executed
and delivered in the State of Texas, and shall in all respects be interpreted,
construed, and governed by and in accordance with the internal substantive laws
of the State of Texas.
17. Headings. The captions set forth in this Agreement are for
convenience of reference only and shall not be considered as part of this
Agreement or as in any way limiting or amplifying the terms and provisions
hereof.
18. Severability. Each provision of this Agreement constitutes a
separate and distinct undertaking, covenant and/or provision hereof. In the
event that any provision of this Agreement shall finally be determined to be
unlawful, such provision shall be deemed severed from this Agreement, but every
other provision of this Agreement shall remain in full force and effect, and in
substitution for any such provision held unlawful, there shall be substituted a
provision of similar import reflecting the original intent of the parties
hereto to the extent possible under law. Notwithstanding the foregoing, to the
extent the non-compete provisions of this Agreement are held to be invalid or
in any manner unenforceable, the Company shall be relieved of its obligations
to make any payments to the Employee as provided in Section 9.
19. Prohibition Against Assignment. Employee agrees, for himself
and on behalf of his executors and administrators, heirs, legatees,
distributes, and any other person or persons claiming any benefit under him by
virtue of this Agreement, that this Agreement and rights, interests and
benefits hereunder shall not be assigned, transferred, pledged or hypothecated
in any way by the Employee or any executor, administrator, heir, legatee,
distributee or other persons claiming under the Employee by virtue of this
Agreement. Any attempt to assign, transfer, pledge or hypothecate or otherwise
dispose of this Agreement, or of any rights, interests, and benefits contained
herein, contrary to the foregoing provisions shall be null and void and without
effect and shall relieve the Company of any and all liability hereunder.
12
<PAGE> 13
20. Entire Agreement
(a) This Agreement constitutes the entire agreement
between the Parties and contains all of the agreements between the Parties with
respect to the subject matter hereof and supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the subject matter hereof and all such prior agreements are hereby
terminated.
(b) No change or modification of this Agreement shall be
valid unless the same be in writing and signed by the Employee and an
authorized representative of the Company.
21. Communications. All notices, requests, demands, and other
communications under this Agreement shall be in writing and, unless otherwise
provided herein, shall be deemed to have been duly given upon hand-delivery or
upon deposit in the United States Mail, postage prepaid, certified or
registered mail, return receipt requested, as follows:
<TABLE>
<S> <C>
If to the Company: Chairman of the Board
c/o Solo Serve Corporation
1610 Cornerway Blvd.
San Antonio, TX 78219
With a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, TX 78205
Attention: Ms. Donna K. McElroy
If to Consultant: Charles M. Siegel
1403 Fortune Hill
San Antonio, TX 78258
with a copy to: Davis, Adami & Cedillo Incorporated
Harte-Hanks Tower, Suite 400
7710 Jones-Maltsberger
San Antonio, TX 78216-6950
Attention: Mr. J. Russell Davis
</TABLE>
13
<PAGE> 14
or at such other address as shall have been furnished to the other in writing
in accordance herewith, except that such notice of such change shall be
effective only upon receipt.
22. Policies and Procedures. As used in this Agreement, the
phrases "policies and procedures" or "existing policies and procedures" shall
mean the policies and procedures of the Company as such may be amended from
time to time in the discretion of the Company, which amendments the Employee
shall be given notice of by the Company.
23. Termination of Consulting Agreement. Upon execution of this
Agreement by the Parties, the Consulting Agreement by and between Charles M.
Siegel and Solo Serve Corporation dated June 26, 1996 shall be terminated in
all respects as of the Effective Date and neither Party shall have any
continuing duties, payment obligations or other obligations under the
Consulting Agreement, except that the Employee shall continue to be bound by
the terms and conditions of Section 8 of the Consulting Agreement and the
options granted to the Employee under the Consulting Agreement shall not be
affected by the termination of the Consulting Agreement.
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement effective on the 8th day of August, 1996.
THE EMPLOYEE
------------
/s/ Charles M. Siegel
--------------------------------------
CHARLES M. SIEGEL
THE COMPANY
-----------
SOLO SERVE CORPORATION
By: /s/ Robert J. Grimm
-----------------------------------
Robert J. Grimm,
Chairman of the Board
14
<PAGE> 1
EXHIBIT 10.31
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
SOLO SERVE CORPORATION
1610 Cornerway Boulevard
San Antonio, Texas 78219
September 16, 1996
Congress Financial Corporation (Southwest)
1201 Main Street
Dallas, Texas 75250
Gentlemen:
Congress Financial Corporation (Southwest) ("Lender") and Solo Serve
Corporation ("Borrower") have entered into certain financing arrangements
pursuant to the Loan and Security Agreement, dated June 20, 1995, between
Lender and Borrower, as amended by Amendment No. 1 to Loan and Security
Agreement, dated October 27, 1995, Amendment No. 2 to Loan and Security
Agreement, dated January 31, 1996 and Amendment No. 3 to Loan and Security
Agreement, dated June 26, 1996 (and as amended hereby and as the same may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement", together with all agreements, documents and
instruments at any time executed and/or delivered in connection therewith or
related thereto, collectively, the "Financing Agreements").
Borrower has requested that Lender agree to certain amendments to the
Loan Agreement, and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein. By this Amendment, Lender and
Borrower desire and intend to evidence such amendments.
In consideration of the foregoing and the agreements and covenants
contained herein, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definition. As used herein, the following term shall
have the meaning given to it below, and the Loan Agreement is hereby amended to
include, in addition and not in limitation, the following definition:
"'Amendment No. 4' shall mean this Amendment No. 4 to Loan and
Security Agreement between Lender and Borrower."
(b) Interpretation. All capitalized terms used herein shall have the
meanings assigned thereto in the Loan Agreement, unless otherwise defined
herein.
<PAGE> 2
2. Amendment.
Section 9.14 of the Loan Agreement is hereby deleted in its entirety
and replaced with the following:
"9.14 Working Capital. Borrower shall maintain Working Capital
of not less than $4,500,000 at all times after September 1, 1996."
3. Representations, Warranties and Covenants. In addition to the
continuing representations, warranties and covenants heretofore or hereafter
made by Borrower to Lender pursuant to the Financing Agreements, Borrower
hereby represents, warrants and covenants with and to Lender as follows (which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof and shall be incorporated into and made a part of
the Financing Agreements):
(a) No Event of Default exists on the date of this Amendment(after
giving effect to the amendment to the Loan Agreement made by this Amendment).
(b) This Amendment has been duly executed and delivered by Borrower and
is in full force and effect as of the date hereof, and the agreements and
obligations of Borrower contained herein constitute legal, valid and binding
obligations of Borrower enforceable against Borrower in accordance with their
respective terms.
4. Conditions Precedent. The effectiveness of the amendments contained
herein shall be subject to the satisfaction of the following conditions
precedent in a manner satisfactory to Lender and its counsel:
(a) the receipt by Lender of an original of this Amendment, duly
authorized, executed and delivered by Borrower;
(b) no Event of Default shall have occurred and be continuing and no
event shall have occurred or condition be existing and continuing which, with
notice or passage of time or both, would constitute an Event of Default.
5. Amendment Fee. Borrower shall pay to Lender an amendment fee in an
amount equal to $10,000, which amount shall be payable simultaneously with the
execution hereof, which fee is fully earned as of the date hereof, shall be in
addition to all other amounts payable under the Financing Agreements, shall
constitute part of the obligations and may, at Lender's option, be charged
directly to any account(s) of the Borrower maintained with Lender.
6. Effect of this Amendment. Except as modified pursuant hereto, no other
changes or modifications to the Financing Agreements are intended or implied and
in all other respects the Financing Agreements are hereby specifically
ratified,
2
<PAGE> 3
restated and confirmed by all parties hereto as of the effective date
hereof. To the extent of conflict between the terms of this Amendment and the
other Financing Agreements, the terms of this Amendment shall control. The Loan
Agreement and this Amendment shall be read and construed as one agreement.
7. Further Assurances. The parties hereto shall execute and deliver such
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Amendment.
8. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in
accordance with the laws of the State of Texas (without giving effect to
principles of conflicts of law).
9. Binding Effect. This Amendment shall be binding upon and inure to the
benefit of each of the parties hereto and their respective successors and
assigns.
10. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one
and of the same agreement. In making proof of this Amendment, it shall not be
necessary to produce or account for more than one counterpart thereof signed by
each of the parties hereto.
Please sign the enclosed counterpart of this Amendment in the space
provided below, whereupon this Amendment, as so accepted by Lender, shall
become a binding agreement between Borrower and Lender.
Very truly yours,
SOLO SERVE CORPORATION
By: /s/ Charles M. Siegel
----------------------
Title: President
--------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
(SOUTHWEST)
By: /s/ Edward Franco
---------------------------
Title: Vice President
------------------------
3
<PAGE> 1
EXHIBIT 15
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
September 16, 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
September 16, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT SET FORTH IN THE REGISTRANT'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED 8-3-96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> AUG-03-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,001,347
<CURRENT-ASSETS> 19,668,296
<PP&E> 14,600,115
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,618,411
<CURRENT-LIABILITIES> 9,670,555
<BONDS> 16,769,629
<COMMON> 28,562
0
13,889
<OTHER-SE> 7,580,576
<TOTAL-LIABILITY-AND-EQUITY> 34,618,411
<SALES> 48,329,847
<TOTAL-REVENUES> 48,329,847
<CGS> 34,246,327
<TOTAL-COSTS> 34,246,327
<OTHER-EXPENSES> 15,509,152
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 768,350
<INCOME-PRETAX> (2,193,982)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,193,982)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,193,982)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)
</TABLE>
<PAGE> 1
EXHIBIT 99
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 August 3, 1996 and July
29, 1995 and for the thirteen and twenty-six 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
September 16, 1996
