<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 2, 1997
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 September 10,
1997, were 2,856,126 and 1,388,889 shares, respectively. Affiliates of the
registrant held 1,307,500 shares of the Common Stock, and all of the Preferred
Stock, outstanding on September 10, 1997.
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. Financial Statements ...............................................3
Balance Sheets, August 3, 1996 (unaudited),
February 1, 1997 and August 2, 1997 (unaudited).....................3
Statements of Operations, thirteen and twenty-six weeks
ended August 3, 1996 (unaudited) and August 2, 1997 (unaudited).....4
Statements of Cash Flows, twenty-six weeks
ended August 3, 1996 (unaudited) and August 2, 1997 (unaudited).....5
Notes to Financial Statements
(unaudited).........................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................9
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................14
ITEM 6. Exhibits and Reports on Form 8 - K.................................14
Signatures.........................................................17
</TABLE>
2
<PAGE> 3
PART I
ITEM I. Financial Statements
SOLO SERVE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 3, FEBRUARY 1, AUGUST 2,
1996 1997 1997
------------ ------------ ------------
ASSETS (unaudited) (unaudited)
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 1,716,647 $ 1,065,564 $ 1,795,409
Inventory 15,001,347 11,107,938 13,661,082
Other current assets 2,950,302 988,469 1,697,564
------------ ------------ ------------
Total current assets 19,668,296 13,161,971 17,154,055
Property and equipment, net 14,600,115 12,935,322 12,354,342
Goodwill and service marks, net 350,000 290,000 230,000
------------ ------------ ------------
TOTAL ASSETS $ 34,618,411 $ 26,387,293 $ 29,738,397
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 711,836 $ 770,602 $ 790,259
Accounts payable 4,853,592 3,983,898 7,245,054
Accrued expenses 4,105,127 2,339,615 2,973,629
------------ ------------ ------------
Total current liabilities 9,670,555 7,094,115 11,008,942
Long-term debt 16,769,629 14,960,600 17,501,487
Postretirement benefit obligation 555,200 -- --
------------ ------------ ------------
Total Liabilities 26,995,384 22,054,715 28,510,429
============ ============ ============
STOCKHOLDERS' EQUITY:
Preferred stock 13,889 13,889 13,889
Common stock 28,562 28,562 28,562
Capital in excess of par value 24,410,290 24,410,290 24,410,290
Retained deficit (16,829,714) (20,120,163) (23,224,773)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 7,623,027 4,332,578 1,227,968
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,618,411 $ 26,387,293 $ 29,738,397
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SOLO SERVE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------------- --------------------------------
AUGUST 3, AUGUST 2, AUGUST 3, AUGUST 2,
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenues $ 26,069,877 $ 21,365,340 $ 48,329,847 $ 40,968,311
Cost of goods sold (including buying and
distribution, excluding depreciation
shown below) 18,501,996 15,099,928 34,246,327 29,085,986
------------ ------------ ------------ ------------
Gross Profit 7,567,881 6,265,412 14,083,520 11,882,325
Selling, general, and administrative
expense 7,764,277 5,991,440 14,240,293 12,733,145
Store Closures -- (208,000) -- 399,000
Depreciation and amortization expenses 624,964 491,953 1,268,859 1,002,277
------------ ------------ ------------ ------------
Operating loss (821,360) (9,981) (1,425,632) (2,252,097)
Interest expense 399,788 463,731 768,350 853,657
------------ ------------ ------------ ------------
Net income (loss) $ (1,221,148) $ (473,712) $ (2,193,982) $ (3,105,754)
============ ============ ============ ============
Loss per Common Share $ (.43) $ (.17) $ (.77) $ (1.09)
============ ============ ============ ============
Weighted average common shares
outstanding 2,856,126 2,856,126 2,856,126 2,856,126
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
SOLO SERVE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
AUGUST 3, 1996 AUGUST 2, 1997
-------------- --------------
<S> <C> <C>
NET LOSS $ (2,193,982) $ (3,105,754)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH FROM OPERATIONS:
Depreciation and Amortization 1,268,860 1,002,277
Loss on retirement of property -- 1,141
Changes in Assets and Liabilities:
(Increase) decrease in Inventory (791,167) (2,553,144)
(Increase) decrease in Other Current Assets (676,672) (709,094)
Increase (decrease) in Accounts Payable 1,426,655 3,261,155
Increase (decrease) in Accrued Expenses 895,117 634,013
Increase (decrease) in Non Current Liabilities (10,000) --
------------ ------------
Total adjustments 2,112,793 1,636,348
------------ ------------
Net cash used in operations before reorganization items (81,189) (1,469,406)
OPERATING CASH FLOW FROM REORGANIZATION ITEMS:
Payment on allowed claims (460,612) --
------------ ------------
Net cash used in operations: (541,801) (1,469,406)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property & equipment (174,709) (361,293)
------------ ------------
CASH USED IN INVESTING ACTIVITIES (174,709) (361,293)
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under line of credit agreement 52,798,998 44,866,660
Payments under line of credit agreement (50,788,998) (41,931,660)
Payments on long-term debt (348,370) (374,456)
------------ ------------
Net cash provided by financing activities 1,661,630 2,560,544
------------ ------------
NET INCREASE (DECREASE) IN CASH 945,120 729,845
CASH AT BEGINNING OF YEAR 771,527 1,065,564
------------ ------------
CASH AT END OF PERIOD $ 1,716,647 $ 1,795,409
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 752,696 $ 815,796
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 6
SOLO SERVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1:
The financial statements as of August 3, 1996 and August 2, 1997, and for the
thirteen and twenty-six week periods ended August 3, 1996 and August 2, 1997,
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 2, 1997, and the results of
operations and cash flows for the periods presented. Such adjustments are of a
normal and recurring nature. 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 consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended February 1, 1997.
With respect to the unaudited financial information of the Company as of August
3, 1996 and August 2, 1997 and for the thirteen and twenty-six weeks ended
August 3, 1996 and August 2, 1997, 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:
The Company has continued to experience operating losses and lower than
anticipated sales during the second quarter. The Company's business has been
affected by a number of factors, including less promotional activities than in
the comparable period of fiscal 1996; the effect of credit concerns on the
Company's ability to acquire certain types of inventory; reduction or
elimination of certain merchandise categories, including shoes and jewelry; and
increased competition as competitors have opened additional stores in certain
of the market areas served by the Company's stores. Many of these factors are
not within the Company's control.
In response to these conditions, management has formulated a plan which
includes restructuring its lending arrangements and completing other
transactions (see Note 5) and is exploring the opportunities associated with
opening stores in markets smaller than it has traditionally served. If current
plans to improve overall financial performance and meet liquidity requirements
are not successful, the Company would consider other alternatives designed to
enhance liquidity, including additional debt or equity financings, or other
strategic alternatives. There are no assurances that the Company will be
successful in its efforts to improve operations and return the Company to
profitability.
NOTE 3:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 3, 1996 FEBRUARY 1, 1997 AUGUST 2, 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Notes payable to bank, interest at prime plus 1/2%
(9.25% at August 2, 1997) secured by properties $ 5,286,335 $ 5,131,406 $ 4,970,827
Note payable to insurance company, interest at 8%; secured by
equipment and properties 834,013 654,132 $ 466,937
Mortgage notes payable to insurance companies, interest at 9.5%;
secured by the distribution center 5,786,117 5,760,664 $ 5,733,982
Congress Loan Agreement, interest at prime plus 1%
(9.5% at August 2, 1997); secured primarily by inventory 5,575,000 4,185,000 $ 7,120,000
----------- ----------- -----------
17,481,465 15,731,202 18,291,746
Less current portion 711,836 770,602 790,259
----------- ----------- -----------
Long-term portion $16,769,629 $14,960,600 $17,501,487
=========== =========== ===========
</TABLE>
6
<PAGE> 7
The Company has a $5.8 million mortgage note, secured by its corporate office
and distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.5% per annum and requires monthly payments of principal and
interest of $49,773 until December 2002, when the remaining principal balance
of $5.4 million is due. The Company also has 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 until September 1998, when the remaining principal
balance of $35,000 is due. The Company also has a term note payable to Texas
Commerce Bank ("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 remaining principal balance of $4.5
million is due. The TCB note is secured by the Company's three owned store
locations.
The Company entered into a loan agreement with Congress Financial Corporation
(Southwest) ("Congress") on June 20, 1995 which has been amended several times.
In May 1997, the Company and Congress amended certain financial covenants in
the loan agreement. As amended, effective for the remaining term of the note
the Company is obligated to maintain minimum working capital of $3.25 million,
minimum net worth of $800 thousand, and to limit capital expenditures, net of
insurance or other proceeds resulting from the disposal or sale of fixed
assets, to $2.5 million for any fiscal year period. Under the terms of the loan
agreement, which is in effect until July 1999, the Company may borrow up to its
borrowing base as calculated pursuant to the loan agreement, which may not
exceed $15.0 million. The proceeds of the loan may be used for letters of
credit, working capital, and general corporate purposes. The loan as amended is
a revolving loan with a borrowing base formula which limits the amount of
available credit to 60% of the Company's eligible inventory during the period
of March 1st through May 15th and September 1st through November 30th of each
year and to 55% of the Company's eligible inventory during any other period
less (i) a percentage of undrawn amounts on letters of credit and (ii)
availability reserves established from time to time by the lender. In June,
1997 the Company and Congress again amended the loan agreement and entered into
a Standby Guarantee and Indemnification Agreement to facilitate supplemental
borrowings in an amount equal to 3% of the Company's eligible inventory, (not
to exceed $350,000) from June 10, 1997 through December 10, 1997. The loan
bears interest at prime plus 1%. In addition, the Company pays a commitment fee
equal to 1/2% per annum of the unused principal balance of the loan less than
$10,000,000. The loan is secured by substantially all the assets of the Company
other than those subject to other existing liens.
Under the loan agreement, as amended, Congress may establish and revise
availability reserves in its sole discretion to cover risks or events it
perceives may affect its security under the loan or the business or prospects
of the Company. The current availability reserve under the loan agreement
approximates $650,000. As a result of the formula by which the borrowing base
is calculated, an increase in availability reserves restricts the Company's
access to borrowings under the credit facility. In addition to the Congress
credit facility, the Company is dependent upon short-term trade credit as a
source of inventory financing. Short term 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 factoring
institution. The Company's inventories were $1.3 million less at August 2, 1997
than at the end of the comparable period of fiscal 1996, and accounts payable
increased $2.3 million. The $1.3 million reduction in other current assets was
primarily the result of eliminating advance payments to third-party factoring
institutions.
See Note 5.
NOTE 4:
During the first quarter of fiscal 1997, the Company accrued $607,000 in store
closing expense for the estimated future occupancy costs related to three
stores to be closed or in which operations were to be significantly reduced in
the second quarter of the fiscal year. These amounts represented management's
best estimates of the future rents due after the second quarter ($550,000),
vacation pay, and miscellaneous travel and transportation costs associated with
the closings. During the second quarter of fiscal 1997, the Company decided to
continue operations at one of the stores (Baton Rouge) in a reduced capacity as
a clearance outlet. Accordingly, the accrued store closing expense related to
this store ($208,000) was reversed and ongoing operating expenses will be
expensed as incurred in the store operations.
NOTE 5:
On September 8, 1997, the Company entered into a binding commitment letter with
Sanwa Business Credit Corporation ("Sanwa") pursuant to which Sanwa has agreed
to provide the Company up to $12 million in a revolving credit facility to
replace the Congress credit facility described above. The loan will bear
interest at Sanwa's prime rate plus 1% floating, unless the Company defaults
under the loan, in which case the default rate under the loan is prime plus 3%
(as reported in the Wall Street Journal). The loan will mature three (3) years
after the closing date. Principal will be due at maturity and interest only
shall be due and payable in monthly installments. The loan facility may be
prepaid in full (but not in part) upon thirty (30) days prior written notice.
If prepaid on or before the first anniversary, there is a three percent (3%)
pre-payment penalty and a one percent (1%) prepayment penalty thereafter.
7
<PAGE> 8
The advance rate under the Sanwa credit facility would be in an amount equal to
70% of the Company's eligible inventory during the period May 1 through
December 10 of each year and 65% of eligible inventory at all other times.
Within the loan facility, the Company may obtain up to $2 million of letters of
credit. If this letter of credit facility is utilized, Sanwa will charge two
percent (2%) per annum on the undrawn face amount of letters of credit.
Outstanding letters of credit reduce the loan availability under the revolving
loan dollar for dollar. In addition to advances made based upon the percentage
of eligible inventory, Sanwa will make available an additional $750,000 upon
receipt of a letter of credit in such amount from General Atlantic, which
General Atlantic has agreed to issue, subject to appropriate documentation, for
a term extending through December 31, 1998. In consideration for General
Atlantic's agreement to provide the $750,000 standby letter of credit to Sanwa,
the Company would grant to General Atlantic a second lien security interest
(subordinated to Sanwa) on the assets of the Company pledged to Sanwa.
A fee of $192,000 is payable to Sanwa at the closing. A non-refundable
commitment fee of $25,000 was paid in connection with the acceptance of the
commitment. The commitment fee will be credited against the closing fee. A
cancellation fee of $150,000 is payable if the loan does not close for any
reason other than a default by Sanwa and the Company obtains financing from a
party other than Sanwa under terms and conditions pursuant to which Sanwa is
willing to make the loan. A servicing fee of $2,000 per month is payable
monthly in advance while the loan is in effect and an unused line fee is
payable monthly in arrears equal to one-half of 1% per annum based on the
average daily unused principal balance of the revolving loan less than
$10 million. All out-of-pocket expenses incurred by Sanwa are to be fully paid
by the Company whether or not the loan closes. The loan will be secured by a
first perfected security interest in all of the Company's accounts receivable,
inventory and personal property, except for the property subject to liens in
favor of MetLife Capital Corporation.
The proposed credit facility is subject to customary conditions, including
negotiation and execution of final documents. Management expects the proposed
new credit facility to be consummated before the end of September 1997. The
commitment letter expires October 9, 1997. The final loan documents are
expected to contain customary affirmative covenants, negative covenants, events
of default and other similar terms for asset-based loans of this type,
including a lock box/blocked account agreement with all of the Company's banks.
The loan documents will contain financial covenants tested quarterly beginning
January 31, 1998 requiring the Company to maintain specified Interest Coverage
Ratios for various periods and specified minimum Net Worth on designated dates
through the maturity of the loan. For the 3 month fiscal period ending on or
about January 31, 1998, and for the 6 month fiscal period ending on or about
April 30, 1998, the Interest Coverage Ratio, as defined in the commitment
letter, is required to be 2.40 : 1.0 and 1.15 : 1.0, respectively. The Company
is required to maintain minimum Net Worth of $1,200,000 and $550,000,
respectively, at January 31, 1998 and April 30, 1998. The Sanwa commitment
defines "Net Worth" as assets less liabilities, plus the amount of the Siegel
loan described below. For quarterly periods after April 30, 1998, the
designated Interest Coverage Ratio and Net Worth requirements increase in
accordance with the schedule set forth in the commitment letter.
In a related transaction, Charles M. Siegel, President and Chief Executive
Officer of the Company, and a related family trust have agreed to loan the
Company an aggregate amount of $500,000 in addition to the Sanwa credit
facility, which loan would be subordinated to the Sanwa Credit Facility (the
"Siegel loan"). The loan would bear interest at a rate of prime plus 1%, and
would require monthly payments of interest only for a period of five years, at
which time the principal would become due. The Company may not repay any
principal without Sanwa's prior consent and may make interest payments to Mr.
Siegel only if there is no existing default by the Company under the Sanwa
credit facility. Consummation of the Siegel loan is a condition of Sanwa's
obligation to make the Sanwa credit facility available to the Company.
Additionally, the Company has been advised that General Atlantic Corporation
has agreed to sell to Charles M. Siegel the Common Stock of the Company it
currently owns. Upon consummation of this transaction, Mr. Siegel will own
1,255,000 shares of the Company's common stock, or approximately 30% of the
aggregate voting stock of the Company. General Atlantic Corporation will
continue to own 1,388,889 shares of the Company's Preferred Stock, which
represents approximately 33% of the aggregate voting stock of the Company. In
both cases, the percentages of voting shares reported are exclusive of options
outstanding.
Contemporaneously with the proposed transactions described above, the Company
intends to enter into a modified employment agreement with Mr. Siegel pursuant
to which Mr. Siegel would continue to serve as President and Chief Executive
Officer of the Company for a period of five years at an initial base salary of
$312,000 per year, subject to a 4% per annum increase each September during the
employment term. The agreement also would provide for a bonus of $30,000
payable in April 1998 and in April 1999 and deferred compensation in an
aggregate amount up to twice Siegel's base salary under his current employment
agreement, vesting 15%, 30%, 45%, 60%, and 100%, respectively, over the five
year term of the proposed Agreement. The amended employment agreement would
also provide for severance pay of up to two years base salary as severance if
he is terminated by the Company without Cause, as that term is defined in the
Agreement.
8
<PAGE> 9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NUMBER OF STORES
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------- -----------
<S> <C> <C>
Beginning of year 29 28
Closed -- (2)
Opened -- 1
----- -----
END OF SECOND QUARTER 29 27
===== =====
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data of the Company expressed
as a percentage of net sales for the thirteen weeks and twenty-six weeks ended
August 3, 1996 and August 2, 1997.
PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
AUGUST 3, 1996 AUGUST 2, 1997 AUGUST 3, 1996 AUGUST 2, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, including buying and
distribution costs 71.0 70.7 70.9 71.0
------- ------- ------- -------
Gross Profit 29.0 29.3 29.1 29.0
Selling, general and administrative expenses 29.8 28.0 29.5 31.0
Store closing expense -- (1.0) -- 1.0
Depreciation and amortization 2.4 2.3 2.5 2.5
------- ------- ------- -------
Operating Income (Loss) (3.2) (0.0) (2.9) (5.5)
Interest expense 1.5 2.2 1.6 2.1
------- ------- ------- -------
Net Income (Loss) (4.7)% (2.2)% (4.5)% (7.6)%
======= ======= ======= =======
</TABLE>
9
<PAGE> 10
THIRTEEN WEEKS (SECOND QUARTER) AND TWENTY-SIX WEEKS (YEAR-TO-DATE) ENDED
AUGUST 2, 1997 VERSUS THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED AUGUST 3, 1996
Recent Developments
During the second quarter, the Company opened a new store in San Angelo, Texas,
and management is pleased with its early results. Management believes that
there may be opportunities for the Company in markets smaller than those
historically served by the Company, where the Company expects to face less
direct competition from larger off-price retailers and can operate under a
lower expense structure than that generally required by the Company's stores
located in metropolitan areas. On August 21, 1997, the Company entered into a
lease for a new store in Brownwood, Texas, which it plans to open in late
October. Management believes that Brownwood is a market similar to San Angelo
and consistent with the Company's plan to explore opportunities in smaller
markets.
Results of Operations
The Company's net revenues for the second quarter and year-to-date period ended
August 2, 1997 were $21.4 million and $41.0 million, respectively, as compared
to $26.1 million and $48.3 million in the prior year. The majority of the
second quarter and year-to-date sales decreases are attributable to a greater
than anticipated decline in comparable store sales of 19.2% and 14.7%,
respectively. Management attributes the greater than expected comparable store
sales decreases during the second quarter to a number of factors, including
less promotional activities than in the comparable period of fiscal 1996; the
effect of credit concerns on the Company's ability to acquire certain types of
inventory; reduction or elimination of certain merchandise categories,
including shoes and jewelry; and increased competition as competitors have
opened additional stores in certain of the market areas served by the Company's
stores.
Gross profit for the second quarter of 1997 decreased by $1.3 million to $6.3
million from $7.6 million in the second quarter of the prior year. Gross profit
for the first half of 1997 decreased $2.2 million to $11.9 million from $14.1
million during the comparable period of the prior year. The decreased gross
profit during the first half of 1997 resulted principally from the decline in
sales during the period.
For the second quarter of fiscal 1997, selling, general and administrative
expenses decreased $1.8 million to $6.0 million from $7.8 million in 1996. For
the same period, selling , general and administrative expenses as a percentage
of sales decreased from 29.8% to 28.0% from the comparable period of the prior
year. For the first half of fiscal 1997, selling, general and administrative
expenses decreased $1.5 million to $12.7 million from $14.2 million in 1996.
These reductions in expenses are due primarily to a decrease in professional
and consulting fees and a decrease in human resource expenses as a result of
reductions in staff levels from fiscal 1996. Selling, general and
administrative expenses as a percentage of sales increased to 31.0% from 29.5%
for the comparable twenty-six week period of the prior year, principally due to
the decrease in net sales not being fully offset by decreases in expenses in
the first quarter of 1997.
Depreciation and amortization in the second quarter of 1997 decreased 21% to
$492,000 from $625,000 for the same period in 1996. Depreciation and
amortization for the twenty-six weeks ended August 2, 1997 decreased 23% to
$1.0 million from $1.3 million during the comparable period in 1996. This was
due to certain assets becoming fully depreciated in 1996 and the write-down in
1996 of assets associated with closing stores.
The Company recorded operating losses of $10,000 and $2.3 million for the
thirteen and twenty-six weeks ended August 2, 1997, respectively. This is
compared to operating losses of $821,000 and $1.4 million for the thirteen and
twenty-six weeks ended August 3, 1996. The increased loss for the 1997
year-to-date period over the comparable period of 1996 is partly due to store
closing expense of $399,000 in the current year.
The Company recorded net interest expense for the second quarter of 1997 of
approximately $464,000 as compared to $400,000 during the second quarter of
1996. This was primarily the result of increased borrowing under the Company's
line of credit.
10
<PAGE> 11
Liquidity and Capital Resources
Cash used by operating activities before reorganization items in the second
quarter of fiscal 1997 was $1.5 million. This was primarily the result of the
net loss ($3.1 million), increases in inventories ($2.6 million) and other
current assets ($709,000), net of increases in accounts payable ($3.3 million)
and accrued expenses ($634,000). The increase in accrued expenses was primarily
the result of the reserve for store closing expense of $510,000. Capital
expenditures were $360,000, consisting primarily of replenishment and
refurbishment of existing equipment and facilities.
The Company has a $5.8 million mortgage note, secured by its corporate office
and distribution center in San Antonio, Texas. The mortgage note carries an
interest rate of 9.5% per annum and requires monthly payments of principal and
interest of $49,773 until December 2002, when the remaining principal balance
of $5.4 million is due. The Company also has 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 until September 1998, when the remaining principal
balance of $35,000 is due. The Company also has a term note payable to Texas
Commerce Bank ("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 remaining principal balance of $4.5
million is due. The TCB note is secured by the Company's three owned store
locations.
The Company entered into a loan agreement with Congress Financial Corporation
(Southwest) ("Congress") on June 20, 1995 which has been amended several times.
In May 1997, the Company and Congress amended certain financial covenants in
the loan agreement. As amended, effective for the remaining term of the note
the Company is obligated to maintain minimum working capital of $3.25 million,
minimum net worth of $800 thousand, and to limit capital expenditures, net of
insurance or other proceeds resulting from the disposal or sale of fixed
assets, to $2.5 million for any fiscal year period. Under the terms of the loan
agreement, which is in effect until July 1999, the Company may borrow up to its
borrowing base as calculated pursuant to the loan agreement, which may not
exceed $15.0 million. The proceeds of the loan may be used for letters of
credit, working capital, and general corporate purposes. The loan as amended is
a revolving loan with a borrowing base formula which limits the amount of
available credit to 60% of the Company's eligible inventory during the period
of March 1st through May 15th and September 1st through November 30th of each
year and to 55% of the Company's eligible inventory during any other period
less (i) a percentage of undrawn amounts on letters of credit and (ii)
availability reserves established from time to time by the lender. In June,
1997 the Company and Congress again amended the loan agreement and entered into
a Standby Guarantee and Indemnification Agreement to facilitate supplemental
borrowings in an amount equal to 3% of the Company's eligible inventory, (not
to exceed $350,000) from June 10, 1997 through December 10, 1997. The loan
bears interest at prime plus 1%. In addition, the Company pays a commitment fee
equal to 1/2% per annum of the unused principal balance of the loan less than
$10,000,000. The loan is secured by substantially all the assets of the Company
other than those subject to other existing liens.
In order to increase loan availability under the Congress loan agreement,
effective June 26, 1996, General Atlantic Corporation ("General Atlantic"), the
Company's principal stockholder, furnished to Congress a letter of credit in
the amount of $1,500,000 (the "GAC L/C") to serve as additional collateral for
the Congress credit facility. As consideration for General Atlantic's agreement
to provide the GAC L/C, the Company agreed to (a) pay General Atlantic the sum
of $100 per year, (b) reimburse General Atlantic for the amount, if any, which
it is required to reimburse to any issuing or confirming bank which honors any
drafts under the GAC L/C, (c) pay General Atlantic interest on any amounts
drawn under the GAC L/C at Chemical Bank's prime rate plus one percent (1%),
and (d) grant General Atlantic a second lien security interest (subordinated to
Congress) on substantially all of the assets of the Company.
Under the loan agreement, as amended, Congress may establish and revise
availability reserves in its sole discretion to cover risks or events it
perceives may affect its security under the loan or the business or prospects
of the Company. The current availability reserve under the loan agreement
approximates $650,000. As a result of the formula by which the borrowing base
is calculated, an increase in availability reserves restricts the Company's
access to borrowings under the credit facility. In addition to the Congress
credit facility, the Company is dependent upon short-term trade credit as a
source of inventory financing. Short term 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 factoring
institution. The Company's inventories were $1.3 million less at August 2, 1997
than at the end of the comparable period of fiscal 1996, and accounts payable
increased $2.3 million. The $1.3 million reduction in other current assets was
primarily the result of eliminating advance payments to third-party factoring
institutions.
During the second quarter of fiscal 1997, the Company's sales continued to be
adversely affected by a number of factors, many of which are not within the
Company's control. While the Company has maintained inventory at planned
levels, the Company has experienced a reduction in the availability of trade
credit, which has in some instances adversely affected the Company's ability to
acquire and replenish quickly certain types of inventory. Continuing
unfavorable business conditions and financial performance have heightened
vendor and factor concern regarding the Company's creditworthiness. The Sanwa
credit facility and related transactions described below, if consummated, would
enhance the Company's liquidity and provide cash for operations, and management
expects these transactions to mitigate vendor and factor concern regarding the
Company's creditworthiness. Management continues to pursue initiatives designed
to improve the Company's operations and financial performance; however,
11
<PAGE> 12
no assurance can be given that the Company will be successful in its efforts to
improve operations and restore the Company to profitability. Because of these
uncertainties, any investment in the Company's common stock should be
considered speculative.
The Company owns the real estate and improvements at which three of its Solo
Serve stores in San Antonio, Texas are located and leases the remainder of its
stores. The Company also owns its corporate headquarters and distribution
center facility. During fiscal 1996, the Company listed all of its owned
properties for sale and leaseback, including the distribution center. During
the first quarter of fiscal 1997, the Company had entered into an earnest money
contract providing for the sale and leaseback of one of its owned store
locations, which contract was subject to a number of conditions. During the
second quarter, that contract was terminated. Currently the Company has a
preliminary understanding with a prospective purchaser, subject to Board
approval and the negotiation and execution of a definitive earnest money
contract and related agreements, pertaining to the sale and leaseback of all of
its owned properties. No assurance can be given that a definitive agreement
regarding the proposed transaction will be concluded or that if concluded, the
contemplated transaction will be consummated. If the transaction is consummated
on the proposed terms, the Company would realize a gain on the sale of
approximately $3.9 million. The proceeds would permit the Company to discharge
all indebtedness associated with the owned real estate and realize
approximately $1,300,000 in cash to enhance liquidity and provide additional
cash for operations.
The Proposed Sanwa Credit Facility and Related Transactions.
On September 8, 1997, the Company entered into a binding commitment letter with
Sanwa Business Credit Corporation ("Sanwa") pursuant to which Sanwa has agreed
to provide the Company up to $12 million in a revolving credit facility to
replace the Congress credit facility described above. The loan will bear
interest at the prime rate plus 1% floating, unless the Company defaults under
the loan, in which case the default rate under the loan is prime plus 3% (as
reported in The Wall Street Journal). The loan will mature three (3) years
after the closing date. Principal will be due at maturity and interest only
shall be due and payable in monthly installments. The loan facility may be
prepaid in full (but not in part) upon thirty (30) days prior written notice.
If prepaid on or before the first anniversary, there is a three percent (3%)
pre-payment penalty and a one percent (1%) prepayment penalty thereafter.
The advance rate under the Sanwa credit facility would be in an amount equal to
70% of the Company's eligible inventory during the period May 1 through
December 10 of each year and 65% of eligible inventory at all other times.
Within the loan facility, the Company may obtain up to $2 million of letters of
credit. If this letter of credit facility is utilized, Sanwa will charge two
percent (2%) per annum on the undrawn face amount of letters of credit.
Outstanding letters of credit reduce the loan availability under the revolving
loan dollar for dollar. In addition to advances made based upon the percentage
of eligible inventory, Sanwa will make available an additional $750,000 upon
receipt of a letter of credit in such amount from General Atlantic, which
General Atlantic has agreed to issue. The General Atlantic letter of credit
furnished to Congress would be terminated if the Sanwa loan is consummated, and
General Atlantic has agreed to issue the $750,000 letter of credit to Sanwa,
subject to appropriate documentation, for a term extending through December 31,
1998. In consideration for General Atlantic's agreement to provide the $750,000
standby letter of credit to Sanwa, the Company would grant to General Atlantic
a second lien security interest (subordinated to Sanwa) on the assets of the
Company pledged to Sanwa.
A fee of $192,000 is payable to Sanwa at the closing. A non-refundable
commitment fee of $25,000 was paid in connection with the acceptance of the
commitment. The commitment fee will be credited against the closing fee. A
cancellation fee of $150,000 is payable if the loan does not close for any
reason other than a default by Sanwa and the Company obtains financing from a
party other than Sanwa under terms and conditions pursuant to which Sanwa is
willing to make the loan. A servicing fee of $2,000 per month is payable
monthly in advance while the loan is in effect and an unused line fee is
payable monthly in arrears equal to one-half of 1% per annum based on the
average daily unused principal balance of the revolving loan less than $10
million. All out-of-pocket expenses incurred by Sanwa are to be fully paid by
the Company whether or not the loan closes. The loan will be secured by a first
perfected security interest in all of the Company's accounts receivable,
inventory and personal property, except for the personal property subject to
liens in favor of MetLife Capital Corporation.
The proposed credit facility is subject to customary conditions, including
negotiation and execution of final documents. Management expects the proposed
new credit facility to be consummated before the end of September 1997. The
commitment letter expires October 9, 1997. The final loan documents are
expected to contain customary affirmative covenants, negative covenants, events
of default and other similar terms for asset-based loans of this type,
including a lock box/blocked account agreement with all of the Company's banks.
The loan documents will contain financial covenants tested quarterly beginning
January 31, 1998 requiring the Company to maintain specified Interest Coverage
Ratios for various periods and specified minimum Net Worth on designated dates
through the maturity of the loan. For the 3 month fiscal period ending on or
about January 31, 1998, and for the 6 month fiscal period ending on or about
April 30, 1998, the Interest Coverage Ratio, as defined in the commitment
letter, is required to be 2.40 : 1.0 and 1.15 : 1.0, respectively. The Company
is required to maintain minimum Net Worth of $1,200,000 and $550,000,
respectively, at January 31, 1998 and April 30, 1998. The Sanwa commitment
defines "Net Worth" as assets less liabilities, plus the amount of the Siegel
loan described below. For quarterly periods after April 30, 1998, the
designated Interest Coverage Ratio and Net Worth requirements increase in
accordance with the schedule set forth in the commitment letter.
12
<PAGE> 13
In a related transaction, Charles M. Siegel, President and Chief Executive
Officer of the Company, and a related family trust have agreed to loan the
Company an aggregate amount of $500,000 in addition to the Sanwa credit
facility, which loan would be subordinated to the Sanwa Credit Facility (the
"Siegel loan"). The loan would bear interest at a rate of prime plus 1%, and
would require monthly payments of interest only for a period of five years, at
which time the principal would become due. The Company may not repay any
principal without Sanwa's prior consent and may make interest payments to Mr.
Siegel only if there is no existing default by the Company under the Sanwa
credit facility. Consummation of the Siegel loan is a condition of Sanwa's
obligation to make the Sanwa credit facility available to the Company.
Additionally, the Company has been advised that General Atlantic Corporation
has agreed to sell to Charles M. Siegel the Common Stock of the Company it
currently owns. Upon consummation of this transaction, Mr. Siegel will own
1,255,000 shares of the Company's common stock, or approximately 30% of the
aggregate voting stock of the Company. General Atlantic Corporation will
continue to own 1,388,889 shares of the Company's Preferred Stock, which
represents approximately 33% of the aggregate voting stock of the Company. In
both cases, the percentages of voting shares reported are exclusive of options
outstanding.
Contemporaneously with the proposed transactions described above, the Company
intends to enter into a modified employment agreement with Mr. Siegel pursuant
to which Mr. Siegel would continue to serve as President and Chief Executive
Officer of the Company for a period of five years at an initial base salary of
$312,000 per year, subject to a 4% per annum increase each September during the
employment term. The agreement also would provide for a bonus of $30,000
payable in April 1998 and in April 1999 and deferred compensation in an
aggregate amount up to twice Siegel's base salary under his current employment
agreement, vesting 15%, 30%, 45%, 60%, and 100%, respectively, over the five
year term of the proposed Agreement. The amended employment agreement would
also provide for severance pay of up to two years base salary as severance if
he is terminated by the Company without Cause, as that term is defined in the
Agreement..
The Sanwa credit facility, the Siegel loan, the Siegel stock purchase, and the
Siegel employment agreement are subject to customary conditions and definitive
documentation. The proposed transactions are each conditioned upon the closing
of the other transactions under the anticipated terms outlined in this report.
Management expects all of the transactions will close contemporaneously before
the end of September 1997. However, no assurances can be given that the
transactions will be consummated on the terms described above, or that the
transactions will be consummated at all. The Sanwa credit facility and related
transactions, if consummated, would enhance the Company's liquidity and provide
additional cash for operations, and management expects these transactions to
mitigate vendor and factor concern regarding the Company's creditworthiness.
Management has explored credit facility alternatives similar to the Sanwa
credit facility with other lenders, and believes that a similar facility would
be available if the Sanwa credit facility is not consummated. The possible sale
of the Company's real estate on the terms described in this report would
further enhance the Company's liquidity position. If the Company continues to
experience operating losses and the contemplated transactions are not
successful in meeting liquidity requirements, the Company would consider other
alternatives designed to enhance liquidity, including additional debt or equity
financings or other strategic alternatives.
Forward-looking Statements
Forward-looking statements in this 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: general economic conditions,
consumer demand and preferences, and weather patterns in the Company's markets;
competitive factors, including continuing pressure from pricing and promotional
activities of competitors; impact of excess retail capacity; the availability,
selection and purchasing of attractive merchandise on favorable terms;
availability of financing; and relationships with vendors and factors.
Additional information concerning those and other factors are contained in the
Company's Securities and Exchange Commission filings, copies of which are
available from the Company without charge. The Company does not undertake to
publicly update or revise its forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein will not be realized.
13
<PAGE> 14
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 (14)
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)
14
<PAGE> 15
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 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 Siegel (13)
+
10.30 Employment Agreement between the Company and Charles Siegel (13)
+
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 (13)
10.32 Amendment No. 5 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated as of March 31, 1997 (14)
10.33 Letter Agreement dated March 28, 1997 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 (14)
10.34 Letter Agreement dated July 8, 1996 by and between the Company
and Ross E. Bacon.(14) +
10.35 Amendment No. 6 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated as of May 19, 1997 (14) 10.36 Agency
Agreement by and between Solo Serve Corporation and
Hilco/Great American Group dated May 7, 1997, as amended
together with related agreements (15)
10.37 Amendment No. 7 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated June 16, 1997 (15)
10.38 Standby Guarantee and Indemnification Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated June 16, 1997 (15)
10.39 Commitment Letter of Sanwa Business Credit Corporation dated
September 8, 1997 *
15 Independent Accountant's Awareness Letter *
27 Financial Data Schedule *
99 Review Report of Price Waterhouse *
- --------------
* Filed herewith.
+ Management Compensatory Plan or Arrangement
(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.
15
<PAGE> 16
(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.
(13) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended August 3,
1996.
(14) Incorporated by reference to the Exhibits filed to the Company's
Annual Report on Form 10-K for the Fiscal Year ended February 1,
1997.
(15) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended May 3, 1997
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
period covered by this report.
16
<PAGE> 17
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,
Executive Vice President and Chief
Operating and Financial Officer
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
2.1 First Amended Plan of Reorganization of Solo Serve Corporation
dated May 17, 1995 (6)
2.2 Non-material Modifications to First Amended Plan of
Reorganization of Solo Serve Corporation, entered July 6, 1995
(6)
3.1 Restated Certificate of Incorporation of the Company (7)
3.2 Certificate of Designation of Rights and Preferences of Preferred
Stock (7)
3.3 Bylaws of the Company, as amended and restated (14)
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)
</TABLE>
<PAGE> 19
<TABLE>
<S> <C>
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 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 Siegel (13)
+
10.30 Employment Agreement between the Company and Charles Siegel (13)
+
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 (13)
10.32 Amendment No. 5 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated as of March 31, 1997 (14)
10.33 Letter Agreement dated March 28, 1997 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 (14)
10.34 Letter Agreement dated July 8, 1996 by and between the Company
and Ross E. Bacon.(14) +
10.35 Amendment No. 6 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated as of May 19, 1997 (14) 10.36 Agency
Agreement by and between Solo Serve Corporation and
Hilco/Great American Group dated May 7, 1997, as amended
together with related agreements (15)
10.37 Amendment No. 7 to Loan and Security Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated June 16, 1997 (15)
10.38 Standby Guarantee and Indemnification Agreement by and between
Solo Serve Corporation and Congress Financial Corporation
(Southwest) dated June 16, 1997 (15)
10.39 Commitment Letter of Sanwa Business Credit Corporation dated
September 8, 1997 *
15 Independent Accountant's Awareness Letter *
27 Financial Data Schedule *
99 Review Report of Price Waterhouse *
</TABLE>
- --------------
* Filed herewith.
+ Management Compensatory Plan or Arrangement
(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.
<PAGE> 20
(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.
(13) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended August 3,
1996.
(14) Incorporated by reference to the Exhibits filed to the Company's
Annual Report on Form 10-K for the Fiscal Year ended February 1,
1997.
(15) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended May 3, 1997
<PAGE> 1
EXHIBIT 10.39
September 5, 1997
BY FAX AND FEDERAL EXPRESS
Solo Serve Corporation
1610 Cornerway Boulevard
San Antonio, Texas 78219
Attn: Mr. Ross Bacon
COMMITMENT LETTER
Dear Ross:
We are pleased to advise you that Sanwa Business Credit Corporation or
one it its affiliates or subsidiaries ("SBCC"), hereby commits to make
available to Solo Serve Corporation ("Borrower") a loan facility (the "Loan
Facility") in an amount equal to and upon the terms and conditions as set forth
below:
A. Credit Details of the Loan Facility.
1. Purpose. To provide funds for the refinancing of existing
debt and to provide ongoing working capital to Borrower.
2. Description of Facility. The Loan Facility will be comprised
of a revolving loan (the "Revolving Loan") not to exceed Twelve Million and
No/100 Dollars ($12,000,000).
3. Line of Credit Sublimits. The Revolving Loan will be subject
to a letter of credit sublimit in the amount of Two Million and No/100 Dollars
($2,000,000) at all times.
4. Interest Rate for Revolving Loan. Interest on the Revolving
Loan shall equal the Prime Rate (defined herein) plus one-hundred (100) basis
points, which rate shall float and shall be payable monthly in arrears.
5. Interest Rate Generally. The interest rate will be calculated
on the basis of the actual number of days elapsed in a three hundred sixty
(360) day year. Borrower will receive credit for the proceeds of receivables
(for interest
<PAGE> 2
Solo Serve Corporation
September 5, 1997
Page 2
calculations) one (1) business day following receipt by SBCC of immediately
available funds.
6. Default Rate. Upon the occurrence of an Event of Default (as
defined in the Loan Documents) or at Maturity (defined herein), all borrowings
shall bear interest at the Default Rate (defined herein). For purposes hereof,
the term "Default Rate" shall mean the then-applicable interest rate plus two
hundred (200) basis points.
7. Letter of Credit Fee. As additional consideration for issuing
or causing to be issued letters of credit for Borrower's account, or for
issuing its letter of credit guarantees, Borrower shall pay to SBCC fees equal
to two percent (2%) per annum of the undrawn amount of issued letters of credit
or letter of credit guarantees.
8. Maturity Date. The maturity date (the "Maturity") for the
Revolving Loan is the three-year anniversary of the Closing Date.
9. Payment Schedule. Except for permitted prepayments (described
herein), the Borrower shall make monthly installments of interest on the
outstanding principal balance of the Revolving Loan, with all payments being
due at the Maturity.
10. Prepayment. The Loan Documents (defined herein) will provide
that the Loan Facility may be prepaid in whole upon 30 days prior written
notice to SBCC by the payment of the amount of principal to be prepaid,
together with all accrued interest and accompanied by a prepayment fee based on
the following schedule:
<PAGE> 3
Solo Serve Corporation
September 5, 1997
Page 3
<TABLE>
<CAPTION>
Applicable Percentage
Period of Prepayment of Amount Prepaid
-------------------- -----------------
<S> <C>
On or prior to the first anniversary 3.0%
After the first anniversary but prior 1.0%
to the third anniversary, and during
any subsequent renewal period
</TABLE>
11. Advance Rate. SBCC shall advance funds under the Revolving
Loan up to an amount equal to (i) seventy percent (70%) of eligible inventory
during the period commencing on each May 1, and ending on each December 10,
during the term of the Loan and (ii) sixty-five percent (65%) of eligible
inventory at all other times. Eligible inventory shall not include slow moving
packaway inventory (including seasonal inventory stored at the distribution
center) and other slow-moving inventory. In addition to advances made based
upon a percentage of the eligible inventory, upon receipt of a letter of credit
in form and substance acceptable to SBCC, naming SBCC as the beneficiary
thereof in an amount up to $750,000 issued by General Atlantic Corporation,
SBCC shall make advances of the Revolving Loan in an amount up to the face
amount of such letter of credit during the term of such letter of credit.
12 Closing Fee. Borrower shall pay to SBCC a closing fee equal to
$192,000 payable to closing (the "Closing Fee").
13. Commitment Fee. Concurrently with acceptance of the
Commitment Letter, Borrower shall pay to SBCC a commitment fee equal to
$25,000, which fee shall be deemed to be fully earned and non-refundable. Such
commitment fee shall be credited against the Closing Fee, payable at closing.
14. Cancellation Fee. In the event the transaction contemplated
herein does not close for any reason, other than a default by SBCC and in the
event Borrower obtains financing under terms and conditions pursuant to which
SBCC is willing to make financial accommodations to Borrower, then upon funding
of
<PAGE> 4
Solo Serve Corporation
September 5, 1997
Page 4
such alternative financing, Borrower shall pay to SBCC a cancellation fee equal
to $150,000.
15. Service Fee. Borrower shall pay to SBCC a service fee equal
to $2,000 per month, payable monthly in advance.
16. Unused Line Fee. Borrower shall pay to SBCC an unused line
fee, monthly, in arrears, equal to one-half of one percent (.50%) (on a per
annum basis) of the average daily unused principal balance of the Revolving
Loan less than $10,000,000.
17. Security. The Loan Facility shall be secured by a first
perfected security interest in and lien upon all of Borrower's accounts
receivable, inventory and personal property of every type and description;
provided that the security interest granted to SBCC in certain store and trade
fixtures shall be subordinate to a prior existing lien in favor of MetLife.
18. Participation/Assignment Rights. SBCC shall have the right to
participate or assign all or any portion of the Loan Facility without
Borrower's consent.
19. Subordinated Indebtedness. After the date hereof, but prior
to the Closing, Charles M. Siegel shall lend to Borrower not less than Five
Hundred Thousand and No/100 Dollars ($500,000), which loan shall be unsecured,
shall bear interest at the rate of 1% plus the prime rate, and shall be
expressly subordinate to the Revolving Loan, pursuant to the terms of a
subordination agreement in form and substance acceptable to Lender. Such
subordination agreement shall provide that the Borrower shall have the right to
pay interest only on such indebtedness, provided no default has under the Loan
Documents occurred and is continuing.
20. Insurance. Borrower shall provide SBCC with evidence of
policies of physical damage insurance naming SBCC as a lender-loss payee, as
its interests may appear, and containing a breach or violation of warrants,
declaration or conditions endorsement in favor of SBCC, and appropriate
liability insurance naming SBCC as an additional insured, all in amounts, with
insurance
<PAGE> 5
Solo Serve Corporation
September 5, 1997
Page 5
companies, and form satisfactory to SBCC, in SBCC's sole and absolute
discretion. The policies shall provide further for thirty-days prior written
notice to SBCC for any cancellation or material change in coverage.
21. Financial Statements. Borrower shall be required to furnish
to SBCC: (i) as soon as available, but no later than thirty (30) days after the
end of each fiscal month during the term of the Loan Facility, unaudited
financial statements concerning its business, prepared in accordance with
Generally Accepted Accounting Principles (as defined herein), including profit
and loss statements and other accounting data as may be requested by SBCC,
certified by its chief financial officer; (ii) as soon as available, but no
later than sixty (60) days after the end of each fiscal quarter of each of its
fiscal years, quarterly unaudited financial statements concerning its business,
prepared in accordance with Generally Accepted Accounting Principles, including
profit and loss statements and other accounting data as may be requested by
SBCC, certified by its chief financial officer; (iii) as soon as available but
no later than one hundred twenty (120) days after the end of each of its fiscal
years, audited financial statements for the fiscal year prepared by an
independent certified public accountant, including profit and loss statements,
balance sheets and other affiliated accounting data, together with a report of
said accountant to the effect that the financial statements fairly present the
financial position of Borrower and the results of its operations and the
changes in its financial position for the year then ended, in conformity with
Generally Accepted Accounting Principles applied on a consistent basis; (iv) as
soon as available, but no later than ten (10) days after the end of each fiscal
month during the term of the Loan Facility, a borrowing base certificate
certified by the Chief Financial Officer of Borrower, in form and detail
reasonably acceptable to SBCC; (v) as soon as available, but no later than
thirty (30) days prior to the end of Borrower's fiscal year, projections of
profit, loss, capital expenditures and such other matters as SBCC shall
reasonably request, in form and detail reasonably acceptable to SBCC; and (v)
such other financial statements and accounting data as may be requested by SBCC
from time to time concerning Borrower.
<PAGE> 6
Solo Serve Corporation
September 5, 1997
Page 6
22. Financial Covenants. The Loan Documents shall contain
financial covenants as follows:
(i) Borrower shall maintain an Interest Coverage Ratio (defined
below), measured quarterly on a rolling four-quarter basis (except as
noted) in the following amounts at the following times.
<TABLE>
<S> <C>
For the 3 fiscal-month period 2.40 to 1.0
ending on or about 01/31/98:
For the 6 fiscal-month period 1.15 to 1.0
ending on or about 04/30/98:
For the 9 fiscal-month period 1.25 to 1.0
ending on or about 07/31/98:
For the rolling 4 fiscal-quarter 1.35 to 1.0
period ending on or about
10/31/98:
For the rolling 4 fiscal-quarter 1.70 to 1.0
periods ending on or about
01/31/99 through 07/31/99:
For the rolling 4 fiscal-quarter 2.00 to 1.0
period ending on or about
10/31/99 and thereafter:
</TABLE>
(ii) Borrower shall maintain minimum Net Worth, in the following
amounts at the following times:
<TABLE>
<S> <C>
01/31/98: $1,200,000
04/30/98: $ 500,000
07/31/98: $ 650,000
10/31/98: $ 800,000
01/31/99: $2,000,000
04/30/99: $1,500,000
07/31/99: $1,800,000
10/31/99: $2,200,000
01/31/00: $3,600,000
04/30/00: $3,300,000
07/31/00: $3,900,000
10/31/00: $4,800,000
01/31/01: $6,800,000
</TABLE>
<PAGE> 7
Solo Serve Corporation
September 5, 1997
Page 7
(iii) Borrower shall not make Capital Expenditures (defined below)
in excess of (w) $1,000,000 during fiscal year 1997, (x) $2,500,000
during fiscal year 1998, (y) $1,750,000 during fiscal year 1999, or
(z) $1,000,000 during fiscal year 2000, measured quarterly.
24. Non-Financial Covenants. The Loan Documents shall contain
non-financial covenants which shall include those which are reasonable and
customary in SBCC's loan documents, and shall include, but shall not be limited
to, those negative covenants which restrict dividends and distributions, liens,
additional indebtedness, mergers and sales of assets by Borrower.
25. Events of Default. The Loan Documents shall contain a
provision defining and describing Events of Default (an "Event of Default")
which shall be consistent with SBCC's usual and customary practices in
financings of this kind.
26. Subsequent Audits. SBCC reserves the right to perform or have
its agents perform field audits of Borrower. It is the intent of SBCC to
obtain appraisals of inventory no less often than quarterly and to perform
field audits no less than quarterly. Such subsequent appraisals shall be
performed at the sole cost and expense of Borrower.
27. Accounting Terms. Unless otherwise specified, all accounting
terms used herein will have the meaning ascribed to them in accordance with
Generally Accepted Accounting Principles.
28. Syndication Limitations. SBCC shall not syndicate any portion
of the Loan Facility prior to the Closing Date and funding of the transaction.
29. Defined Terms. Any capitalized term used and not defined
herein shall have the meaning ascribed to that term on Exhibit A attached
hereto. The Loan Documents may also contain the defined terms set forth on
Exhibit A attached hereto and made a part hereof.
30. Lock Box/Blocked Account Agreements. As a condition precedent
to the funding of the Loan Facility, Borrower shall enter into lock box and
<PAGE> 8
Solo Serve Corporation
September 5, 1997
Page 8
blocked account agreements with SBCC which are acceptable to SBCC, in SBCC's
sole and absolute discretion.
B. Conditions to SBCC's Obligations. The obligations of SBCC hereunder
are further subject to the following additional conditions being satisfied, in
SBCC's sole discretion, on the Closing Date:
1. Execution and Approval of Documents. This Commitment letter
contains a general summary of certain terms of the transaction contemplated
hereby and is subject to agreement upon the terms of definitive instruments and
documents, as described herein, which will include other terms and conditions,
including but not limited to the terms and conditions that are contained in
SBCC's standard forms of such instruments and documents (collectively, the
"Loan Documents"). Borrower shall have executed or shall have caused to be
executed and delivered to SBCC promissory notes, security agreements, financing
statements, certificates of title, assignments, evidence of insurance, and all
other agreements, instruments, documents, opinions, certificates and assurances
which are either contemplated hereby or reasonably requested by SBCC, all of
which shall be in form, scope, and substance satisfactory to SBCC and its
counsel in their sole discretion. Without limiting the generality of the
foregoing, it is agreed that the Loan Documents will provide that (i) Borrower
waives its right to a trial by jury, (ii) SBCC shall not be required to make
advances if an event of default has occurred and is continuing, and (iii)
Borrower agrees to submit to the jurisdiction of courts located in Chicago,
Illinois.
2. No Material Change or Default. There shall not have occurred
prior to the Closing Date any material adverse change in the business or
financial condition of Borrower from that existing on the date hereof and
disclosed in Borrower's financial statements dated as of August 2, 1997, copies
of which have been delivered to SBCC. In addition, there shall not have
occurred and be continuing on the Closing Date any event which would constitute
an event of default by Borrower under the Loan Documents or any event which
with the giving of notice, passage of time, or both, would constitute such a
default by Borrower under the Loan Documents.
<PAGE> 9
Solo Serve Corporation
September 5, 1997
Page 9
C. Miscellaneous.
1. Reliance by SBCC. This Commitment Letter has been issued in
reliance upon the accuracy of the information furnished to SBCC by or on behalf
of Borrower and notwithstanding any investigation by SBCC all such information
is deemed to be material.
2. Compliance with Law. If any law or regulation affecting
SBCC's entering into the transaction contemplated hereby shall impose upon SBCC
any material obligation, fee, liability, loss, cost, expense or damage which is
not contemplated by this Commitment Letter, the commitment evidenced hereby may
be terminated by SBCC without liability of any kind or nature.
3. Assignment. This Commitment Letter is not assignable by
Borrower by operation of law or otherwise.
4. Expenses. All out-of-pocket expenses incurred by SBCC in
connection with the Loan Facility, including, without limitation, fees and
disbursements of special counsel for SBCC to document the Loan Facility, shall
be paid by Borrower on demand by SBCC whether or not the Loan Facility shall be
funded.
5. APPLICABLE LAW. This Commitment Letter and the documents
executed pursuant hereto or contemplated hereby shall be governed in all
respects by the internal laws (as opposed to the conflicts of laws provisions)
of the State of Illinois.
6. WAIVER OF JURY TRIAL. Borrower hereby waives any right to a
trial by jury in any action to enforce or defend any matter arising from or
related to (i) this Commitment Letter or (ii) any document or agreement
evidencing or relating to the Loan Facility.
7. SUBMISSION TO JURISDICTION. Borrower hereby irrevocably
submits to the jurisdiction of any state or federal court located in Chicago,
Illinois, over any action or proceeding to enforce or defend any matter arising
from or related to (i) this Commitment Letter or (ii) any document or agreement
<PAGE> 10
Solo Serve Corporation
September 5, 1997
Page 10
evidencing or relating to the Loan Facility. Borrower hereby irrevocably
waives, to the fullest extent it may effectively do so, the defense of an
inconvenient forum to the maintenance of any such action or proceeding.
Borrower agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law.
Borrower agrees not to institute any legal action or proceeding
against SBCC or any director, officer, employee, agent or property of SBCC,
concerning any matter arising out of or relating to this Commitment Letter or
any document or agreement evidencing or relating to the Loan Facility in any
court other than one located in Cook County, Illinois.
Nothing in this paragraph shall affect or impair SBCC's right to serve
legal process in any manner permitted by law, or SBCC's right to bring any
action or proceeding against Borrower, or the property of Borrower, in the
courts of any other jurisdiction.
8. Entire Agreement. This Commitment Letter sets forth the
entire agreement of the parties hereto as of the date hereof which respect to
the subject matter hereof and supersedes all other prior written or oral
understandings with respect thereto; provided, however, that all written and
oral representations made by or on behalf of Borrower with respect to the
subject matter hereof shall survive this Commitment Letter. No modification or
waiver of any provision of this Commitment Letter shall be effective unless the
same shall be in writing, signed by the parties hereto.
<PAGE> 11
Solo Serve Corporation
September 5, 1997
Page 11
9. Effective Date and Term of Commitment Letter. This Commitment
Letter shall become effective on the date of receipt by SBCC of an accepted
copy hereof executed by Borrower, such date not to be later than September 9,
1997, and if such accepted copy is timely receive, shall continue to the
earlier of (i) the Closing Date or (ii) October 9, 1997, at which time the
commitment contained herein will terminate.
Sincerely,
Sanwa Business Credit Corporation
By: /s/ Peter J. Levy
-------------------------------
Peter J. Levy, Vice President
Accepted:
SOLO SERVE CORPORATION
By: /s/ Ross E. Bacon
-------------------------------
Title: Chief Operating Officer and
Chief Financial Officer
Date: September 8, 1997
<PAGE> 12
EXHIBIT A
"Capital Expenditures" shall mean all expenditures for any fixed
assets or improvements, or for replacements, substitutions or additions
thereto, which have a useful life of more than one year, including, but not
limited to, the direct or indirect acquisition of such assets by way of
increased product or service charges, offset items or otherwise; provided that
capital expenditures shall exclude capitalized lease payments.
"EBITDA" shall mean for any applicable fiscal period, the Borrower's
Net Income (defined herein) during such period from continuing operations (but
without deduction of income and franchise taxes), plus interest expenses and
depreciation and amortization deducted in determining Net Income for such
period.
"Generally Accepted Accounting Principles" shall mean, as of the date
of any determination with respect thereto, generally accepted accounting
principles as used by Financial Accounting standards Board and/or the American
Institute of Certified Public Accountants, consistently applied and maintained
throughout the periods indicated.
"Interest Coverage Ratio" shall mean for any fiscal period, the ratio
of: (i) Borrower's EBITDA for that period, to (ii) Borrower's Interest Expenses
for such period.
"Interest Expenses" shall mean the aggregate amount of interest paid
or accrued by Borrower including, without limitation, interest payable with
respect to the obligations of Borrower to SBCC and the interest portion of
capitalized lease payments, all as determined in accordance with Generally
Accepted Accounting Principles.
"Net Worth" shall mean as to any Borrower as of the date of any
determination thereof total assets as valued at book value, less total
liabilities of Borrower, other than Borrower's liability for the subordinated
debt payable to Charles M. Siegel.
"Prime Rate" shall mean the highest prime rate of interest quoted,
from time to time, by The Wall Street Journal as the "base rate on corporate
loans at large U.S. money center commercial banks; provided, however, that in
the event The Wall Street Journal ceases quoting a prime rate of the type
described, "Prime Rate" shall mean the highest per annum rate of interest
quoted as the "Bank Prime Loan" rate for "This week" in Statistical Release
H.15(519) published from time to time by the Board of Governors of the Federal
Reserve System. The Prime Rate shall change effective on the date of the
publication of any change in the applicable index by which such "Prime Rate" is
determined.
<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, 1997 (issued pursuant to the provisions of Statement on Auditing
Standards No. 71) by reference in the prospectus constituting part of its
Registration Statements on Forms S-8 (No. 33-99666 and No. 33-99670) filed on
November 21, 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, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE REGISTRANT SET FORTH IN THE REGISTRANTS'S QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED 8-2-97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-02-1997
<CASH> 1,795,409
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,661,082
<CURRENT-ASSETS> 17,154,055
<PP&E> 12,354,342
<DEPRECIATION> 0
<TOTAL-ASSETS> 29,738,397
<CURRENT-LIABILITIES> 11,008,942
<BONDS> 17,501,487
0
13,889
<COMMON> 28,562
<OTHER-SE> 1,185,517
<TOTAL-LIABILITY-AND-EQUITY> 29,738,397
<SALES> 40,968,311
<TOTAL-REVENUES> 40,968,311
<CGS> 29,085,986
<TOTAL-COSTS> 29,085,986
<OTHER-EXPENSES> 14,134,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 853,657
<INCOME-PRETAX> (3,105,754)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,105,754)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,105,754)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</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 financial information included in Form 10-Q of
Solo Serve Corporation (the Company) as of August 2, 1997 and August 3, 1996
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 financial information for it to be in conformity
with generally accepted accounting principles.
The accompanying financial information has been prepared assuming that the
Company will continue as a going concern. The Company's recurring operating
losses raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to future operations are described in
Note 2. The 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 1, 1997, 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 May 14, 1997 (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 1, 1997, 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, 1997
