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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 November 1, 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 - 204805
State or other jurisdiction of (I.R.S. Employer
incorporation 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 December 15, 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 December 15, 1997.
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INDEX
PART I - FINANCIAL INFORMATION
PAGE
ITEM 1 Financial Statements
Balance Sheets, November 2, 1996 (unaudited),
February 1, 1997 and November 1, 1997 (unaudited)...............................3
Statements of Operations, thirteen and thirty-nine weeks
ended November 2, 1996 (unaudited) and November 1, 1997 (unaudited).............4
Statements of Cash Flows, thirty-nine weeks
ended November 2, 1996 (unaudited) and November 1, 1997 (unaudited).............5
Notes to Financial Statements (unaudited).......................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................8
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings..............................................................12
ITEM 6 Exhibits and Reports on Form 8 - K.............................................12
Signatures.....................................................................15
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PART I
ITEM I. Financial Statements
SOLO SERVE CORPORATION
BALANCE SHEETS
NOVEMBER 2, FEBRUARY 1, NOVEMBER 1,
1996 1997 1997
------------ ------------ ------------
ASSETS (unaudited) (unaudited)
CURRENT ASSETS:
Cash $ 1,585,673 $ 1,065,564 $ 1,378,892
Inventory 15,419,498 11,107,938 16,939,935
Other current assets 1,901,533 988,469 2,151,740
------------ ------------ ------------
Total current assets 18,906,704 13,161,971 20,470,567
Property and equipment, net 13,970,244 12,935,322 12,089,060
Goodwill and service marks, net 320,000 290,000 200,000
------------ ------------ ------------
TOTAL ASSETS $ 33,196,948 $ 26,387,293 $ 32,759,627
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt $ 755,675 $ 770,602 $ 769,613
Accounts payable 5,155,994 3,983,898 9,448,311
Accrued expenses 3,351,392 2,339,615 2,562,239
------------ ------------ ------------
Total current liabilities 9,263,061 7,094,115 12,780,163
Long-term debt 17,232,516 14,960,600 20,431,772
Note payable to stockholder -- -- 500,000
Postretirement benefit obligation 550,200 -- --
------------ ------------ ------------
Total Liabilities 27,045,777 22,054,715 33,711,935
------------ ------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
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 (18,301,570) (20,120,163) (25,405,049)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,151,171 4,332,578 (952,308)
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 33,196,948 $ 26,387,293 $ 32,759,627
============ ============ ============
The accompanying notes are an integral part of these financial statements.
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SOLO SERVE CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------------------------------------------
NOVEMBER 2, NOVEMBER 1, NOVEMBER 2, NOVEMBER 1,
1996 1997 1996 1997
------------ ------------ ------------ ------------
Net revenues $ 21,207,810 $ 16,745,433 $ 69,537,658 $ 57,713,744
Cost of goods sold (including buying and
distribution, excluding depreciation
shown below) 14,836,369 11,728,342 49,082,697 40,814,328
------------ ------------ ------------ ------------
Gross profit 6,371,441 5,017,091 20,454,961 16,899,416
Selling, general, and administrative
expense 6,841,068 6,017,544 21,081,361 18,750,688
Store closure expense -- -- -- 399,000
Depreciation and amortization expense 580,590 470,744 1,849,449 1,473,021
------------ ------------ ------------ ------------
Operating loss (1,050,217) (1,471,197) (2,475,849) (3,723,293)
Interest expense 421,752 557,936 1,190,102 1,411,593
------------ ------------ ------------ ------------
Net loss before extraordinary item (1,471,969) (2,029,133) (3,665,951) (5,134,886)
Extraordinary item, loss on early
retirement of debt -- 150,000 -- 150,000
------------ ------------ ------------ ------------
Net loss $ (1,471,969) $ (2,179,133) $ (3,665,951) $ (5,284,886)
============ ============ ============ ============
Net loss per common share $ (.52) $ (.76) $ (1.28) $ (1.85)
============ ============ ============ ============
Weighted average common shares
outstanding 2,856,126 2,856,126 2,856,126 2,856,126
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
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SOLO SERVE CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
THIRTY-NINE WEEKS ENDED
NOVEMBER 2, NOVEMBER 1,
1996 1997
---------------------------------
CASH FLOWS USED IN OPERATIONS:
NET LOSS $ (3,665,951) $ (5,284,886)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH USED IN OPERATIONS:
Depreciation and amortization 1,849,449 1,473,021
Loss on retirement of property 127,572 1,141
Changes in assets and liabilities:
(Increase) decrease in inventory (1,209,318) (5,831,997)
(Increase) decrease in other current assets 372,097 (1,163,271)
Increase (decrease) in accounts payable 1,729,173 5,464,413
Increase (decrease) in accrued expenses 141,382 222,624
Increase (decrease) in non current liabilities (15,000) --
------------ ------------
Total adjustments 2,995,355 165,931
------------ ------------
Net cash used in operations before reorganization items (670,596) (5,118,955)
OPERATING CASH FLOW FROM REORGANIZATION ITEMS:
Payment on allowed claims (460,612) --
------------ ------------
Net cash used in operations: (1,131,208) (5,118,955)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Investment in property & equipment (222,999) (537,900)
------------ ------------
CASH USED IN INVESTING ACTIVITIES (222,999) (537,900)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under long-term debt 77,557,780 66,830,668
Borrowings from stockholder -- 500,000
Payments on long-term debt (75,389,427) (61,360,485)
------------ ------------
Net cash provided by financing activities 2,168,353 5,970,183
------------ ------------
NET INCREASE IN CASH 814,146 313,328
CASH AT BEGINNING OF YEAR 771,527 1,065,564
------------ ------------
CASH AT END OF PERIOD $ 1,585,673 $ 1,378,892
============ ============
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest $ 1,160,454 $ 1,346,180
The accompanying notes are an integral part of these financial statements.
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SOLO SERVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
NOTE 1:
The financial statements as of November 2, 1996 and November 1, 1997, and for
the thirteen and thirty-nine week periods ended November 2, 1996 (fiscal 1996)
and November 1, 1997 (fiscal 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 November
1, 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 thirty-nine 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 1, 1997 (fiscal 1996).
NOTE 2:
The Company has continued to experience operating losses and lower than
anticipated sales during the third quarter. The Company's business was affected
by a number of factors, including the effect of credit concerns, principally by
third party factors, on the Company's ability to acquire and replenish 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.
In response to these conditions, management restructured its lending
arrangements (see Note 3), opened stores in markets smaller than it has
traditionally served, and entered into a contract to sell and leaseback all of
its owned properties. 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.
NOTE 3:
Long-term debt consists of the following:
NOVEMBER 2, FEBRUARY 1, NOVEMBER 1,
1996 1997 1997
----------- ----------- -----------
Note payable to bank, interest at prime plus 1/2%
(9.0% at November 1, 1997); secured by properties $ 5,209,681 $ 5,131,406 $ 4,890,722
Note payable to insurance company, interest at 8%; secured by
equipment and fixtures 744,969 654,132 370,502
Mortgage notes payable to insurance companies, interest at 9.5%;
secured by the corporate office and distribution center 5,773,541 5,760,664 5,720,161
Note payable to shareholder, interest at prime plus 1%
(9.5% at November 1, 1997); unsecured -- -- 500,000
Revolving Credit Line, interest at prime plus 1%
(9.5% at November 1, 1997); secured primarily by inventory 6,260,000 4,185,000 10,220,000
----------- ----------- -----------
17,988,191 15,731,202 21,701,385
Less current portion 755,675 770,602 769,613
----------- ----------- -----------
Long-term portion $17,232,516 $14,960,600 $20,931,772
=========== =========== ===========
The Company 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. These properties are currently
subject to a contract for sale and leaseback, which, if concluded would result
in repayment of the TCB indebtedness. 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 $5.8
million mortgage note, secured by its corporate office
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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. This property is also subject to a contract for sale and
leaseback, pursuant to which the Nationwide indebtedness would be assumed by the
purchaser.
On October 2, 1997, the Company replaced its previous revolving credit facility
with a $12 million revolving credit facility with Sanwa Business Credit
Corporation ("Sanwa"). The loan bears interest at the prime rate plus 1%
floating. The loan matures October 2, 2000. Principal will be due at maturity
and interest only is due and payable in monthly installments. The loan is
secured by substantially all of the assets of the Company not pledged to secure
other indebtedness, which consists primarily of inventory.
The advance rate under the Sanwa credit facility is 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. In addition to
advances made based upon the percentage of eligible inventory, Sanwa made
available an additional $750,000 upon receipt of a letter of credit in such
amount from General Atlantic. In consideration for General Atlantic's providing
the $750,000 standby letter of credit to Sanwa, the Company granted General
Atlantic a second lien security interest (subordinated to Sanwa) on the assets
of the Company pledged to Sanwa. Covenants under the loan agreement require the
Company to maintain an interest coverage ratio (defined as the ratio of EBITDA
to interest expense for the period; EBITDA is earnings before interest, taxes,
depreciation and amortization and excluding extraordinary items,) of 2.4 to 1.0
and net worth (defined as total assets less total liabilities except for the
Siegel Loan) of $720,000 and $70,000 for the fiscal quarter ended January 1998
and April 1998, respectively. The ratios, amounts and measurement periods will
vary, as described in the loan agreement.
On October 2, 1997, Chuck Siegel, President and Chief Executive Officer of the
Company, and a related family trust loaned the Company an aggregate amount of
$500,000 (the Siegel Loan). The loan bears interest at a rate of prime plus 1% ,
and requires monthly payments of interest only for a period of five years, at
which time the principal becomes due. The Siegel Loan is subordinate to the
Sanwa credit facility and to repayment by the Company of any amounts advanced
under the letter of credit issued by the Company's principal stockholder,
General Atlantic Corporation. 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. In
related transactions, Mr. Siegel purchased from General Atlantic Corporation all
of its common stock in the Company, and his employment contract with the Company
was amended.
NOTE 4:
During the first quarter of fiscal 1997, the Company accrued $607,000 in store
closure 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:
In February 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share", which is required to be adopted in February 1998. At
that time, the Company will be required to change the method used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive effect of stock options
will be excluded. The impact on basic and fully diluted earnings per share is
not expected to be material.
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ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL 1996 FISCAL 1997
----------- -----------
Beginning of year 29 28
Closed (1) (2)
Opened -- 2
----------- -----------
END OF THIRD QUARTER 28 28
----------- -----------
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 thirty-nine weeks ended
November 2, 1996 and November 1, 1997.
PERCENTAGE OF NET SALES
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
NOVEMBER 2, NOVEMBER 1, NOVEMBER 2, NOVEMBER 1,
1996 1997 1996 1997
----------------------------------------------------------------------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, including buying and
distribution costs, excluding depreciation 70.0 70.0 70.6 70.7
----------------------------------------------------------------------
Gross profit 30.0 30.0 29.4 29.3
Selling, general and administrative expense 32.3 36.0 30.3 32.5
Store closure expense - - - 0.7
Depreciation and amortization expense 2.7 2.8 2.7 2.6
----------------------------------------------------------------------
Operating loss (5.0) (8.8) (3.6) (6.5)
Interest expense 1.9 3.3 1.7 2.4
----------------------------------------------------------------------
Net loss before extraordinary item (6.9) (12.1) (5.3) (8.9)
Extraordinary item, loss on early retirement of - 0.9 - 0.3
debt
----------------------------------------------------------------------
Net Income Loss (6.9) (13.0) (5.3) (9.2)
======================================================================
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THIRTEEN WEEKS (THIRD QUARTER) AND THIRTY-NINE WEEKS (YEAR-TO-DATE)
ENDED NOVEMBER 1, 1997 VERSUS THIRTEEN WEEKS AND
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
Recent Developments
During the third quarter, the Company opened a new store in Brownwood, 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. During the third quarter, the Company also instituted a preferred
customer program which is designed to provide promotional benefits to its core
customers.
Also during the third quarter, the Company entered into a new revolving credit
facility with Sanwa Business Credit Corp. and borrowed $500,000 from Chuck
Siegel, its President and Chief Executive Officer. See Liquidity and Capital
Resources. In a related transaction, Mr. Siegel purchased from General Atlantic
Corporation all of its common stock in the Company, and the Company entered into
an amended 5-year Employment Agreement with Mr. Siegel.
Results of Operations
The Company's net revenues for the third quarter and year-to-date period ended
November 1, 1997 were $16.7 million and $57.7 million, respectively, as compared
to $21.2 million and $69.5 million in the prior year. The majority of the third
quarter and year-to-date sales decreases are attributable to a greater than
anticipated decline in comparable store sales of 16.5% and 15.7%, respectively.
Management attributes the greater than expected comparable store sales decreases
during the third quarter to a number of factors, including the effect of credit
concerns, principally by third party factors, on the Company's ability to
acquire and replenish 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 third quarter of 1997 decreased by $1.4 million to $5.0
million from $6.4 million in the third quarter of the prior year. Gross profit
for the first three quarters of 1997 decreased $3.6 million to $16.9 million
from $20.5 million during the comparable period of the prior year. The decreased
gross profit during the first three quarters of 1997 resulted from the decline
in sales during the period.
For the third quarter of fiscal 1997, selling, general and administrative
expense decreased $800 thousand to $6.0 million from $6.8 million in 1996. For
the same period, selling, general and administrative expense as a percentage of
sales increased from 32.3% to 36.0% from the comparable period of the prior
year. For the first three quarters of fiscal 1997, selling, general and
administrative expenses decreased $2.3 million to $18.8 million from $21.1
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 expense as a percentage of sales increased to 32.5% from 30.3%
for the comparable thirty-nine week period of the prior year, principally due to
the decrease in net sales not being fully offset by decreases in expenses in
1997.
Depreciation and amortization in the third quarter of 1997 decreased 18.9% to
$471,000 from $581,000 for the same period in 1996. Depreciation and
amortization for the thirty-nine weeks ended November 1, 1997 decreased 16.7% to
$1.5 million from $1.8 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 $1.5 million and $3.7 million for the
thirteen and thirty-nine weeks ended November 1, 1997, respectively. This is
compared to operating losses of $1.1 million and $2.5 million for the thirteen
and thirty-nine weeks ended November 2, 1996. The increased loss for the 1997
year-to-date period over the comparable period of 1996 is principally due to the
decline in sales and partly due to store closing expense of $399,000 in the
current year.
The Company recorded net interest expense for the third quarter of 1997 of
approximately $558,000 as compared to $422,000 during the third quarter of 1996.
This was primarily the result of increased borrowing under the Company's line of
credit.
In the third quarter of 1997 and in conjunction with the Company's refinancing
of its credit facility, the Company was required to make a $150,000 prepayment
penalty on its prior outstanding revolving credit facility. This prepayment
penalty was funded with borrowings under the Sanwa credit facility.
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Liquidity and Capital Resources
Cash used by operating activities through the third quarter of fiscal 1997 was
$5.1 million. This was primarily the result of the net loss ($5.3 million),
increases in inventories ($5.8 million) and other current assets ($1.2 million),
net of increases in accounts payable ($5.5 million) and accrued expenses
($223,000). The increase in accrued expenses was primarily the result of the
reserve for store closing expense of $203,000. Capital expenditures were
$536,000, consisting primarily of replenishment and refurbishment of existing
equipment and facilities.
The Company 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. These properties are currently
subject to a contract for sale and leaseback, which, if concluded would result
in repayment of the TCB indebtedness. 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 $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. This
property is also subject to a contract for sale and leaseback, pursuant to which
the Nationwide indebtedness would be assumed by the purchaser.
On October 2, 1997, the Company replaced its previous revolving credit facility
with a $12 million revolving credit facility with Sanwa Business Credit
Corporation ("Sanwa"). The loan bears interest at the prime rate plus 1%
floating. The loan matures October 2, 2000. Principal will be due at maturity
and interest only is due and payable in monthly installments. The loan is
secured by substantially all of the assets of the Company not pledged to secure
other indebtedness, which consists primarily of inventory.
The advance rate under the Sanwa credit facility is 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. In addition to
advances made based upon the percentage of eligible inventory, Sanwa made
available an additional $750,000 upon receipt of a letter of credit in such
amount from General Atlantic. In consideration for General Atlantic's providing
the $750,000 standby letter of credit to Sanwa, the Company granted General
Atlantic a second lien security interest (subordinated to Sanwa) on the assets
of the Company pledged to Sanwa. Covenants under the loan agreement require the
Company to maintain an interest coverage ratio (defined as the ratio of EBITDA
to interest expense for the period; EBITDA is earnings before interest, taxes,
depreciation and amortization and excluding extraordinary items,) of 2.4 to 1.0
and net worth (defined as total assets less total liabilities except for the
Siegel Loan) of $720,000 and $70,000, for the fiscal quarter ended January 1998
and April 1998, respectively. Thereafter, the ratios, amounts and measurement
periods will vary, as described in the loan agreement.
On October 2, 1997, Chuck Siegel, President and Chief Executive Officer of the
Company, and a related family trust loaned the Company an aggregate amount of
$500,000 (the Siegel Loan). The loan bears interest at a rate of prime plus 1% ,
and requires monthly payments of interest only for a period of five years, at
which time the principal becomes due. The Siegel Loan is subordinate to the
Sanwa credit facility and to repayment by the Company of any amounts advanced
under the letter of credit issued by the Company's principal stockholder,
General Atlantic Corporation. 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. In a
related transaction, Mr. Siegel purchased from General Atlantic Corporation all
of its common stock in the Company, and the Company entered into an amended
5-year Employment Agreement with Mr. Siegel.
The Company is dependent upon short term trade credit as its principal 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. While the Company
maintained inventory at planned levels during the third quarter, the Company's
sales were adversely affected by a number of factors, including the effect of
credit concerns, principally by third party factors, on the Company's ability to
acquire and replenish 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. These factors contributed to
continuing operating losses and lower than anticipated sales during the third
quarter.
The Sanwa credit facility and related transactions described above enhanced the
Company's liquidity and provided additional cash for operations. Management
believes that these transactions also mitigated vendor and factor concern
regarding the Company's creditworthiness and that as a result improved product
reached the Company's stores late in the third quarter. Management continues to
pursue initiatives designed to improve the Company's operations and financial
performance; however, no assurance can be given that the Company will be
successful in its efforts to increase sales, improve operations and restore the
Company to profitability. Continuing unfavorable business conditions and
financial performance would likely intensify vendor and factor concern regarding
the Company's creditworthiness, which would likely adversely affect the
Company's ability to acquire the quantity and quality of inventory necessary to
improve financial performance. Because of these uncertainties, any investment in
the Company's stock should be considered speculative. If current plans to
improve overall financial
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performance and meet liquidity requirements are not successful, the Company
would consider other alternatives designed to enhance liquidity, including
additional debt or equity financing, or other strategic alternatives.
Negotiations have continued with the prospective purchaser of the Company's
owned real estate, and the Company has entered into two amended Agreements of
Purchase and Sale whereby the Company has agreed to sell these properties and
lease them back from the Purchaser. Each of the agreements is conditioned upon
the other closing. In addition to usual and customary conditions regarding the
Purchaser's approval of the physical condition of the properties and the status
of the Company's title to the properties, the agreements are subject to and
conditioned upon the agreement of the Purchaser and the Company regarding the
terms of definitive leases whereby the Company would lease back each of the
properties. Each of the Company's and the Purchaser's obligations under the
Contracts are subject to and conditioned upon various other conditions set forth
in the Contracts. No assurance can be given that the contemplated transactions
will be consummated. If the transactions are consummated pursuant to the
existing agreements, the Company would realize a gain of approximately $2.3
million to be amortized over the life of the leases. The proceeds would permit
the Company to discharge all indebtedness associated with the owned real estate
and realize approximately $1.3 million in cash to enhance liquidity and provide
additional cash for operations. The transactions are currently scheduled to
close in January 1998.
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.
11
12
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)
12
13
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 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(16)
10.40 Letter of Price Waterhouse LLP dated September 18, 1997(17)
10.41 Loan and Security Agreement by and between the Company and Sanwa
Business Credit Corporation(18)
10.42 Employment Agreement by and between the Company and Charles M. Siegel(18)+
10.43 Subordinated Promissory Note of the Company to Charles Siegel in
Principal Amount of $400,000(18)
10.44 Subordinated Promissory Note of the Company to The Siegel Family
Trust in Principal Amount of $100,000(18)
10.45 Letter of Credit and Security Agreement by and between the Company and
General Atlantic Corporation(18)
10.46 Subordination and Intercreditor Agreement by and among the Company,
Sanwa Business Credit Corporation, and General Atlantic Corporation(18)
10.47 Subordination and Intercreditor Agreement by and among the Company,
Sanwa Business Credit Corporation, Charles M. Siegel, and The Siegel
Family Trust(18)
27 Financial Data Schedule *
- --------------
* 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.
13
14
(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.
(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.
(16) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended August 2, 1997.
(17) Incorporated by reference to the Exhibits filed to the Company's
Current Report on Form 8-K for September 18, 1997.
(18) Incorporated by reference to the Exhibits filed to the
Company's Current Report on Form 8-K for October 2, 1997.
(b) Reports on Form 8-K. A report on Form 8-K was filed for September 18, 1997
announcing a change in the Company's auditors. A second report on Form 8-K
was filed for October 2, 1997 announcing that the President and Chief
Executive Officer of the Company had purchased 1,255,000 shares of the
Company's common stock or approximately 30% of the aggregate voting stock
of the Company, from the Company's principal stockholder, that the Company
had replaced its previous revolving credit facility with a new $12 million
revolving credit facility with Sanwa Business Credit Corporation, and
certain other related transactions, including a new loan to the Company by
its President in the amount of $500,000. The report also disclosed that the
Company had entered into agreements to sell and leaseback the Company's
owned real estate, subject to various conditions and approval requirements.
14
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,
Executive Vice President and
Chief Operating and Financial Officer
15
16
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)
10.21 Employment Agreement between the Company and Timothy L. Grady(9)+
10.22 Employment Agreement between the Company and Janet Pollock(9)+
17
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(16)
10.40 Letter of Price Waterhouse LLP dated September 18,1997 (17)
10.41 Loan and Security Agreement by and between the Company and Sanwa
Business Credit Corporation (18)
10.42 Employment Agreement by and between the Company and Charles M. Siegel(18)+
10.43 Subordinated Promissory Note of the Company to Charles Siegel in
Principal Amount of $400,000(18)
10.44 Subordinated Promissory Note of the Company to The Siegel Family Trust
in Principal Amount of $100,000(18)
10.45 Letter of Credit and Security Agreement by and between the Company and
General Atlantic Corporation(18)
10.46 Subordination and Intercreditor Agreement by and among the Company,
Sanwa Business Credit Corporation, and General Atlantic Corporation(18)
10.47 Subordination and Intercreditor Agreement by and among the Company,
Sanwa Business Credit Corporation, Charles M. Siegel, and The Siegel
Family Trust(18)
27 Financial Data Schedule *
- --------------
* 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.
18
(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.
(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.
(16) Incorporated by reference to the Exhibits filed to the Company's
Quarterly Report on Form 10-Q for the Quarter ended August 2, 1997.
(17) Incorporated by reference to the Exhibits filed to the Company's
Current Report on Form 8-K for September 18, 1997.
(18) Incorporated by reference to the Exhibits filed to the Company's
Current Report on Form 8-K for October 2, 1997.