-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IiuNHuqRtyvIX20vHUXabiuQvyET7wgXvn0rjzwY2DwDreRJuRBQdUWz1Jn6ZfQB RgoshlpMSb6Yz8aj9DguTQ== 0000950134-97-004135.txt : 19970521 0000950134-97-004135.hdr.sgml : 19970521 ACCESSION NUMBER: 0000950134-97-004135 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970519 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOLO SERVE CORP CENTRAL INDEX KEY: 0000884941 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 742048057 STATE OF INCORPORATION: DE FISCAL YEAR END: 0201 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19994 FILM NUMBER: 97611497 BUSINESS ADDRESS: STREET 1: 1610 CORNERWAY BLVD CITY: SAN ANTONIO STATE: TX ZIP: 78219 BUSINESS PHONE: 2106626262 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (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) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $.01 per share 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock (which consists of shares of Common Stock and Preferred Stock) held by non-affiliates of the registrant as of April 30, 1997 cannot be determined because there is not an active trading market for the Company's stock. See Item 5 of this Report. The number of shares of the issuer's Common Stock, par value $.01 per share, and Preferred Stock, par value $.01 per share, outstanding as of April 30, 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 April 30, 1997. Exhibit Index on Page 57 Total Pages 95 2 FORM 10-K TABLE OF CONTENTS PART I
Page ---- Item 1. Business ...................................................... 3 Item 2. Properties .................................................... 9 Item 3. Legal Proceedings ............................................. 9 Item 4. Submission of Matters to a Vote of Security Holders ........... 10 Item 4a. Executive Officers of the Company ............................. 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..................................................... 10 Item 6. Selected Financial Data ....................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................... 12 Item 8. Financial Statements .......................................... 19 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure .................................... 19 PART III Item 10. Directors and Executive Officers .............................. 20 Item 11. Executive Compensation ........................................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management .................................................. 31 Item 13. Certain Relationships and Related Transactions ................ 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................................................... 35 Index to Consolidated Financial Statements and Schedules ............... F-1
2 3 PART I ITEM 1. BUSINESS GENERAL The Company operates a chain of off-price retail stores offering a wide selection of name-brand and other merchandise at prices significantly below those of traditional department and specialty stores. Solo Serve stores offer a wide variety of fashion apparel for the entire family, as well as fragrances, hosiery, shoes and quality home furnishings. The Company currently operates 28 Solo Serve stores in Texas, Louisiana, and Alabama. The Company was formed in Texas in 1979 to acquire all of the assets of Solo Serve Company and was reincorporated in Delaware in December 1991. Prior to February 9, 1996, Solo Serve Corporation common stock was quoted on the NASDAQ National Market System under the symbol "SOLOQ". The Company was notified by NASDAQ that the Company's common stock would no longer be eligible for trading on the NASDAQ Stock Market effective February 9, 1996 because the Company's request for an exception from the quantitative maintenance criteria required for inclusion in the NASDAQ National Market System had been denied. Following delisting from NASDAQ/NMS, the Company's common stock began trading on the over-the-counter market and the quotes are carried in the "pink sheets." There are few trades in the Company's common stock. On July 21, 1994 (the "Petition Date"), the Company filed a petition (the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Texas (the "Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which became effective on July 18, 1995. Under the Plan, the Unsecured Creditors agreed to a distribution of 72.5% of pre- petition unsecured allowed claims. The total amount of pre-petition unsecured allowed claims was $15.6 million. Additionally, the Plan allowed for cash distributions for certain secured and priority claims which totaled $2.2 million. On the effective date of the Plan, the Company issued 1,388,889 shares of convertible Preferred Stock for an aggregate consideration of $2.5 million. All of the Preferred Stock was purchased by General Atlantic Corporation ("GAC"), the Company's largest stockholder. On July 31, 1995, the Company disbursed $10.2 million to its creditors in accordance with the First Distribution as proposed by the Plan. The second and final distribution, which occurred on December 20, 1995, was approximately $3.5 million. The second distribution was financed in part by $2.5 million of funds in escrow which were the proceeds from the sale of the Company's Preferred Stock. As of February 3, 1996, the Company had "Contested Claims" of approximately $461,000 which were classified as Liabilities Subject to Compromise. On April 17, 1996, the Bankruptcy Court entered the Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy case. As of February 1, 1997 the Company has settled all known claims. Pursuant to the Plan, the Company's existing common stock was subject to a one-for-two reverse split. The Preferred Stock issued in connection with the Plan has a liquidation value of $1.80 per share, is convertible to an equal number of common shares, has voting rights on an as converted basis, and pays no preferential dividends. With the issuance of Preferred Stock mentioned above, GAC has increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. The settlement of the Company's pre-petition liabilities reduced the Company's net operating loss carryforwards and other tax credit carryforwards by approximately $4.2 million. The above mentioned equity infusion by GAC has not caused an ownership change that would limit the future utilization of the Company's remaining net operating loss carryforwards and other tax credit carryforwards. However, future ownership changes could result in such limitations. In an effort to improve the Company's financial performance and in connection with the Company's bankruptcy reorganization, the Company reduced the number of stores, implemented expense reductions commensurate with the downsizing of the total stores in operation, and improved liquidity by restructuring its pre-petition debt and obtaining a new credit facility. Since the effective date of the Plan, the Company has continued to experience lower than anticipated sales and continuing operating losses. The Company's business has been affected by a number of factors, including increased competition in its principal markets, weakness in the apparel industry, unfavorable economic conditions in 3 4 certain markets and other factors, many of which are not within the Company's control. The Company continues to experience increased competitive pressure on both price points and market share. Increased competitive pricing and promotional strategies have put significant downward pressure on price points, and competitors have opened additional store locations in the Company's principal markets. While the Company has maintained inventory at planned levels, the Company has experienced some reduction in the availability of trade credit, and continuing unfavorable business conditions and financial performance could heighten vendor and factor concern regarding the Company's creditworthiness, which could adversely affect the Company's ability to receive sufficient trade credit support to acquire adequate levels of inventory in the future. No assurance can be given that the Company will be successful in its efforts to improve sales and operations and reverse operating trends. Because of these uncertainties, any investment in the Company's common stock should be considered speculative. THE SOLO SERVE STORE The Solo Serve stores are designed to create a departmentalized atmosphere through merchandise presentation and abundant in-store signage. The Company seeks to create an attractive, comfortable shopping environment that draws customers' attention to the broad assortment of value-priced branded merchandise. Merchandise departments are well-signed, easily distinguished and typically configured around a "racetrack" aisle designed to optimize the customer's visual impressions of the quality and quantity of the store's merchandise. Departments are carpeted and display fixtures along with capacity racks are used to highlight the store's broad merchandise assortment. In-store signage highlights famous designers' and manufacturers' names and reinforces the Company's value pricing. The store entrances are designed to create a brand, price, fashion and service statement to the customer by featuring fragrance showcases, prominent branded men's and women's apparel and a customer service desk. The Solo Serve stores are located generally in metropolitan areas in large strip shopping centers. The Solo Serve stores typically vary in size from 25,000 to 30,000 total square feet, with an average of approximately 23,000 square feet of selling space and a 3,000-square-foot storage facility. MERCHANDISING STRATEGY The Company primarily purchases a large selection of nationally-recognized branded merchandise for its Solo Serve stores, which the Company prices significantly below traditional department and specialty stores. The Company seeks to manage the inventory in its Solo Serve stores to achieve a high turnover rate and to provide the stores with fresh merchandise on a frequent basis. Discount prices and high inventory turnover are made possible by an opportunistic purchasing strategy which consists primarily of branded goods purchased at incentive prices, of in-season cancellations by major retailers, manufacturers' overruns, end-of-season closeouts, occasional acquisitions of end-of- season inventory from well-known and upscale retail companies, and an efficient distribution system permitting quick delivery of new merchandise to the stores. First quality name-brand merchandise remains the primary focus of the Solo Serve store's product offering, but purchases of selected irregulars, which are subject to strict quality control, permit the Company to reinforce Solo Serve's "price-value" message. Through frequent promotions and a changing variety of quality, off-price merchandise in the stores, the Company seeks to frequently attract the knowledgeable, value- conscious customer. The broadest merchandise selection in Solo Serve stores is in women's fashions. Women's merchandise lines include dresses, separates, coordinates, activewear, and outerwear. Women's apparel is segmented into juniors, misses, petites and plus sizes. Handbags, sleepwear and loungewear, intimate apparel and casual and dress shoes complement the women's apparel group. Another important department in Solo Serve stores is the men's department. Men's apparel includes branded dress shirts and ties, basics, casual sportswear, activewear, dress slacks, jeans, and outerwear. The children's department is designed to offer exceptional values for families with young children. Children's merchandise lines include a wide selection of infants' and toddlers' apparel and basics; girls' sportswear, 4 5 dresses, lingerie, sleepwear, activewear, basics and outerwear in sizes 4 to 6x and 7 to 14; and boys' tops, bottoms, jeans, activewear, basics and outerwear in sizes 4 to 7 and 8 to 20. Additionally, the Company is expanding its product offering of domestics, home decor and gifts. Solo Serve stores also offer an extensive and in-depth selection of prestige fragrances in a department store format under an exclusive supply agreement with a major fragrance supplier, Model Imperial, Inc. The Company operates a licensed department in its stores and sells Model's fragrances on a consignment basis. Under the terms of the agreement, the Company supplies fixtures, staffing, and advertising at specified levels and receives a commission on actual sales. Although the Company retains some discretion over merchandise mix, Model is primarily responsible for the ultimate selection and pricing of fragrances. Model filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code on July 18, 1996. Although Model has not yet accepted or rejected the exclusive supply agreement with the Company during the pendency of the Chapter 11 case, Model has indicated its desire to continue the contract with the Company. Model is seeking modifications of the percentage commission paid to the Company. The Company has not yet determined whether a continued relationship with Model would fulfill the product and business needs of the Company. A disruption in the Company's supply of fragrances could adversely affect sales during key selling seasons. If a disruption in the Model supply should occur, the Company would seek an alternative supplier of fragrances on a similar consignment basis or directly purchase products to attempt to offset any loss of sales and gross margin. Any direct purchase of inventory would increase working capital requirements and may have an adverse effect on liquidity. The Company has granted a license to an independent licensee to operate fine jewelry departments in the San Antonio Solo Serve stores. Under the license agreement, which expires August 31, 1999, the licensee has agreed to pay to the Company a base rental amount and a percentage of its sales in excess of specified amounts. These jewelry departments typically occupy 200 square feet of selling space in each of the 12 San Antonio stores. During fiscal 1997, management plans to, among other things, place special emphasis on merchandising and marketing specifically to the econo-socio-ethnic background of the trade area and customer base of individual stores. This is expected to include, but not be limited to, market-specific or store-specific tailoring of the product offerings, including price points, sizing, brands, assortments, categories, and promotions. Additionally, greater emphasis will be placed on planning of stock levels and allocating of product by category and price points to meet the needs of the individual store and its customer base. It is possible that certain categories of inventory will be eliminated entirely in certain stores and other categories will be added or existing categories expanded. Management believes that these efforts and a reduction in turnaround time in its distribution center will increase sales, reduce overall inventory levels and enhance cash flow. Management also plans to open a new store in the third quarter of fiscal 1997 in a new market area smaller than the market areas served by the Company's existing stores.. This will be a test of the Company's ability to operate a smaller store in a smaller market than it has historically, and to design a store to match a specific market. The store will be in a market with less direct competition from other, larger off-price retailers. The Company anticipates that with its new merchandising strategy, such a store can be successful and contribute to improving the Company's operating results. PRICING STRATEGY The Company's pricing strategy is designed to provide exceptional value to its customers. Solo Serve stores offer merchandise at prices significantly below those charged by traditional department and specialty stores. Most price tickets display the Solo Serve selling price as well as the comparable selling price of the item at traditional department or specialty stores. In addition, the ticket clearly identifies whether the item is first quality or an irregular. Pricing decisions are made centrally by the Company's staff of buyers, subject to review by the divisional merchandise managers. Management periodically monitors its competitors' prices in order to permit more focused promotional efforts and to ensure that the Company's prices remain competitive. The Company's management information systems provide ongoing information enabling the Company's buyers to track sales by unit and category and adjust current prices when appropriate. During 1996, the Company implemented selectively 5 6 higher initial markups than in comparable periods in fiscal 1995, which contributed to higher gross margins on lower gross sales. During 1997, management plans to reduce promotional pricing activity from historical levels. The Company's advertised promotions are designed to permit Solo Serve customers to realize additional savings over the already discounted prices, encourage customers to visit the stores regularly and reinforce Solo Serve's image as a dependable source of quality goods at substantial savings. Price reductions are taken on fashion merchandise to maximize inventory turnover and offer additional value opportunities to customers. Management periodically reviews and adjusts its pricing strategies and promotional activities in an effort to more effectively convey its price/value message and encourage frequent visits to its stores. PROMOTIONAL STRATEGY The Company's advertising and promotional strategy is designed principally to reinforce Solo Serve's image as a value-priced retailer for the entire family. Advertising and promotion programs are directed at the general population through newspaper advertisements, special promotional events, television and radio and focus on advertising specific merchandise or categories offered at opportunistic or at discounted prices. The Company continues to strive to encourage frequent shopping from customers by presenting the customer with an ever-changing mix of merchandise. Media promotions are reinforced by in-store signage highlighting famous designers' and manufacturers' names and by pricing statements comparing Solo Serve's prices to those of department and specialty stores. In 1997, management expects to shift more of its advertising expenditures from print to electronic media, principally television. The Company maintains an in-house advertising department that currently produces substantially all of the Company's print advertising and in-store signage. Computerized graphics technology is used to produce camera-ready print media, which management believes results in more timely and cost effective production than would be possible with third-party providers. VENDOR RELATIONSHIPS AND PURCHASING STRATEGY To ensure a steady supply of brand-name and other merchandise, the Company has developed long-standing relationships with certain of its suppliers. The Company maintains a central buying staff in San Antonio and for part of fiscal 1996 employed its own staff of full-time resident buyers in New York. Late in 1996, the Company eliminated its New York buying staff. Management believes that the San Antonio buyers are best able to understand the preferences of customers in the Company's markets. These buyers make frequent trips to New York (where the Company still maintains an office) and Los Angeles, and are continually in contact with market and buying resources throughout the country. The Company's buying staff is comprised of experienced off-price buyers, some of whom also have experience with traditional department stores. The buying staff is divided into groups supervised by divisional merchandise managers who report to the Chief Executive Officer. The Company actively pursues additional branded sources of supply and is attempting to selectively upgrade its merchandise assortments. During fiscal year 1996, the Company purchased goods from over 1,500 vendors. By purchasing closer to and during the selling season and later in the merchandise buying cycle than department and specialty stores, the Company believes it is able to take advantage of favorable market conditions. This purchasing strategy enables the Company to interpret and react to important fashion developments during the selling season. To help ensure an adequate supply of value-oriented merchandise at the beginning of a new season, the Company occasionally purchases out-of-season merchandise ("Packaways") at advantageous prices and warehouses this merchandise at its San Antonio distribution center. During 1996, as part of its strategy to reduce inventory levels, the Company significantly reduced its purchases of Packaways. Management does not believe this has materially hindered its ability to have adequate product available for sale at favorable costs. Favorable merchandise costs are also realized by purchasing from vendors offering in-season cancellations by major retailers, manufacturers' overruns, end-of-season closeouts, and selected irregulars. While the Company believes its relationships with its vendors are generally satisfactory, no assurances can be given that an adequate supply of merchandise at attractive prices will continually be available for all of the Company's departments or that there will not be periodic delays or disruptions in the flow of merchandise to the Company's stores. 6 7 INVENTORY MANAGEMENT AND MERCHANDISE DISTRIBUTION The Company's current inventory management strategy of reducing average store inventories as compared to the prior year is designed to achieve high inventory turnover rates while enabling the Company to provide its stores with fresh merchandise on a frequent basis and improving gross margin as a percentage of sales. By closely monitoring sales, current inventory levels and fashion trends and comparing them with on-order merchandise, the Company seeks to manage its inventory turnover by making necessary purchasing adjustments. The Company owns and operates a 440,000 square-foot headquarters facility and distribution center which is located on a 24-acre parcel of land in San Antonio, Texas. This facility houses executive offices, central buying, advertising, management information systems and administrative staff in 40,000 square feet of office space and a 400,000 square-foot receiving, distribution and warehouse area. The Company uses a centralized distribution system in which all merchandise is processed through its distribution center and allocated to the Company's stores. Merchandise received at the distribution center is checked, price-ticketed, assigned to individual stores, packed for delivery and shipped. The Company utilizes its distribution personnel and systems to assign merchandise to stores based on store volume and known historical customer purchasing patterns. The distribution system complements the Company's promotional advertising strategy by prioritizing and processing featured merchandise through the Company's distribution center on an expedited basis. The Company uses its distribution facility to take advantage of assorted merchandise lots at deep discounts, which can be sorted and priced at the distribution center. The Company delivers merchandise from its distribution center to the stores by means of contract carriers or the Company's trucks, typically twice each week. The distribution center is conveniently located near major north-south and east-west highways, facilitating efficient distribution to the Company's stores. MANAGEMENT INFORMATION SYSTEMS Management continues to be committed to the use of technology as a means of raising productivity and improving the overall performance of the business. Merchandise planning and control systems are the principal focus of present efforts. Management believes that its current merchandising systems are adequate. During the fall of 1995, the Company implemented a merchandise planning system that management believes improved inventory management by allowing for timely response to business trends, and the management of lower average store inventories. During 1997, additional capabilities of the system are expected to be utilized to manage inventory allocation and store inventory planning by department and category. During 1997 the Company plans to pilot a new Point of Sale cash register system at 5 stores. Management expects the new system to speed customer check-out, improve customer service, and enhance reporting capabilities. The Company is in the process of reviewing potential system problems related to the year 2000, the resolutions of which management does not believe would have a material adverse effect on the Company or its business. COMPETITION The national apparel market is highly fragmented and competitive. In addition to price, the Company believes the principal competitive factors in the retail apparel industry are merchandise assortment, quality and presentation, relationships with vendors, store location, operating costs, and customer service. The Company faces significant competition for customers and merchandise supply from other off-price apparel stores and discount stores. Many of these competitors are units of large national or regional chains that have substantially greater resources than the Company. Among other advantages, the availability of greater resources permits large national and regional chains to buy merchandise in larger lots and therefore at better prices; to leverage their general and administrative expenses over a larger sales base; to selectively adopt more aggressive pricing or promotional strategies in certain markets when it is deemed to be advantageous from a competitive standpoint; and to establish 7 8 and maintain relationships with suppliers who provide access to certain higher profile branded merchandise. Additionally, as certain larger national and regional competitors open new stores, they have been able to secure locations in new retail developments with better tenant mix and demographics than many Solo Serve stores. Historically, Solo Serve stores have competed with other off-price stores by offering a large selection of name-brand merchandise at competitive prices; with discount stores by offering higher-quality name-brand fashions at comparable price points; and with traditional department stores by offering similar name-brands at substantially reduced prices. In recent years larger off-price chains have significantly expanded their presence in the Company's historical markets. Moreover, the off-price apparel business has become more competitive as traditional department stores have adopted more aggressive pricing and promotional strategies and as discount stores have improved and enhanced their merchandise selections while continuing to offer discount prices. Additionally, the growth of fashion-branded outlet malls has somewhat constricted, and may further constrict, the supply of branded merchandise formerly available to off-price retailers. In fiscal year 1996, an overall weakness in retail apparel sales further stimulated price competition among existing competitors. Additionally, increased competitive pricing and promotional strategies by major department stores put tremendous downward pressure on price points during the important Christmas selling season in 1996. Moreover, in the Company's principal markets, San Antonio and New Orleans, larger national and regional competitors have opened additional store locations and more locations are planned. See "Management's Discussion and Analysis." EMPLOYEES During fiscal year 1996, the Company's work force consisted of an average of approximately 900 forty-hour equivalent employees, referred to by the Company as "associates". This employee base consisted of approximately 550 full-time associates and an additional 450 part-time associates. Substantial seasonality is associated with employment levels. The Company expects the employee base in fiscal 1997 to be approximately the same as 1996. Management believes that the Company's associates are paid competitively with current local standards in the industry. The Company contributes a portion of the cost of medical and life insurance coverage for those associates who are eligible to participate in Company-sponsored plans. All associates also receive discounts on purchases of Company merchandise in the stores. The Company considers its relationship with its associates to be satisfactory. Effective February 1996, the Company reentered the Texas Workers' Compensation insurance program and in January 1997 the Company purchased fully-funded health and worker's compensation insurance policies. Subsequent to December 1996, the Company became aware of certain unpaid claims under the Company's then self-funded worker's compensation and health plans, including a substantial claim related to a bone marrow transplant for a dependent of one of the Company's associates. The Company is seeking resolution of this matter currently. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CREDIT SALES The Company offers customers several methods of payment, including cash, personal checks and third-party credit cards (American Express, Discover, MasterCard, and Visa). Solo Serve stores also offer a layaway deferred payment plan. The Company does not have a private label credit card. 8 9 ITEM 2. PROPERTIES STORE LOCATIONS AND PROPERTIES The table below shows the location and opening dates of each of the Company's 28 stores in operation at fiscal year end 1996:
STORE MARKET STORE MARKET LOCATION OPENING DATE LOCATION OPENING DATE - ------------ ------------ ------------ ------------ San Antonio, TX 1919 San Antonio, TX November 1985 San Antonio, TX May 1959 San Antonio, TX April 1988 San Antonio, TX May 1970 San Antonio, TX September 1988 San Antonio, TX February 1981 San Antonio, TX August 1989 San Antonio, TX July 1981 Corpus Christi, TX March 1990 Austin, TX November 1981 San Antonio, TX October 1990 New Orleans, LA July 1983 McAllen, TX September 1992 New Orleans, LA September 1983 Austin, TX October 1990 Baton Rouge, LA October 1983 Laredo, TX July 1991 Mobile, AL September 1984 San Antonio, TX March 1992 New Orleans, LA October 1984 Brownsville, TX August 1992 Corpus Christi, TX March 1985 Shreveport, LA July 1993 New Orleans, LA September 1985 San Antonio, TX March 1994 New Orleans, LA November 1985 Austin, TX March 1994
In fiscal year 1994, the Company closed its one store located in Waco, Texas, assigned its leases and sold the furniture and fixtures of its eight stores in Houston and closed its eight Half & More stores. In fiscal 1995 the Company closed its one store located in Montgomery, Alabama. In fiscal 1996 the Company closed one of its Austin stores. The Company owns the real estate and improvements on which three of its Solo Serve stores in San Antonio, Texas are located and leases the remainder of its stores. The leases have remaining terms ranging from 1 to 15 years, with renewal options at higher fixed rates in most cases. Most of the leases provide for percentage rent over sales breakpoints. The Company presently leases an office in New York for the use of its buyers when they make buying trips. The Company also owns its 440,000 square-foot corporate headquarters and distribution center located in San Antonio, Texas. During 1996, the Company listed all of its owned properties for sale, including the distribution center. The Company has entered into an earnest money contract providing for the sale and leaseback of one of its owned store locations, which contract is subject to a number of conditions. No assurance can be given that the transaction will close. The Company continues to consider alternatives with regard to its remaining owned real estate, including sale/leaseback or, subject to availability of suitable locations, outright sale of any of the three properties. See "Management's Discussion and Analysis -- Liquidity and Capital Resources." SERVICE MARKS "Solo Serve" and "Solo" are service marks that have been registered by the Company with the U.S. Patent and Trademark Office. ITEM 3. 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. 9 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended February 1, 1997. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY Charles M. Siegel, age 58, became employed by the Company in August 1996 as President and Chief Executive Officer. He joined the Company as a full-time consultant and Acting Chief Operating Officer in early July 1996. Prior to joining the Company, Mr. Siegel was President, Chairman and Chief Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor organization to Shoppers World stores, for which Mr. Siegel was a member of the founding executive group in 1975. Ross E. Bacon, age 52, became Chief Operating and Financial Officer and Executive Vice President of the Company in September 1996. He had joined the Company in July 1996 as Chief Financial Officer. From 1994 to 1996, Mr. Bacon was a self-employed financial consultant, and from 1993 to 1994, he was Vice President and Chief Financial Officer of Telecommunications Management, Inc., the parent company of Discount Cellular Paging, a San Antonio-based cellular telephone and paging company. Mr. Bacon was Vice President and Chief Financial Officer of Flowers to Go, Inc. from 1992 until 1993. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth for the periods indicated, on a per share basis, the range of high and low sales prices for the Company's common stock as quoted by NASDAQ. For the Fiscal Year Ended February 3, 1996:
High Low ---- --- Quarter ended April 29, 1995 $ 1.12 $ .50 Quarter ended July 29, 1995 2.25 .44 Quarter ended October 28, 1995 2.12 1.12 Quarter ended February 3, 1996 1.50 .12
Prior to February 9, 1996, Solo Serve Corporation common stock was quoted on the NASDAQ National Market System under the symbol "SOLOQ". The Company was notified by NASDAQ that the Company's common stock would no longer be eligible for trading on the NASDAQ Stock Market effective February 9, 1996 because the Company's request for an exception from the quantitative maintenance criteria required for inclusion in the NASDAQ National Market System had been denied. Following delisting from NASDAQ/NMS, the Company's common stock began trading on the over-the-counter market and the quotes are carried in the "pink sheets." There are few trades in the Company's common stock. The following table sets forth for the periods indicated, the range of closing bid prices of the Common Stock of the Company in the over-the-counter market since February 9, 1996, as reported by the National Quotation Bureau.
HIGH LOW ---- --- From February 9, 1996 to May 4, 1996 .125 .125 Quarter ended August 3, 1996 .25 .125 Quarter ended November 2, 1996 .4375 .1875 Quarter ended February 1, 1997 .1875 .09375
These price quotations reflect inter-dealer prices, without adjustment for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. There was no price information available for April 10, 1997 through May 6, 1997; however, the closing bid price on each of April 10, 1997 and May 6, 1997 was .15625. On April 30, 1997, there were 2,856,126 shares of common stock outstanding, held by 71 holders of record. The Company has paid cash dividends on its common stock in prior years. However, since the Company has been publicly held, the Company has never declared or paid any cash dividends on the common stock. Furthermore, certain covenants in various credit agreements of the Company restrict the payment of dividends on the common stock. 10 11 ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from the Company's audited consolidated financial statements, including those found elsewhere in this Annual Report on Form 10-K for the year ended February 1, 1997. The selected financial data below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with those audited consolidated financial statements.
Fiscal Year Ended ------------------------------------------------------------------------ Jan. 30, Jan. 29, Jan. 28, Feb. 3, Feb. 1, 1993 1994 1995 1996 1997 --------- --------- --------- --------- -------- (in thousands, except operating and per share data) Number of Weeks in Fiscal Year 52 52 52 53 52 INCOME STATEMENT DATA: Net revenues $ 154,386 $ 169,053 $ 138,925 $ 109,823 $ 95,238 Cost of goods sold (including buying and distribution excluding depreciation shown below) 104,316 120,293 100,687 83,474 67,485 --------- --------- --------- --------- -------- Gross profit 50,070 48,760 38,238 26,349 27,753 Selling, general and administrative expenses 40,332 50,000 39,013 29,620 28,203 Depreciation and amortization 2,975 4,075 3,748 2,815 2,421 Store closing expenses -- 1,500 -- -- -- Write off of property and equipment -- -- -- -- 525 Non recurring item -- -- -- -- 464 --------- --------- --------- --------- -------- Operating income (loss) 6,763 (6,815) (4,523) (6,086) (3,860) Interest expense, net 962 1,237 1,090 1,129 1,624 --------- --------- --------- --------- -------- Income (loss) before income taxes, accounting change, 5,801 (8,052) (5,613) (7,215) (5,484) reorganization items, and extraordinary item Reorganization items -- -- 6,262 1,787 -- Provision for (benefit from) income taxes 2,154 (3,070) 3,661 (1,418) -- --------- --------- --------- --------- -------- Income (loss) before accounting change and extraordinary item 3,647 (4,982) (15,536) (7,584) (5,484) Cumulative effect of change in accounting for postretirement benefits, net of tax (193) -- -- -- -- Extraordinary item-gain on discharge of debt, net of tax -- -- -- 2,753 -- --------- --------- --------- --------- -------- Net income (loss) $ 3,454 $ (4,982) $ (15,536) $ (4,831) $ (5,484) ========= ========= ========= ========= ======== Income (loss) per common share before accounting change and extraordinary item $ 1.34 $ (1.70) $ (5.45) $ (2.10) $ (1.92) Net income (loss) per common share(1) $ 1.26 $ (1.70) $ (5.45) $ (1.34) $ (1.92) Dividends declared per common share -- -- -- -- -- Weighted average shares outstanding 2,740 2,919 2,850 3,605 2,856 BALANCE SHEET DATA (AT PERIOD END): Total assets $ 57,697 $ 57,753 $ 54,692 $ 33,300 $ 26,387 Long-term debt (including capital lease obligations) $ 11,247 $ 17,998 $ 5 $ 15,136 $ 14,961 Liabilities subject to compromise $ -- $ -- $ 33,385 $ 461 $ -- Total stockholders' equity $ 32,493 $ 27,572 $ 12,148 $ 9,817 $ 4,333 OPERATING DATA: Number of stores in operation at end of period 41 46 30 29 28 Number of stores opened during period 11 8 2 -- -- Number of stores closed during period -- 3 18 1 1 Comparable store net sales increase (decrease)(2) 3.0% (5.9%) (11.2%) (5.6%) (10.6%) Selling square footage in operation at end of period (in thousands) 880 996 701 675 657 Gross square footage in operation at end of period (in thousands) 1,083 1,233 876 844 821 Sales per selling square foot $ 203 $ 187 $ 169 $ 161 $ 143 Sales per gross square foot $ 161 $ 149 $ 135 $ 129 $ 115 Average sales per store (in thousands) $ 4,665 $ 4,244 $ 3,984 $ 3,758 $ 3,360
(1) See Note 1 of Notes to Financial Statements. (2) Comparable store sales are calculated by excluding the net sales of stores for any week of one period if the store was not open during the same week of the prior period. Net sales are not included for the first four weeks following a store opening. In fiscal 1995, a 53 week year, the extra week was excluded from comparable store sales. 11 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NUMBER OF STORES
Fiscal 1994 Fiscal 1995 Fiscal 1996 ----------- ----------- ----------- Beginning of year 46 30 29 First Quarter Additions 2 0 0 First Quarter Dispositions (1) 0 0 Second Quarter Dispositions (17) (1) 0 Third Quarter Dispositions 0 0 (1) --- --- --- END OF YEAR 30 29 28 --- --- ---
RESULTS OF OPERATIONS As a percentage of sales
Fiscal 1994 Fiscal 1995 Fiscal 1996 ----------- ----------- ----------- Net Sales 100.0% 100.0% 100.0% Cost of goods sold, including buying and distribution costs 72.5 76.0 70.9 ----- ----- ----- Gross Profit 27.5 24.0 29.1 Selling, general and administrative expenses 28.1 27.0 29.6 Depreciation and amortization 2.7 2.6 2.5 Store closing expenses -- -- -- Write down of property and equipment -- -- 0.5 Non recurring item -- -- 0.5 ----- ----- ----- Operating loss (3.3) (5.6) (4.0) Interest expense .8 1.0 1.7 ----- ----- ----- Loss before income taxes, reorganization and extraordinary items (4.1) (6.6) (5.7) ----- ----- ----- Reorganization items 4.5 1.6 -- Provision for (benefit from) income taxes 2.6 (1.3) -- ----- ----- ----- Loss before extraordinary item (11.2) (6.9) (5.7) Extraordinary item, net of tax -- 2.5 -- ----- ----- ----- Net Loss (11.2)% (4.4)% (5.7)% ===== ===== =====
12 13 PLAN OF REORGANIZATION On July 21, 1994 (the "Petition Date"), the Company filed a petition (the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Texas (the "Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which became effective on July 18, 1995. Under the Plan, the Unsecured Creditors agreed to a distribution of 72.5% of pre- petition unsecured allowed claims. The total amount of pre-petition unsecured allowed claims was $15.6 million. Additionally, the Plan allowed for cash distributions for certain secured and priority claims which totaled $2.2 million. On the effective date of the Plan, the Company issued 1,388,889 shares of convertible Preferred Stock for an aggregate consideration of $2.5 million. All of the Preferred Stock was purchased by General Atlantic Corporation ("GAC"), the Company's largest stockholder. On July 31, 1995, the Company disbursed $10.2 million to its creditors in accordance with the First Distribution as proposed by the Plan. The second and final distribution, which occurred on December 20, 1995, was approximately $3.5 million. The second distribution was financed in part by $2.5 million of funds in escrow which were the proceeds from the sale of the Company's Preferred Stock. As of February 3, 1996, the Company had "Contested Claims" of approximately $461,000 which have been classified as Liabilities Subject to Compromise. As of February 1, 1997, the Company has settled all known claims. Pursuant to the Plan the Company's existing common stock was subject to a one-for-two reverse split. The Preferred Stock issued in connection with the Plan has a liquidation value of $1.80 per share, is convertible to an equal number of common shares, has voting rights on an as converted basis, and pays no preferential dividends. With the issuance of Preferred Stock mentioned above, GAC has increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. The settlement of the Company's pre-petition liabilities reduced the Company's net operating loss carry-forwards and other tax credit carry-forwards by approximately $4.2 million. The above mentioned equity infusion by GAC has not caused an ownership change that would limit the future utilization of the Company's remaining net operating loss carry-forwards and other tax credit carry-forwards. However, future ownership changes could result in such limitations. In an effort to improve the Company's financial performance and in connection with the Company's bankruptcy reorganization, the Company reduced its number of stores, implemented expense reductions commensurate with the downsizing of the total stores in operation, and improved liquidity by restructuring its pre-petition debt and obtaining a new credit facility. Since the bankruptcy, the Company has continued to experience lower than anticipated sales and continuing operating losses. The Company's business has been adversely affected by a number of factors, including increased competition in its principal markets, weakness in the apparel industry, unfavorable economic conditions in certain markets and other factors, many of which are not within the Company's control. Increased competitive pricing and promotional strategies have put significant downward pressure on price points, and competitors have opened additional store locations in the Company's principal markets. While the Company has maintained inventory at planned levels, the Company has experienced some reduction in the availability of trade credit, and continuing unfavorable business conditions and financial performance could heighten vendor and factor concern regarding the Company's creditworthiness, which could adversely affect the Company's ability to receive sufficient trade credit support to acquire adequate levels of inventory in the future. FISCAL 1996 VERSUS FISCAL 1995 Net revenues for fiscal 1996 decreased 13.3% from the prior year to $95.2 million from $109.8 million. Comparable stores net sales decreased 10.6%. Management attributes the sales decline principally to increased competitive pressures in its market areas, continuing unfavorable economic conditions in some of the Company's principal markets, less promotional activities than in comparable periods of fiscal 1995, and the effect that the Company's bankruptcy had on its core customers, whose purchasing decisions management believes to be driven by the availability of certain branded products, which the Company had difficulty obtaining immediately preceding 13 14 and during the bankruptcy period. Net revenues were favorably impacted $559 thousand by the reclassification of certain revenue items which had been accounted for as a reduction in SG&A expenses in prior years. Gross profit for fiscal 1996 increased $1.5 million to $27.8 million from $26.3 million in the prior year. Gross profit as a percentage of net sales increased to 29.1% from 24.0% in fiscal 1995. The increase in gross profit percentage resulted principally from reduced shrinkage, reduced promotional activity, selectively higher initial markups, reduced buying and distribution costs from those experienced in fiscal 1995, the above-referenced reclassification of certain revenue items which had been accounted for as a reduction in SG&A expenses in prior years, and the reclassification of certain expense items that had been accounted for as costs of goods sold in 1995. Selling, general and administrative expenses for fiscal 1996 decreased $1.4 million, or 4.7%, to $28.2 million from $29.6 million for the prior year. The decrease was the result of cost cutting measures, the closing of one under- performing store, termination of the Company's Post Retirement Benefit Plan, and adjustments to various balance sheet balances off-set by an increase in SG&A expenses due to the above-referenced reclassification of certain revenue items which had been accounted for as a reduction in SG&A expenses in prior years. Depreciation and amortization expenses for fiscal 1996 decreased 14.3% to $2.4 million from $2.8 million primarily due to some assets becoming fully depreciated. During the second quarter of fiscal 1997, the Company plans to close one store and to implement plans to either close or operate in some reduced capacity two additional stores. At fiscal year end 1996, based on the revised cash flow estimates from these locations, the Company has written down the non-recoverable net book value ($525 thousand) of leasehold improvements and fixtures and equipment associated with the locations in accordance with FAS 121. The Company also recognized and recorded an unanticipated and non-recurring charge of $464 thousand in January 1997 which related to fiscal 1996. In recent years, the Company self-insured workers' compensation and medical insurance for its employees and purchased stop-loss coverage to limit its maximum exposure. In late fiscal 1996, a dependent of one of the Company's former employees who is covered by COBRA required expensive medical treatment which was not covered by the stop-loss provider, and the majority of this accrual relates to this claim. The Company's stop-loss providers have denied coverage for these claims, and the Company has accrued for management's best estimate of the Company's maximum exposure. Management also believes that it is possible that some of these costs may be recovered from the stop-loss provider. Effective January 1, 1997, the Company purchased fully insured coverage for medical and workers' compensation insurance. The Company experienced an operating loss, after the $525 thousand write down of fixed assets and the $464 thousand reserve for the non-recurring item, of $3.9 million in fiscal 1996 compared to an operating loss of $6.1 million in fiscal 1995. Net interest expense increased to $1.6 million in fiscal 1996 from $1.1 million in the prior year. During the pendency of the Chapter 11 case in fiscal 1995, the Company accrued interest on approximately $5.9 million in indebtedness secured by a first mortgage on the Company's distribution center, but did not accrue interest on any other pre-petition indebtedness. Interest expense on all indebtedness was accrued following the confirmation of the Plan. Had the Company accrued interest on all of its indebtedness for the full year, the interest expense for fiscal 1995 would have been approximately $1.8 million yielding a pro forma decrease in net interest expense of $200 thousand. For 1996, management developed and implemented a business strategy which sought to achieve higher gross margins on lower comparable store sales than in fiscal 1995. The key elements of this strategy were lower average store inventories, quick price reduction on slower moving merchandise, constant flow of fresh merchandise, less promotional pricing, and a significantly reduced expense structure. The Company also implemented programs designed to achieve significant cost reductions on an annualized basis, including reductions in SG&A expenses, and buying and distribution costs. It is expected that these additional reductions will be fully realized in 1997. Although management believes this business strategy is appropriate in light of business conditions and recent sales trends, the Company's sales results have continued to be disappointing and the 14 15 Company has continued to experience operating losses. No assurance can be given that the Company will be successful in its efforts to improve sales and operations and reverse recent operating trends. FISCAL 1995 VERSUS FISCAL 1994 Net sales for fiscal 1995 decreased 21% from the prior year to $109 million from $139 million. This decrease was attributable to the closing of certain under-performing stores in 1994 and 1995 ($24 million) and a 5.6% comparable store sales decrease ($6 million). Management attributes this decline to the continuing weakness in the apparel industry, unfavorable economic conditions in the Company's principal markets and increased competitive pressure. Gross profit for fiscal 1995 decreased $12 million to $26 million from $38 million in the prior year. Gross profit as a percentage of sales declined to 24% from 27.5% in fiscal 1994. The decrease in gross profit percentage was primarily attributable to promotional markdowns associated with lower than expected sales, increased inventory shrinkage, and an increase in distribution and buying costs associated with increased flow of new merchandise relative to the same period of the prior year. Selling, general and administrative expenses for fiscal 1995 decreased 24% to $30 million from $39 million for the prior year primarily due to the closing of certain under-performing stores in 1994 and 1995 and the implementation of cost-cutting measures. The Company continues to evaluate and implement certain cost-cutting measures designed to reduce expenses without unduly impairing levels of customer service. Depreciation and amortization expenses for fiscal 1995 decreased 25% to $2.8 million from $3.7 million due to operating fewer stores. The Company experienced an operating loss of $6.1 million in fiscal 1995 compared to an operating loss of $4.5 million in fiscal 1994. Net interest expense of $1.1 million in fiscal 1995 was approximately the same as fiscal 1994. During the pendency of the Chapter 11 case, the Company accrued interest on approximately $5.9 million in indebtedness secured by a first mortgage on the Company's distribution center, but did not accrue interest on any other pre-petition indebtedness. Interest expense on all indebtedness was accrued following the confirmation of the Plan. Had the Company accrued interest on all of its indebtedness for the full year, the interest expense for fiscal 1995 would have been approximately $1.8 million. 15 16 SEASONALITY AND QUARTERLY FLUCTUATIONS The following table sets forth certain unaudited quarterly information of the Company and includes all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of such information for the interim periods. The operating results for any quarter are not necessarily indicative of results for any future period. FISCAL 1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- Net revenues $ 25,176 $ 28,271 $ 24,249 $ 32,126 Gross Profit 6,082 7,312 6,000 6,954 Operating loss (2,102) (771) (2,139) (1,074) Loss before reorganization items, income taxes and extraordinary item (2,267) (940) (2,500) (1,509) Reorganization items 373 1,413 0 0 Extraordinary item - gain on discharge of debt 0 (2,753) 0 0 Income tax benefits 0 (1,418) 0 0 Net loss (2,640) (1,818) (2,500) (1,509) Net loss per share of common stock* $ (0.93) $ (0.60) $ (.59) $ (0.36) Number of stores opened during quarter 0 0 0 0 Number of stores closed during quarter 0 1 0 0
FISCAL 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- Net revenues $ 22,260 $ 28,070 $ 21,208 $ 23,700 Gross Profit 6,516 7,568 6,371 7,298 Net loss (973) (1,221) (1,472) (1,819) Net loss per share of common stock* $ (.34) $ (.43) $ (.52) $ (.63) Number of stores opened during quarter 0 0 0 0 Number of stores closed during quarter 0 0 1 0
*Amounts have been restated, where applicable, to give effect to the Company's one-for-two reverse stock split in fiscal 1995. 16 17 COMPARABLE STORE SALES The following table sets forth for fiscal 1994, fiscal 1995, and fiscal 1996 certain information regarding the percentage decrease in total comparable store sales adjusted so that all amounts relate to 52 weeks for the fiscal years. Fiscal 1996
Fiscal Fiscal First Second Third Fourth 1994 1995 Quarter Quarter Quarter Quarter Year ---- ---- ------- ------- ------- ------- ---- Total (11%) (6%) (11%) (12%) (6%) (13%) (11%)
Management attributes the comparable store net sales decrease principally to increased competitive pressures in its market areas, continuing unfavorable economic conditions in some of the Company's principal markets, less promotional activities than in comparable periods of fiscal 1995, and the effect that the Company's bankruptcy had on its core customers, whose purchasing decisions management believes to be driven by the availability of certain branded products, which the Company had difficulty obtaining immediately preceding and during the bankruptcy period. Net revenues were favorably impacted $559 thousand by the reclassification of certain revenue items which had been accounted for as a reduction in SG&A expenses in prior years. Management believes that the current product offering of better branded products is improved as compared to that available to the Company during the bankruptcy period. In fiscal 1996, the continuing overall weakness in retail apparel sales in the Company's principal markets stimulated price competition among existing competitors and traditional department and specialty stores put downward pressure on price points. Additionally two major national chain off-price retailers added stores in the San Antonio market where 12 of the Company's 28 stores are located. Management believes that fourth quarter sales were also impacted by the reduction of selling days in fiscal 1996 the traditional Christmas selling season. There were five fewer selling days between Thanksgiving and Christmas in 1996 than in 1995. Additionally, in December 1995, the Company had greater sales promotions than in the same period of fiscal 1996, and in January 1996, the Company had a higher volume of clearance sales activity than in the same period of fiscal 1996. During the first quarter of fiscal 1997, comparable store sales declined 9.3% over the same period in fiscal 1996 ($17.6 million compared to $19.5 million). While management had planned for lower comparable store sales during this period, the decline in comparable store sales was greater than anticipated. Management attributes the decline in part to competition in its principal markets, to soft Easter sales, and to a record cold April in south and south-central Texas where 20 of its 28 stores operate. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities before reorganization items in fiscal 1996 improved by $6.7 million, when compared to fiscal 1995. $1.1 million was provided by operating activities in fiscal 1996, whereas cash was used by operating activities in fiscal 1995 of $5.6 million. The improvement was primarily the result of decreases in inventories ($3.1 million) and other current assets ($1.3 million), and an increase in accounts payable ($600 thousand). Capital expenditures were $300 thousand and consisted primarily of replenishment and refurbishment of existing equipment and facilities. As part of its Plan of Reorganization, the Company restructured its pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8 million mortgage note, secured by the Company's corporate office and distribution center in San Antonio, Texas. The mortgage note carries an interest rate of 9.5% per annum and requires monthly payments of principal and interest of $49,773 until December 2002, when the balance of $5.4 million is due. The Company also modified and assumed a note payable to MetLife Capital Corporation ("MetLife"), which is secured by various equipment and fixtures located at the corporate office and certain stores. The MetLife note carries an interest rate of 8.0% and requires equal monthly payments, including principal and interest, of $35,044 until September 1998, when the balance of $35,000 is due. The Company also entered into a term note payable to TCB which carries an interest rate of prime plus one-half percent and is due in equal monthly installments of principal and interest of $64,117 until January 17 18 1999, when the 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 became effective on the effective date of the Plan. Under the terms of the loan agreement, the Company may borrow up to its borrowing base as calculated pursuant to the loan agreement, which may not exceed $15.0 million. The proceeds of the loan may be used for letters of credit, working capital, and general corporate purposes consistent with past practices. The loan as amended is a revolving loan with a borrowing base formula which limits the amount of available credit to 60% of the Company's eligible inventory during the period of March 1 to May 15, and September 1 to December 1 of each year and to 55% of the Company's eligible inventory during any other period less (i) open letters of credit and (ii) availability reserves established from time to time by the lender. The loan bears interest at the prime rate of Core States Bank, N.A. plus 1%. In addition, the Company pays a commitment fee equal to 1/2% per annum of the amount of the unused facility and other fees associated with changes in certain covenants since the effective date of the loan agreement. The loan is secured by substantially all the assets of the Company other than those subject to other existing liens. The Company and Congress have amended certain financial covenants in the loan agreement to require minimum working capital of $3.25 million, minimum net worth of $800 thousand, and a $2.5 million annual limitation on capital expenditures, net of insurance or other proceeds resulting from the disposal or sale of fixed assets, for the remaining term of the loan. Congress has also proposed, and the amendment includes, an extension of the term of the loan agreement from July 1998 to July 1999. Under the loan agreement, Congress may establish and revise availability reserves in its sole discretion to cover risks or events it perceives may affect its security under the loan or the business or prospects of the Company. As a result of the formula by which the borrowing base is calculated, an increase in availability reserves restricts the Company's access to borrowings under the credit facility. The current availability reserve under the loan agreement approximates $660 thousand. 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 $3.1 million less at fiscal year end 1996 than at fiscal year end 1995 and accounts payable increased $600 thousand. Of the $1.3 million reduction in other current assets, $936 thousand was the result of reducing advance payments to third-party factoring institutions. During the first quarter of fiscal 1997, the Company's sales have continued to be adversely affected by a number of factors, including increased competition in its principal markets, weakness in the apparel industry, unfavorable economic conditions in certain markets and other factors, many of which are not within the Company's control. Increased competitive pricing and promotional strategies have put significant downward pressure on price points, and competitors have opened additional store locations in the Company's principal markets. While the Company has maintained inventory at planned levels, the Company has experienced some reduction in the availability of trade credit, and continuing unfavorable business conditions and financial performance could heighten vendor and factor concern regarding the Company's creditworthiness, which could adversely affect the Company's ability to receive sufficient trade credit support to acquire adequate levels of inventory in the future. No assurance can be given that the Company will be successful in its efforts to improve sales and operations and reverse operating trends. Because of these uncertainties, any investment in the Company's common stock should be considered speculative. The Company owns the real estate and improvements on which three of its Solo Serve stores in San Antonio, Texas are located and leases the remainder of its stores. During 1996, the Company listed all of its owned properties for sale, including the distribution center. The Company has entered into an earnest money contract providing for the sale and leaseback of one of its owned store locations, which contract is subject to a number of conditions. No assurances can be made that the transaction will close. The Company continues to consider alternatives with regard to its remaining owned real estate including sale/leaseback or, subject to availability of suitable locations, outright sale of any of the three properties. The Company has received and is evaluating proposals on all of its remaining owned real estate. These proposals generally contemplate the sale/leaseback of the properties in question although the Company may also consider out-right sale of the properties under certain circumstances. No assurance can be given that the pending proposals will result in definitive agreements relating to any of the remaining properties, and all of the properties are pledged to secure certain indebtedness of the Company. However, disposition of the Company's owned real estate on terms proposed by the Company would enhance the Company's liquidity and provide additional cash for operations. 18 19 In order to reduce chain-wide inventories, reduce debt and enhance its cash position, the Company will close one store in the second quarter of fiscal 1997. For the same reasons, the Company is also considering closing, or operating in some reduced capacity two additional stores, subject to satisfactory arrangements with landlords. If current sales trends continue and other initiatives are not successful in improving overall financial performance and meeting liquidity requirements, the Company would consider other alternatives, including additional reductions in the Company's scale of operations and implementation of additional measures designed to reduce expenses. Forward-looking Statements Forward-looking statements in this Annual 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. ITEM 8. FINANCIAL STATEMENTS For the financial statements and supplementary data required by this Item 8, see the Index to Consolidated Financial Statements and Schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 19 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS DIRECTORS Certain information concerning the directors, including all positions they hold with the Company and their principal occupations during the last five years, is set forth below: Robert J. Grimm, age 58, has been with the Company since 1960. He has been Chairman of the Board since March 1992, and was Chief Executive Officer from 1979 until July 1995, when he became a consultant to the Company. He served as President from 1979 until December 1994. He had previously served in various buying and merchandising positions with the Company. Stephen P. Reynolds, age 45, has been a director of the Company since 1981. Mr. Reynolds has been a General Partner of General Atlantic Partners since its formation in 1989, prior to which time he was the Treasurer of General Atlantic. Mr. Reynolds is a member of the board of directors of several privately-held companies in which General Atlantic Partners, General Atlantic, or one of their affiliates is an investor. John C. Seiler, age 62, has been a director of the Company since May 1988. Mr. Seiler was Vice President of Associated Dry Goods from 1972 to 1981, serving as Chairman and Chief Executive Officer of that company's Stewart Dry Goods Division (Louisville, KY) from 1974-1981. Mr. Seiler has maintained a retail consulting business, owned retail stores in Louisville (Ports International -- TABI International, 1982-1988), and served on the board of directors of Citizens Fidelity Bank and Trust Co. (1974-1989), Maker's Mark Distillery (1976-1981), and Duty Free Shoppers Limited (1982-1986). Walter H. Teninga, age 69, has been a director of the Company since December 1991. Mr. Teninga is the founder of the Warehouse Club, Inc., a publicly-held wholesale membership company that is no longer in business, and served as its Chairman of the Board and Chief Executive Officer from 1982 to 1991. Prior to that time, Mr. Teninga served as President of the Northern Division of the Price Company and as Vice Chairman and Chief Financial and Development Officer of K mart Corporation. Mr. Teninga currently serves on the Board of Directors of Great Lakes REIT and Developers Diversified Realty Corporation, and served on the board of the Michigan National Corporation until November 1995. Charles M. Siegel, age 58, became employed by the Company in August 1996 as President and Chief Executive Officer. He joined the Company as a full-time consultant and Acting Chief Operating Officer in early July 1996. Prior to joining the Company, Mr. Siegel was President, Chairman and Chief Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor organization to Shoppers World stores, for which Mr. Siegel was a member of the founding executive group in 1975. The Board of Directors has three committees. The Audit Committee of the Board of Directors consists of Messrs. Reynolds, Seiler, and Teninga. The functions of the Audit Committee are to recommend the appointment of the Company's independent auditors, to review the arrangements for and the scope and results of the annual audit and to review internal accounting controls. The Compensation Committee of the Board of Directors consists of Messrs. Grimm, Reynolds, Seiler and Teninga. The functions of the Compensation Committee are to review and make recommendations concerning the compensation of officers and other management personnel. The Stock Option Committee of the Board of Directors consists of Messrs. Reynolds and Seiler. The function of the Option Committee is to administer the Company's Stock Option Plan. The Board of Directors does not have a standing nominating committee or a committee which performs similar functions. None of the directors or the executive officers of the Company has a family relationship with any of the other executive officers or other nominees for director. Except for Mr. Teninga, who is a director of Great Lakes REIT and Developers Diversified Realty Corporation, and Mr. Reynolds, who is a director of Computer Learning Centers, Inc., none of the directors or nominees is a director of any other company which has a class of securities 20 21 registered under, or is required to file reports under, the Securities Exchange Act of 1934 or of any company registered under the Investment Company Act of 1940. EXECUTIVE OFFICERS Certain information is set forth below concerning the executive officers of the Company, each of whom has been selected to serve until the 1997 annual meeting of directors and until his or her successor is duly elected and qualified. Charles M. Siegel, age 58, became employed by the Company in August 1996 as President and Chief Executive Officer. He joined the Company as a full-time consultant and Acting Chief Operating Officer in early July 1996. Prior to joining the Company, Mr. Siegel was President, Chairman and Chief Executive Officer of 50-Off Stores, Inc., which in 1988 became the successor organization to Shoppers World stores, for which Mr. Siegel was a member of the founding executive group in 1975. Ross E. Bacon, age 52, became Chief Operating and Financial Officer and Executive Vice President of the Company in September 1996. He had joined the Company in July 1996 as Chief Financial Officer. From 1994 to 1996, Mr. Bacon was a self-employed financial consultant, and from 1993 to 1994, he was Vice President and Chief Financial Officer of Telecommunications Management, Inc., the parent company of Discount Cellular Paging, a San Antonio-based cellular telephone and paging company. Mr. Bacon was Vice President and Chief Financial Officer of Flowers to Go, Inc. from 1992 until 1993. SECTION 16(a) REPORTS Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers and directors, and persons who own more than ten percent of the Company's Common Stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Executive officers, directors, and greater-than-ten-percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Except as set forth in this paragraph, the Company believes, based solely on its review of the copies of Section 16(a) forms furnished to the Company and written representations from executive officers and directors, that all Section 16(a) filing requirements have been fulfilled. Mr. Walter Teninga filed a Form 4 for September 1996 on October 15, 1996. Each of Mr. Charles M. Siegel and Mr. Ross E. Bacon became subject to filing Section 16 reports on August 8, 1996 and July 15, 1996, respectively, but did not file Form 3's until September 20, 1996 and September 5, 1996, respectively. Mr. Ross E. Bacon filed a Form 4 for October 1996 on April 21, 1997. ITEM 11. EXECUTIVE COMPENSATION Compensation Summary The following table sets forth a summary of compensation for the fiscal years ended February 1, 1997, February 3, 1996, and January 28, 1995 paid by the Company to the Company's President, Charles Siegel, and the most highly-compensated executive officers of the Company who received more than $100,000 in compensation during fiscal 1996, Ross Bacon. Also included is information for David P. Dash, who was the Chief Executive Officer of the Company until August 8, 1996. Stock options listed for fiscal year 1994 were cancelled on July 18, 1995, the Effective Date of the Company's Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code, as described below, and do not reflect the 1-for-2 reverse split otherwise effective to the Common Stock of the Company on the Effective Date. Except as described below, compensation listed in column (i) consists of life and health insurance premiums paid by the Company for the named executive. 21 22 SUMMARY COMPENSATION TABLE
Long Term Compensation ----------------------------- Annual Compensation Awards Payouts ---------------------------------------- -------------------- ------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Restricted Annual Stock Stock LTIP All Other Name and Principal Fiscal Salary Bonus Compen- Award(s) Options Payouts Compen- Position Year ($) ($) sation($) ($) (Shares) ($) sation($) - -------- ---- ------- ------- --------- ------- -------- ------- --------- Charles Siegel, 1996 173,679 100,000 0 0 100,000 0 28 President (1) - ---------------------------------------------------------------------------------------------------------- David P. Dash, 1996 135,865 0 0 0 0 0 61 Former President (2) 1995 250,000 62,500 0 0 175,000 0 5,298 1994 35,096 25,000 0 0 150,000 0 10 - ---------------------------------------------------------------------------------------------------------- Ross Bacon, COO (3) 1996 64,801 0 0 0 50,000 0 39 - ----------------------------------------------------------------------------------------------------------
- -------------------- (1) Mr. Siegel became a consultant to the Company on June 26, 1996 pursuant to the terms of a Consulting Agreement. See "Agreements Related to Employment and Compensation" in this Report. On August 8, 1996, he succeeded Mr. Dash as President of the Company. The amount listed as "salary" for fiscal 1996 includes consulting fees of $42,854. The $100,000 bonus was part of the compensation package paid upon execution of his employment agreement. At Fiscal Year End 1996, Mr. Siegel held options to purchase 100,000 shares of Common Stock, all of which were vested and none of which were at an exercise price lower than the market price of the Common Stock on that date. (2) Mr. Dash was succeeded by Mr. Charles Siegel as President of the Company on August 8, 1996. Mr. Dash joined the Company during fiscal 1994 pursuant to the terms of an Employment Agreement approved by the Bankruptcy Court. See "Agreements Related to Employment and Compensation" in this Report. At Fiscal Year End 1996, all options previously held by Mr. Dash had terminated unexercised. Column (i) includes $5,196 in relocation expenses paid by the Company in 1995. (3) Mr. Bacon joined the Company during fiscal 1996. At Fiscal Year End 1996, Mr. Bacon held options to purchase 50,000 shares of Common Stock, 15,000 of which were vested and none of which were at an exercise price lower than the market price of the Common Stock on that date. 22 23 OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value % of Total at Assumed Annual Rates of Options Exercise Stock Price Appreciation Options Granted to Price Per Expiration for Option Term(1) Name Granted Employees Share Date (a) (b) (c) (d) (e) (f) (g) ============================================================================================== 5% 10% -------------------------- Charles Siegel 25,000 8.9% $ 0.375 7/01/01 $11,965 $15,099 75,000 26.7% $ 0.25 8/08/06 $30,542 $48,633 David P. Dash 0 n/a n/a n/a n/a n/a Ross Bacon 20,000 7.1% $ 0.4375 7/15/06 $14,253 $22,695 30,000 10.7% $ 0.25 10/07/06 $12,217 $19,453
(1) At Fiscal Year End 1996, all of the options held by employees and directors were exercisable at a price that exceeded fair market value of the common stock underlying the options. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
(a) (b) (c) (d) (e) Number of Value of Unexercised Unexercised In-The-Money Options at Options at Shares FY-End (#) FY-End ($) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable - ---- ------------ ------------ ------------- ------------- Siegel 0 0 100,000/0 $0/0 Dash 0 0 0/0 $0/0 Bacon 0 0 15,000/35,000 $0/0
COMPENSATION OF DIRECTORS Directors who are not also officers or full-time employees of the Company were paid a total retainer fee of $12,500 for the fiscal year ended February 1, 1997. These directors are also paid $1,000 for each duly called meeting of the Board of Directors that such persons attend (not to exceed $4,000 per year) and $250 for each telephonic meeting of the Board of Directors in which they participate, and are reimbursed for reasonable expenses of travel, meals and accommodations in connection with meetings. On the Effective Date of the Company's Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code, all previously outstanding options to purchase Common Stock of the Company were cancelled, including those options held by the members of the Board of Directors. Pursuant to the terms of the Plan, a new director stock option plan, the Solo Serve Non-officer Director Option Plan (the "New Director Plan"), became effective on the Effective Date. The New Director Plan is a non-discretionary plan which authorized the grant of non-statutory stock options to acquire an aggregate of 135,000 shares of Common Stock to those persons who are directors and not officers of the Company. The number of shares for which options may be granted are subject to adjustment in the event of a stock dividend, split up or combination of stock, or reclassification of shares of stock. 23 24 Pursuant to the terms of the New Director Plan, each director of the Company was initially granted an option to acquire 20,000 shares of Common Stock on September 1, 1995. Directors who join the Board for the first time on or after that date will be granted 20,000 options on the date they become directors of the Company. In addition to these initial grants, directors would receive annual grants thereafter of 1,000 options, on the first day following the Annual Meeting of Stockholders of the Company after September 1, 1995, provided that the director remains a member of the Board on such date. The option price per share for each option is the fair market value (as defined in the New Director Plan) of the Common Stock on the date of grant. The New Director Plan contains change of control adjustment provisions substantially similar to those in the New Incentive Plan, as described below. Grants of Options shall vest over a three-year period, forty percent (40%) six (6) months after the date of grant, and twenty (20%) percent on each of the next three anniversaries of the date of grant. Each option expires on the tenth anniversary of the date of grant. No option granted under the New Director Plan is transferable other than by will or the laws of descent and distribution. Although the New Director Plan may be amended by the Board of Directors, stockholder approval is required for any amendment which will (i) increase the aggregate number of shares of Common Stock that may be issued and sold under the New Director Plan, or (ii) change the designation of class for persons eligible to receive options. The New Director Plan also provides that the provisions of the New Director Plan relating to (i) the number of shares of Common Stock for which an option may be granted, (ii) the option price, and (iii) the timing of the grant and vesting of an option, may not be amended more than once every six months, with the exception of amendments required to be made so that the New Director Plan continues to comply with the Internal Revenue Code, ERISA, or the rules promulgated thereunder. Options granted under the New Director Plan would be nonqualified stock options. The U.S. Federal tax treatment of nonqualified stock options is as follows: 1. The grant of a nonqualified option results in neither taxable income to the option holder nor a tax deduction to the Company. 2. Except as noted in paragraph 3 below, when an option holder exercises such an option he will realize, for federal income tax purposes, ordinary income in the amount of the difference between the option price and the then fair market value of the shares, and the Company will be entitled to a corresponding deduction if federal income tax withholding requirements are satisfied. Any such ordinary income will increase the option holder's tax basis for the purpose of computing his gain or loss on the later sale or exchange of the shares. 3. With respect to options exercised by officers and directors of the Company who could be subject to Section 16(b) of the Securities Exchange Act of 1934, instead of the tax treatment described in paragraph 2 above, a different rule will apply unless an election is filed by the option holder with Internal Revenue Service under Section 83(b) of the Code within 30 days of the date the option is exercised. If such an election is not filed, such option holder will recognize ordinary income upon the lapse of the Section 16(b) restrictions (rather than on the exercise of the option) in the amount by which the fair market value of the shares on the date the restriction lapses exceeds the option price, and the Company will be entitled to a corresponding deduction at such time. Any such ordinary income will increase the option holder's tax "basis" for the purpose of computing his gain or loss on the sale or exchange of the shares. 4. Upon the subsequent sale or exchange by the option holder of stock purchased upon exercise of the option, any excess of the selling price over the option holder's tax basis (which tax basis will generally equal the amount paid for the shares plus the ordinary income recognized as described in paragraphs 2 and 3 above) will be treated as capital gain, and any diminution of such selling price below his purchase price will be treated as capital loss. If the holding period and other requirements of the capital gains provisions are satisfied, any profit realized by the option holder on such a later sale or exchange of such shares will be long-term capital gain and any loss will be long-term capital loss. A resale by the option holder has no tax consequence as far as the Company is concerned. 24 25 The exercise price of existing stock options held by members of the Board of Directors is $2.125 per share. The Board of Directors determined during a Board Meeting in April 1997 to modify outstanding options held by Directors such that the strike price of the outstanding options would be changed to the current market price for the Company's common stock at the time of the modification. Such modification had not yet been implemented as of the date of this Report, but is expected to be implemented during May 1997. Agreements Relating to Employment and Compensation In June 1996, the Company entered into a consulting agreement with Charles M. Siegel pursuant to which Mr. Siegel was to function as the acting Chief Operating Officer for the Company. The agreement provided for a term expiring January 31, 1997, total consulting fees of $150,000 payable in 7 equal installments of $21,428.57, and the grant of options to purchase 25,000 shares of Company common stock. The agreement also imposed a duty of confidentiality regarding the Company's Confidential Matters, and prohibited Mr. Siegel from competing with the Company through January 31, 1997. On August 8, 1996, the Company entered into an employment agreement with Mr. Siegel. Pursuant to the Agreement, Mr. Siegel became President and Chief Executive Officer of the Company. Mr. Siegel is eligible to receive severance benefits equal to six months' base salary if he is terminated by the Company without "cause" as that term is defined in the agreement. The employment agreement terminated the consulting agreement, except for the obligations of confidentiality and non-competition, which remained in force, and the retention by Mr. Siegel of the stock options granted with the consulting agreement. The employment agreement also contains independent obligations of confidentiality, and prohibits Mr. Siegel from investing or becoming employed by or associated with 50-Off Stores or actively soliciting the employment or hiring of any Company personnel for a period of twenty-four months following termination of the Agreement. The employment agreement provides for a term ending February 1, 1999, a sign-on bonus of $100,000, an annual base salary of $300,000, and a grant of options to purchase 75,000 shares of Company common stock. In January 1995, the Bankruptcy Court authorized the Company to enter into an employment agreement with David P. Dash. Pursuant to this agreement, Mr. Dash became President of the Company. The agreement provided for a three-year term ending February 1, 1998, a sign-on bonus of $25,000, and an annual base salary of $250,000. Under the agreement, Mr. Dash was eligible for up to 50% of his base salary paid as an additional annual bonus in accordance with and subject to the terms of the Company's then existing bonus plan, with a guaranteed first-year bonus of at least $62,500. Mr. Dash resigned from the Company effective August 8, 1996. Under the terms of the agreement, Mr. Dash may not compete with the Company nor actively solicit the employment of Company personnel for a period of twelve to twenty-four months following termination of the agreement, except under certain limited circumstances. On July 8, 1996, the Company entered into a letter agreement with Ross Bacon pursuant to which Mr. Bacon was offered (and subsequently accepted) employment with the Company. Under the agreement, Mr. Bacon is eligible to receive severance benefits equal to three (3) month's base salary if he is terminated without "cause" (as defined in the agreement) during the first six (6) months of his employment with the Company, and six (6) months' base salary if he is terminated without cause after six months from beginning his employment with the Company. New Stock Option Plan Pursuant to the terms of the Plan, all stock options outstanding on the Effective Date were cancelled, and the Company's Incentive Stock Option Plan and Performance Share Plan were also cancelled on the Effective Date. A new Solo Serve Stock Incentive Plan (the "New Incentive Plan") became effective on the Effective Date. The New Incentive Plan is intended to provide the Board of Directors with flexibility to adapt the compensation of officers, key employees, consultants and advisors of the Company (the "Eligible Persons") to a changing business environment by allowing not only grants of stock options ("Options"), but also grants of stock appreciation rights ("SARs"), shares of restricted stock ("Restricted Stock") and any other form of compensation that the committee of the Board of Directors administering the New Incentive Plan (the "Committee") determines is consistent with the purpose of the New Incentive Plan. The Board of Directors has determined that the Committee shall be the Stock Option Committee. The New Incentive Plan also provides the Committee with flexibility in determining the terms and conditions under which Options, SARs and Restricted Stock may be awarded. 25 26 The Company, through the New Incentive Plan, seeks to motivate officers, key employees, consultants and advisors and to attract highly competent individuals whose judgment, initiative and continuing effort will contribute to the success of the Company. The complete text of the New Incentive Plan is incorporated by reference to the Exhibits to this report. The following summary of the material features of the New Incentive Plan does not purport to be complete, and is qualified in its entirety by reference to the complete text of the New Incentive Plan. General Subject to the adjustment provisions described below, the maximum number of shares of Common Stock and Common Stock equivalents which may be made subject to grants under the New Incentive Plan under all forms of awards is 500,000. The shares to be issued under the New Incentive Plan may be either treasury shares or newly issued shares. Any shares subject to a grant under the New Incentive Plan that lapse or are terminated or forfeited for any reason prior to exercise may be made subject to subsequent grants under the New Incentive Plan, provided that no monetary benefits of ownership therefrom, such as dividends, were received by the former grantee. The Committee that administers the New Incentive Plan consists of members of the Board of Directors who are "disinterested persons" (as that term is defined in the rules and regulations under Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act")) and "outside directors" (as that term is defined in the proposed regulations to be promulgated under Section 162(m) of the Code, as may be modified or amended by the adopted regulations). Within the limits of the New Incentive Plan, the Committee determines the amounts, times, forms, terms and conditions of grants under the New Incentive Plan. Participation in the New Incentive Plan is determined by the Committee and is limited to officers, key employees, consultants and advisors. The cost of administering the benefit payments under the New Incentive Plan shall be borne solely by the Company. Generally, no member of the Board of Directors or the Committee shall be liable for any action or determination taken or made with respect to the New Incentive Plan. In addition, the Company will indemnify the Board of Directors and the Committee against any claims, losses, demands, causes of action or other expense, including reasonable expenses of counsel, in connection with administration of the New Incentive Plan. As a condition to any grant under the New Incentive Plan, each participant must enter into an agreement containing such terms and conditions relating to such grant as shall be determined by the Committee consistent with the terms of the New Incentive Plan. In addition, the Committee may from time to time establish procedures governing the administration of the New Incentive Plan and terms and conditions related to the grant of awards under the New Incentive Plan. The Board of Directors may at any time amend, suspend, or terminate the New Incentive Plan without stockholder approval or approval of participants, except that (i) stockholder approval is required if any action may increase the total number of shares of Common Stock subject to the New Incentive Plan (other than pursuant to the adjustment provisions of the New Incentive Plan) and (ii) as described below, the approval of participants is required if certain modifications are to be made following an event effectively constituting a Change in Control (as defined in the New Incentive Plan) of the Company. In the event that the outstanding shares of Common Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company or another corporation by reason of merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up, or stock dividend, the Committee shall make such adjustments, if any, to outstanding grants and the New Incentive Plan as it deems appropriate. The New Incentive Plan contains a self-operative provision that modifies any term of the New Incentive Plan that varies from or conflicts with any applicable federal or state securities laws and regulations in effect from time to time so that such term conforms to and complies with such laws. 26 27 The New Incentive Plan permits the Committee to determine, at the time of each grant, whether, when and how dividends (or dividend cash equivalents), if any, shall be paid in respect of such grant. The New Incentive Plan contains provisions to enable the Company to satisfy its tax withholding obligations pursuant to such arrangements as are satisfactory to the Committee. The Committee may permit participants to pay such taxes through the tender of cash or securities or the withholding of the Common Stock or cash to be received through grants or any other arrangement satisfactory to the Committee. Grants under the New Incentive Plan that are otherwise subject to vesting over a period of time can, under certain circumstances, become fully and immediately exercisable or can cease to be subject to applicable restrictions upon certain events effectively constituting a Change of Control of the Company (the date of which any such event occurs is referred to as a "Trigger Date"). The New Incentive Plan also provides that upon the occurrence of a Trigger Date, participants have a 90-day period during which they may settle outstanding grants for cash. In the case of an award granted less than six months prior to the Trigger Date to a participant subject to the restrictions imposed under Section 16 (b) of the Exchange Act, the period during which grants could be so settled would be from the Trigger Date until 90 days after the end of the six-month period following the date such award was granted. Such cash settlements would be made pursuant to provisions designed to give participants the benefit of the higher of (i) the highest price paid or to be paid for shares of the Common Stock in connection with the events related to the occurrence of the Trigger Date and (ii) the highest market price for shares of the Common Stock during the period beginning 90 days prior to the Trigger Date and ending on the date a participant elects to exercise such cash settlement right. Such cash settlement rights of a participant may be exercised notwithstanding the termination of the participant's employment with the Company. Any termination or modification of the New Incentive Plan after a Trigger Date may not adversely affect the cash settlement rights of a participant in respect of such Trigger Date without such participant's consent. The Committee may, prior to a Trigger Date, provide that such cash settlement rights shall automatically be deemed exercised upon the occurrence of a Trigger Date. The provision of such cash settlement rights in respect of grants under the New Incentive Plan will not reduce the number of shares and share equivalents available for grants under the New Incentive Plan. The Change of Control provisions in the New Incentive Plan may cause a possible merger, takeover of the Company, acquisition of control of the Company by a principal stockholder or change in management to be more expensive than it would be in the absence of such provisions. The Change of Control provisions do not apply to a transaction between General Atlantic or an affiliate thereof and the Company. The New Incentive Plan is not being proposed in response to any present actions known to the Board of Directors. The Board of Directors believes that on balance the New Incentive Plan will be of significant benefit to the Company, its stockholders and its employees. Options The Committee has full and final authority to select those Eligible Persons who will be granted Options. The Options granted under the New Incentive Plan may be Incentive Stock Options ("ISOs"), as defined in Section 422 of the Code, or options not qualifying for treatment as ISOs ("Nonstatutory Stock Options"). Subject to applicable provisions of the Code, the Committee determines the recipients of Options and the terms of the Options, including the number of shares for which an Option is granted, the term of the Option and the time(s) when the Option can be exercised. Restrictions on the exercise of an Option may at the discretion of the Committee be contained in the agreement with the participant or in the Committee's procedures. Each ISO must comply with all the requirements of Section 422 of the Code. The Committee may in its discretion waive any condition or restriction on the exercise of an Option and may accelerate the time at which any Option is exercisable. 27 28 The price per share of the Common Stock subject to an Option (the "Option Price") is set by the Committee. In the case of ISOs, the Option Price may not be less than the fair market value of the Common Stock generally determined to be the last sale price reflected on the Nasdaq National Market System on the date of the grant of the ISOs (or, if not so quoted, the value set by the Committee as the fair market value, at the Committee's sole discretion); provided, however, the Option Price of an ISO granted to an Eligible Person that owns 10% or more of the Common Stock may not be less than 110% of the fair market value of the Common Stock on the date of grant of the ISOs. The Committee also determines the manner in which the Option Price of an Option may be paid, which may include the tender of cash or securities or the withholding of the Common Stock or cash to be received through grants or any other arrangement satisfactory to the Committee. Options are not transferable except by will or the laws of descent and distribution. SARs The Committee has full and final authority to select those Eligible Persons who will be granted SARs. In the discretion of the Committee, SARs may be granted separately or in tandem with the grant of an Option. An SAR is a grant entitling the participant to receive an amount in cash or shares of the Common Stock or a combination thereof, as the Committee may determine, having a value equal to (or if the Committee shall determine at the time of grant, less than) the excess of (i) the fair market value on the date of exercise of the shares of the Common Stock with respect to which the SAR is exercised over (ii) the fair market value of such shares on the date of the grant (or over the Option Price, if the SAR is granted in tandem with an Option). An SAR granted in tandem with a Nonstatutory Stock Option may be granted either at or after the time of the grant of the Nonstatutory Stock Option. An SAR granted in tandem with an ISO may be granted only at the time of the grant of the ISO. An SAR granted in tandem with a longer exercisable Option terminates and is no longer exercisable upon the termination or exercise of the related Option. Subject to the limitations set forth in the New Incentive Plan, SARs shall be subject to such terms and conditions as shall be determined from time to time by the Committee. The Committee at any time may accelerate the exercisability of any SAR and otherwise waive or amend any conditions to the grant of an SAR. SARs are not transferable except by will or the laws of descent and distribution. Restricted Stock The New Incentive Plan provides that the Committee will have discretion to make awards of Restricted Stock to the Eligible Persons. A Restricted Stock grant entitles the recipient to acquire, at no cost or for a purchase price determined by the Committee on the date of the grant (as determined by the Committee), shares of the Common Stock subject to such restrictions and conditions as the Committee may determine at the time of the grant. Upon (i) the grant of Restricted Stock (or upon payment of the purchase price for Restricted Stock if a purchase price is required) and (ii) recording of the Restricted Stock in the stock ledger of the Company, the recipient may have all the rights of a stockholder with respect to the Restricted Stock, including voting and dividend rights. A grant of Restricted Stock will be subject to nontransferability restrictions, Company repurchase and forfeiture provisions and such other conditions (including conditions on voting and dividends) as the Committee shall impose at the time of grant. Shares of Restricted Stock may not be transferred or otherwise disposed of except as specifically provided for in the New Incentive Plan. Upon the grant of a Restricted Stock award, the Committee shall specify the conditions, if any, to be met in order for the restrictions on the shares subject to the grant to lapse and/ or the date(s) when the restrictions will lapse. Restrictions may include vesting restrictions based upon matters such as timing, but could also relate to other matters. Subsequent to the lapse of all restrictions on shares of Restricted Stock, such shares shall cease to be Restricted Stock and shall be deemed "vested." The Committee may in its discretion waive any condition or restriction related to a grant of Restricted Stock or accelerate the date(s) on which a grant of Restricted Stock vests. 28 29 In the event of termination of employment of a participant for any reason prior to shares of Restricted Stock becoming vested, the Company has the right, in the discretion of the Committee, to repurchase such unvested shares at their purchase price, or to require forfeiture of such shares if acquired at no cost. Other Awards In addition to Options, SARs and Restricted Stock, the New Incentive Plan permits the Committee to grant awards to Eligible Persons consisting of any other form of consideration that the Committee determines is consistent with the purposes of the New Incentive Plan. The grant of additional types of awards is subject to the overall limitation on the number of shares of the Common Stock (or share equivalents) that may be granted under the New Incentive Plan to participants under all forms of awards. Pursuant to such authority, the Committee could grant awards to Eligible Persons such as restricted units, phantom stock, performance awards, performance units, performance shares, stock appreciation shares, limited stock appreciation rights, stock acquisition rights, valuation protection rights, reload options or any other type of award or combination or derivative of various types of awards. The form and terms of any such additional types of awards, as well as the terms and conditions of the grant of any such awards, will be determined by the Committee and set forth in the agreements entered into with participants and in the Committee's procedures. Such grants (including grants of Options, SARs and Restricted Stock) may be settled at the discretion of the Committee in cash, shares of the Common Stock or any combination thereof. Federal Income Tax Consequences Commencing in taxable years beginning on or after January 1, 1994, a publicly held corporation may not, subject to limited exceptions, deduct for federal income tax purposes certain compensation paid to an executive officer who is the chief executive officer or one of the four other highest paid executive officers in excess of $1 million in any taxable year (the "$1 Million Cap"). In general, compensation received on account of the exercise of options that were granted on or prior to February 17, 1993 will not be subject to the $1 Million Cap. Also, certain other performance-based compensation may not be subject to the $1 Million Cap. Compensation attributable to the exercise of options and other awards granted after February 17, 1993, however, may be counted in determining whether the $1 Million Cap has been exceeded in any taxable year if such compensation does not qualify as performance-based compensation. The Company believes that any Options and SARs to be granted under the New Incentive Plan with an exercise price at or above the fair market value of the Common Stock on the date of grant will qualify as performance-based compensation and not be subject to the $1 Million Cap. However, whether (i) the grant of Restricted Stock or any other types of awards under the New Incentive Plan are subject to the $1 Million Cap, (ii) the $1 Million Cap with respect to such an executive will be exceeded and (iii) the Company's deductions for compensation paid in excess of the $1 Million Cap will be denied, will depend on the resolution of various factual and legal issues that cannot be determined at this time. Under the Code, a participant receiving a Nonstatutory Stock Option generally does not realize taxable income upon the grant of the Option. A participant does, however, realize ordinary income upon the exercise of a Nonstatutory Stock Option to the extent that the fair market value of the Common Stock on the date of exercise exceeds the Option Price. The Company may deduct for federal income tax purposes (subject to the $1 Million Cap, if applicable, and subject to satisfying the federal income tax withholding requirements) an amount equal to the ordinary income so realized by the participant. Upon the subsequent sale of the shares acquired pursuant to a Nonstatutory Stock Option, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant. There will be no tax consequences to the Company upon the subsequent sale of shares acquired pursuant to a Nonqualified Stock Option. The grant of an ISO does not result in taxable income to a participant. The exercise of an ISO also does not result in taxable income, provided that the employment requirements specified in the Code are satisfied, although such exercise may give rise to alternative minimum taxable income for the participant. In addition, if the participant does not dispose of the Common Stock acquired upon exercise of an ISO during the statutory holding period, then any gain or loss upon subsequent sale of the Common Stock will be a long-term capital gain or loss, assuming the shares represent a capital asset in the participant's hands. 29 30 The statutory holding period for the Common Stock acquired pursuant to the exercise of an ISO is the later of two years from the date the ISO is granted or one year from the date the Common Stock is transferred to the participant pursuant to the exercise of the ISO. If the employment and statutory holding period requirements are satisfied, the Company may not claim any federal income tax deduction upon either the exercise of the ISO or the subsequent sale of the Common Stock received upon exercise of the ISO. If these requirements are not satisfied, the amount of ordinary income taxable to the participant is the lesser of (i) the fair market value of the Common Stock on the date of exercise minus the Option Price, or (ii) the amount realized on disposition minus the Option Price. The Company may deduct for federal income tax purposes (subject to the $1 Million Cap, if applicable) an amount equal to the ordinary income so realized by the participant. A recipient does not realize taxable income upon the grant of an SAR but realizes ordinary income upon its exercise to the extent of the fair market value of the Common Stock subject to the SAR on the date of the exercise and the Company may then deduct for federal income tax purposes (subject to the $1 Million Cap, if applicable, and subject to satisfying federal income tax withholding requirements) an amount equal to the ordinary income realized by the participant. Upon the subsequent sale of shares acquired pursuant to an SAR, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant. In general, a participant receiving Restricted Stock does not realize taxable income on the grant of Restricted Stock. A participant will, however, realize ordinary income when the Restricted Stock becomes vested to the extent that the fair market value of the Common Stock on that date exceeds the price, if any, paid for the Restricted Stock or, if no price were paid, to the extent of the fair market value of the Common Stock on that date. However, the participant may elect (within 30 days after the grant of Restricted Stock) to realize taxable income on the date of the grant to the extent of the fair market value of the Restricted Stock (determined without regard to restrictions on transferability and any substantial risk of forfeiture). If such election is made, the participant will not realize taxable income when the Restricted Stock becomes vested. In addition, if such an election is made and the Restricted Stock is subsequently forfeited, the participant is not entitled to a deduction but will be allowed a capital loss, if any, equal to the amount paid for such shares. Upon a subsequent sale of vested Restricted Stock, any gain or loss will be capital gain or loss, assuming the shares represent a capital asset in the hands of the participant. The Company may deduct for federal income tax purposes (subject to the $1 Million Cap, if applicable, and subject to satisfying federal income tax withholding requirements) an amount equal to the ordinary income realized by the recipient of the Restricted Stock. Dividends paid to the participant on Restricted Stock during the restricted period are ordinary compensation income to the participant and deductible as such by the Company (subject to the $1 Million Cap, if applicable). If the exercisability of an Option or an SAR or the elimination of restrictions on Restricted Stock is accelerated, or special cash settlement rights are triggered and exercised, as a result of a Change in Control, all or a portion of the value of the relevant award at that time may be deemed a "parachute payment" for purposes of determining whether a 20% excise tax is payable by the participant as a result of the receipt of an "excess parachute payment" pursuant to Section 4999 of the Code. The Company will not be entitled to a deduction for that portion of any parachute payment which is subject to the excise tax. 30 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Based upon information received from the persons concerned, each person known to the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock of the Company, each director, each of the named executive officers, and all directors and executive officers of the Company as a group, owned beneficially as of April 30, 1997, the number and percentage of outstanding shares of Common Stock of the Company indicated in the following table. Except as noted below, each of the persons listed has sole investment and voting power with respect to the shares indicated and the address of each of the persons listed is c/o the Company. BENEFICIAL OWNERSHIP(1)
COMMON STOCK PREFERRED STOCK NAME AND ADDRESS NUMBER PERCENTAGE NUMBER PERCENTAGE OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS - ----------------------------------------------------------------- -------------------------- General Atlantic Corporation (2) 2,643,889 62.3% (2a) 1,388,889 100% 125 E. 56th Street New York, NY 10022 - ----------------------------------------------------------------- -------------------------- Robert J. Grimm (3) 62,000 2.2% 0 0% - ----------------------------------------------------------------- -------------------------- Stephen P. Reynolds (4) 12,000 ** 0 0% - ----------------------------------------------------------------- -------------------------- John C. Seiler (5) 14,500 ** 0 0% - ----------------------------------------------------------------- -------------------------- Walter H. Teninga (6) 12,000 ** 0 0% - ----------------------------------------------------------------- -------------------------- David P. Dash (7) 0 0% 0 0% - ----------------------------------------------------------------- -------------------------- Charles Siegel (8) 100,000 3.4% 0 0% - ----------------------------------------------------------------- -------------------------- Ross Bacon (9) 15,000 ** 0 0% - ----------------------------------------------------------------- -------------------------- All Executive Officers 215,500 7.1% 0 0% and Directors as a group (6 persons) (10) - ----------------------------------------------------------------- --------------------------
- ----------- ** less than 1% (1) Unless otherwise indicated, all shares are held directly with sole voting and investment power. All options referenced are exercisable at a price equal to or greater than $0.25 per share. (2) General Atlantic Corporation ("GAC") is a Delaware corporation whose principal business is holding and managing investments for its own account. The shares directly owned by GAC are deemed to be beneficially owned by GAC's direct and indirect controlling stockholders. GAC is, through a number of intermediary holding companies, a wholly-owned subsidiary of General Atlantic Group Limited, a Bermuda corporation, whose principal business is holding and managing investments for its own account. The address of General Atlantic Group Limited is Washington Mall II, Church Street, Hamilton 5, Bermuda. General Atlantic Group Limited is, through an intermediate holding company, a wholly-owned subsidiary of The Atlantic Foundation, a Bermuda grant-making, charitable corporation. The address of The Atlantic Foundation is P. O. Box HM 666, Clarendon House, Church Street, Hamilton, HM CX, Bermuda. No natural person beneficially owns the securities owned by The Atlantic Foundation. (2a) Includes 1,388,889 shares of Preferred Stock, which is convertible into an equivalent number of shares of Common Stock of the Company, and votes with the Common Stock. (3) Includes 12,000 shares issuable upon exercise of stock options, and does not include options to purchase 8,000 shares of Common Stock, none of which are exercisable within 60 days. (4) Includes 12,000 shares issuable upon exercise of stock options, and does not include options to purchase 8,000 shares of Common Stock, none of which are exercisable within 60 days. (5) Includes 12,000 shares issuable upon exercise of stock options, and does not include options to purchase 8,000 shares of Common Stock, none of which are exercisable within 60 days. (6) Includes 12,000 shares issuable upon exercise of stock options, and does not include options to purchase 8,000 shares of Common Stock, none of which are exercisable within 60 days. (7) All of the options previously held by Mr. Dash expired unexercised prior to Fiscal Year End 1996. 31 32 (8) Includes 100,000 shares issuable upon exercise of stock options. (9) Includes 15,000 shares issuable upon exercise of stock options, and does not include options to purchase 35,000 shares of Common Stock, none of which are exercisable within 60 days. (10) Includes 163,000 issuable upon exercise of stock options, and does not include options to purchase 67,000 shares of Common Stock, none of which are exercisable within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Prior to the Initial Public Offering, the Company and General Atlantic had been members of an affiliated group (the "Group") within the meaning of Section 1504(a) of the Internal Revenue Code of 1986, as amended, and had been filing consolidated income tax returns. General Atlantic was the common parent of the Group. General Atlantic and the Company had entered into an agreement regarding tax allocation providing for the allocation of taxes for the years that they were members of the Group. The Company and General Atlantic, on April 17, 1992, entered into an agreement regarding tax consequences of deconsolidation, the primary purposes of which are (i) to ensure adequate communication and cooperation between General Atlantic and the Company after the closing of the Initial Public Offering; (ii) to ensure that the Company will be entitled to any refund or credit resulting from the carryback of a net operating loss or credit generated in a taxable year or period beginning after the closing of the Initial Public Offering; (iii) to provide that both General Atlantic and the Company will agree to pay to the other party who suffers a tax detriment as a result of a subsequent Internal Revenue Service audit adjustment any accompanying tax benefit that such party may receive; (iv) to provide that General Atlantic will indemnify the Company for any tax liability imposed upon (x) the Group (other than the Company) for any taxable year or period, and (y) the Company or for which the Company may be liable for any taxable year or period ending on or before the closing of the Initial Public Offering; and (v) to provide that the Company will indemnify General Atlantic for any tax liability of the Company for any taxable year or period beginning after the closing of the Initial Public Offering. Under the terms of the Plan of Reorganization, the Company issued 1,388,889 shares of Preferred Stock to General Atlantic Corporation in consideration of an aggregate purchase price of $2,500,000 on July 18, 1995. The Preferred Stock is convertible into an equal number of shares of Common Stock of the Company, votes with the Common Stock on a share-for-share basis, and was not subject to reduction by the one-for-two reverse split effected in connection with the Plan. The Company was informed that General Atlantic Corporation used funds from working capital for the purchase price of the Preferred Stock. On July 18, 1995, the Company amended its Certificate of Incorporation to provide for the one-for-two reverse split of Common Stock and to designate the Preferred Stock. After the reverse split, General Atlantic Corporation held 1,255,000 shares of Common Stock and 1,388,889 shares of Preferred Stock, which is approximately 62% of the voting securities of the Company on the date of this report. On June 20, 1995, the Company entered into a Loan and Security Agreement with Congress Financial Corporation (Southwest) ("Congress") pursuant to which Congress agreed to provide a revolving credit facility and letter of credit accommodations in an amount up to the borrowing base as calculated pursuant to the loan agreement, which may not exceed $15,000,000 (the "Credit Facility"). The Credit Facility is secured by a first lien on substantially all of the assets of the Company, including inventory and accounts receivable. The availability of loans under the Credit Facility is determined by an advance rate formula. In order to increase loan availability under the Credit Facility, 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 Credit Facility effective June 26, 1996. 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 (behind Congress) on substantially all of the assets of the Company. 32 33 The Company has retained the services of a commercial real estate brokerage firm to seek out a buyer or buyers to purchase from and lease back to the Company its owned properties. The wife of the Company's Executive Vice President, Chief Operating and Financial Officer is one of the brokers assigned to the listing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Compensation Committee Interlocks and Insider Participation Mr. Grimm, the Chairman of the Board and former President of the Company, served on the Compensation Committee of the Board of Directors in fiscal year 1995. Pursuant to the terms of the Registration Rights Agreement by and among the Company, General Atlantic Corporation, and Robert J. Grimm dated as of March 6, 1992, the Company has granted certain registration rights to General Atlantic and Mr. Grimm. Under the terms of the Registration Rights Agreement, in the event that the Company proposes to register any of its securities under the Securities Act for its own account, except in certain circumstances, General Atlantic and Mr. Grimm are entitled to include shares of Common Stock in such registration ("Piggyback Registration"), subject to the right of the underwriters of any such offering to limit the number of shares included in such registration. The Company has agreed to pay all expenses in connection with a Piggyback Registration. General Atlantic has the additional right to require ("Demand Registration") the Company to register shares of Common Stock under the Securities Act at any time after the effective date of the Initial Public Offering, and the Company is required to effect such registration, subject to certain conditions and limitations. General Atlantic is required to bear the expenses of each Demand Registration. General Atlantic has the right to require the Company to effect three such Demand Registrations; provided, however, that General Atlantic shall not be entitled to more than one Demand Registration in any period of 180 days. The Company need not comply with the Demand Registration if the fair market value of the shares of Common Stock to be registered does not equal or exceed $5,000,000. To the Company's knowledge, General Atlantic has no current plans to require a Demand Registration. The Company has agreed to customary indemnities including an agreement to indemnify, subject to certain limited exceptions, General Atlantic and Mr. Grimm in connection with a Demand Registration and a Piggyback Registration. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)1. Financial Statements The following financial statements of the Company are included following the Index to Consolidated Financial Statements and Schedule on page F-1 of this Report. Report of Independent Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements (a)2. Financial Statement Schedule 33 34 The following financial statement schedule is included following the Index to Consolidated Financial Statements and Schedule on page F-1 of this Report. Report of Independent Accountants on Financial Statement Schedule X. Supplementary Consolidated Statements of Operations Information All other schedules have been omitted because they are not applicable, not required under the instructions or the information requested is set forth in the consolidated financial statements or related notes thereto. 34 35 (a)3. Exhibits 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 * 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 1-for-2 reverse split effected July 18, 1995) (9) 10.1 Registration Rights Agreement among General Atlantic Corporation, Robert J. Grimm and the Company (1) 10.2 Agreement Regarding Tax Consequences of Deconsolidation between the Company and General Atlantic Corporation (1) 10.3 Tax Allocation Agreement between the Company and General Atlantic Corporation (1) 10.4 Form of Indemnity Agreement between Directors, Executive Officers and the Company (1) 10.5 Associate Stock Purchase Plan of the Company (2) 10.6 Retirement Savings Plan and Trust of the Company (2) 10.7 Mortgage Note A, dated November 20, 1992, in principal amount of $4,940,000, with the Company as Maker and Nationwide Life Insurance Company as Holder (2) 10.8 Mortgage Note B, dated November 20, 1992, in principal amount of $1,000,000, with the Company as Maker and Employers Life Insurance Company of Wausau as Holder (2) 10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc. (3) 10.10 Employment Agreement between the Company and David P. Dash (4)+ 10.11 Employment Agreement between the Company and Robert J. Grimm, as amended (5)+ 10.12 Subscription Agreement between the Company and General Atlantic Corporation (7) 10.13 Solo Serve Corporation 1995 Stock Incentive Plan (8) + 10.14 Solo Serve Corporation Director Stock Option Plan (8) + 10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce Bank, National Association, Borrower, General Atlantic Corporation and the Official Committee of Unsecured Creditors of Solo Serve Corporation (7) 10.16 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (7) 10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve Corporation and MetLife Capital Corporation (8) 10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation, Nationwide Life Insurance Company, and Employers Life Insurance Company (8) 10.19 Promissory Note, dated July 31, 1995, in principal amount of $5,565,000, with the Company as Maker, and Texas Commerce Bank National Association as Holder (8) 10.20 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (9) 10.21 Employment Agreement between the Company and Timothy L. Grady (9) + 10.22 Employment Agreement between the Company and Janet Pollock (9) + 10.23 Consulting Services Agreement between the Company and Robert J. Grimm (10) + 10.24 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (11) 10.25 Letter Agreement dated January 23, 1996 by and between the Company and MetLife Capital Corporation modifying the Loan and Security Agreement between the Company and MetLife Capital Corporation, as amended on July 18, 1995 (11) 35 36 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 * 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 * 10.34 Letter Agreement dated July 8, 1996 by and between the Company and Ross E. Bacon.*+ 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.* 21.1 Subsidiaries of the Registrant * 23.1 Consent of Independent Accountants * 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. (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. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. 36 37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ Ross E. Bacon --------------------------------- ------------------------------- Charles M. Siegel Ross E. Bacon, President and Chief Executive Vice President and Executive Officer Chief Operating and Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) DATED: May 19, 1997 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Name and Title Date --------- -------------- ---- /s/ Charles M. Siegel President and Chief Executive May 19, 1997 - ---------------------------------- Officer, Director Charles M. Siegel /s/ Ross E. Bacon Executive Vice President and May 19, 1997 - ---------------------------------- Chief Operating and Financial Ross E. Bacon Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) /s/ Robert J. Grimm Chairman of the Board May 19, 1997 - ---------------------------------- Robert J. Grimm /s/ Stephen P. Reynolds Director May 19, 1997 - ---------------------------------- Stephen P. Reynolds /s/ John C. Seiler Director May 19, 1997 - ---------------------------------- John C. Seiler /s/ Walter H. Teninga Director May 19, 1997 - ---------------------------------- Walter H. Teninga
37 38 SOLO SERVE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . F2 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F3 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F4 Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . F5 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F7 Consolidated Financial Statement Schedule Report of Independent Accountants on Financial Statement Schedule . . . . . . . . . . . . S-1 Schedule X - Supplementary Consolidated Statements of Operations Information . . . . . S-2
Schedules not included above have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or related notes. F-1 39 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Solo Serve Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Solo Serve Corporation and its subsidiary (the Company) at February 3, 1996 and February 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1, the Company's Plan of Reorganization was approved by creditors and shareholders and confirmed by the United States Bankruptcy Court on July 6, 1995 and became effective on July 18, 1995. The Company's recurring operating losses raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to future operations are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICE WATERHOUSE LLP San Antonio, Texas May 14, 1997 F-2 40 SOLO SERVE CORPORATION CONSOLIDATED BALANCE SHEETS ITEM 1. Financial Statements
ASSETS FEBRUARY 3, 1996 FEBRUARY 1, 1997 ------------------------------------ Cash $ 771,527 $ 1,065,564 Inventory 14,210,180 11,107,938 Other current assets 2,273,630 988,469 ------------------------------------ Total current assets 17,255,337 13,161,971 Property and equipment, net 15,634,267 12,935,322 Goodwill and service marks, less accumulated amortization of $2,090,000 and $2,210,000 at February 3, 1996 and February 1, 1997, respectively 410,000 290,000 Deferred income taxes, net of valuation allowance of $10,141,039 and $12,022,873 at February 3, 1996 and February 1, 1997, respectively - - ------------------------------------ TOTAL ASSETS $ 33,299,604 $ 26,387,293 ==================================== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES NOT SUBJECT TO COMPROMISE: CURRENT LIABILITIES: Current portion of long-term debt $ 683,951 $ 770,602 Accounts payable 3,426,821 3,983,898 Accrued expenses 3,210,010 2,339,615 ------------------------------------ Total current liabilities 7,320,782 7,094,115 Long-term debt 15,135,885 14,960,600 Postretirement benefit obligation 565,200 - LIABILITIES SUBJECT TO COMPROMISE 460,612 - ------------------------------------ TOTAL LIABILITIES 23,482,479 22,054,715 ------------------------------------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 2,000,000 shares authorized, 1,388,869 shares issued and outstanding at February 3, 1996 and 13,889 13,889 February 1, 1997 Common stock, $.01 par value; 8,000,000 authorized, 2,856,126 issued and outstanding at February 3, 1996 and February 1, 1997 28,562 28,562 Capital in excess of par value 24,410,290 24,410,290 Retained earnings (deficit) (14,635,616) (20,120,163) ------------------------------------ TOTAL STOCKHOLDERS' EQUITY 9,817,125 4,332,578 ------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,299,604 $ 26,387,293 ====================================
The accompanying notes are an integral part of these financial statements. F-3 41 SOLO SERVE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 28, 1995 FEBRUARY 3, 1996 FEBRUARY 1, 1997 ---------------------------------------------------- ----------------------------------------------- Number of weeks in fiscal year 52 53 52 ----------------------------------------------- Net Revenues $ 138,925,236 $109,823,364 $95,237,689 Cost of goods sold (including buying and distribution, excluding depreciation shown below) 100,686,542 83,474,450 67,484,703 ----------------------------------------------- Gross Profit 38,238,694 26,348,914 27,752,986 Selling, general, and administrative expenses 39,013,103 29,620,266 28,203,345 Depreciation and amortization 3,748,006 2,815,024 2,420,868 Write down of property and equipment - - 525,000 Non-recurring charge - - 464,000 ----------------------------------------------- Operating Loss (4,522,415) (6,086,376) (3,860,227) Interest expense, (contractual interest of $1,821,075 and $1,791,412 for the 52 weeks ended January 28, 1995 and 53 weeks ended February 3, 1996, respectively) 1,090,164 1,129,346 1,624,320 ----------------------------------------------- Loss before reorganization items, income taxes and extraordinary item (5,612,579) (7,215,722) ( 5,484,547) ----------------------------------------------- Reorganization Items: Loss on disposal of stores 3,301,234 553,222 - Loss on write-off of capitalized merchandising software 1,000,154 - - Provision for other reorganization expenses 2,161,254 1,421,754 - Interest earned on accumulated cash resulting from Chapter 11 proceedings (200,222) (188,283) - ----------------------------------------------- 6,262,420 1,786,693 - ----------------------------------------------- Loss before income taxes and extraordinary item (11,874,999) (9,002,415) (5,484,547) ----------------------------------------------- Provision for (benefit from) income taxes: Current - - - Deferred 3,661,480 (1,418,200) - ----------------------------------------------- 3,661,480 (1,418,200) - ----------------------------------------------- Loss before extraordinary item (15,536,479) (7,584,215) (5,484,547) Extraordinary item: gain on discharge of debt (net of tax effect of $1,418,200) - 2,752,975 - Net Loss ($15,536,479) ($4,831,240) ($5,484,547) =============================================== Loss per common share before extraordinary item ($5.45) ($2.10) ($1.92) =============================================== Extraordinary gain per common share - $0.76 - =============================================== Net Loss per common share ($5.45) ($1.34) ($1.92) =============================================== Weighted average common shares outstanding 2,849,867 3,604,853 2,856,126 ===============================================
The accompanying notes are an integral part of these financial statements. F-4 42 SOLO SERVE CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Common Stock Preferred Stock Common Stock Preferred Common Stock Stock Capital Capital in Shares Shares Stock $.01 $.01 par in Excess of Excess of Par Outstanding Outstanding par value value par value Value ------------------------------------------------------------------------------------ Balance at January 29, 1994 5,652,452 $ 56,525 $ 21,783,792 Proceeds from issuance of common stock on the exercise of stock options (Note 9) 59,800 598 111,826 Net Loss ------------------------------------------------------------------------------------ Balance at January 28, 1995 5,712,252 57,123 21,895,618 ------------------------------------------------------------------------------------ Proceeds from issuance of preferred stock 1,388,889 $ 13,889 $ 2,486,111 Common stock one-for-two reverse split (2,856,126) (28,561) 28,561 Net Loss ------------------------------------------------------------------------------------ Balance at February 3, 1996 1,388,889 2,856,126 13,889 28,562 2,486,111 21,924,179 ------------------------------------------------------------------------------------ Net Loss ------------------------------------------------------------------------------------ Balance at February 1, 1997 1,388,889 2,856,126 $ 13,889 $ 28,562 $ 2,486,111 $ 21,924,179 ==================================================================================== Retained Earnings (Deficit) Total --------------------------- Balance at January 29, 1994 $ 5,732,103 $27,572,420 Proceeds from issuance of common stock on the exercise of stock options (Note 9) 112,424 Net Loss (15,536,479) (15,536,479) --------------------------- Balance at January 28, 1995 (9,804,376) 12,148,365 --------------------------- Proceeds from issuance of preferred stock 2,500,000 Common stock one-for-two reverse split - Net Loss (4,831,240) (4,831,240) --------------------------- Balance at February 3, 1996 (14,635,616) 9,817,125 --------------------------- Net Loss (5,484,547) (5,484,547) --------------------------- Balance at February 1, 1997 ($20,120,163) $ 4,332,578 ===========================
The accompanying notes are an integral part of these financial statements. F-5 43 SOLO SERVE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED JANUARY 28, 1995 FEBRUARY 3, 1996 FEBRUARY 1, 1997 ------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $ (15,536,479) $ (4,831,239) $ (5,484,547) Gain on discharge of debt - 2,752,975 - ----------------------------------------------------- Loss before gain on discharge of debt (15,536,479) (7,584,214) (5,484,547) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH Depreciation and amortization 3,748,006 2,815,024 2,420,868 Loss on retirement and write down of leasehold improvements and property and equipment 78,087 208,070 652,573 Changes in assets and liabilities (Increase) Decrease in inventories 7,965,791 738,648 3,102,242 (Increase) Decrease in other current assets 2,843,290 181,519 1,285,161 (Increase) Decrease in non-current receivables (1,662,935) 1,662,935 - Decrease (Increase) in long-term deferred income taxes 1,770,270 (1,418,200) - Increase (Decrease) in accounts payable 7,217,744 (1,652,125) 557,077 (Decrease) Increase in accrued expenses (1,694,563) (606,607) (870,395) (Decrease) Increase in long-term postretirement benefit obligation 116,200 63,900 (565,200) ----------------------------------------------------- Total adjustments 20,381,890 1,993,164 6,582,326 ----------------------------------------------------- Net cash provided (used) by operating activities before reorganization items 4,845,411 (5,591,050) 1,097,779 OPERATING CASH FLOWS FROM REORGANIZATION ITEMS: Payments made on reorganization costs (748,965) (1,185,823) - Non cash items from reorganization - (1,132,424) (460,612) Loss on disposal of stores 3,301,234 553,222 - Write-off of capitalized merchandising software 1,000,154 - - Provision for other reorganization expenses 1,898,055 257,139 - ----------------------------------------------------- Net cash provided (used) by operating activities 10,295,889 (7,098,936) 637,167 ----------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (1,257,783) (877,402) (254,494) ----------------------------------------------------- Net cash provided (used) by investing activities before reorganization items (1,257,783) (877,402) (254,494) INVESTING CASH FLOWS FROM REORGANIZATION ITEMS: Proceeds from sale of property and equipment 2,000,000 - - ----------------------------------------------------- Net cash provided (used) by investing activities 742,217 (877,402) (254,494) ----------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit agreement 18,635,466 25,067,240 103,367,509 Payments under line of credit agreement (13,585,529) (21,507,240) (102,747,509) Borrowings under long-term debt agreement 5,000 - - Payments under long-term debt agreement (635,373) (462,515) (708,636) Proceeds from issuance of common stock on exercise of stock options 112,424 - - ----------------------------------------------------- Net cash provided by finance activities before reorganization items 4,531,988 3,097,485 (88,636) FINANCING CASH FLOWS FROM REORGANIZATION ITEMS: Distributions to claimants under plan of reorganization - (13,933,177) - Sale of preferred stock - 2,500,000 - Provision for Debtor-In-Possession financing 263,199 - - ----------------------------------------------------- Net cash provided by financing activities 4,795,187 (8,335,692) (88,636) ----------------------------------------------------- Net increase (decrease) in cash 15,833,293 (16,312,030) 294,037 Cash at beginning of year 1,250,264 17,083,557 771,527 ----------------------------------------------------- Cash at end of year $ 17,083,557 $ 771,527 $ 1,065,564 ===================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 973,735 $ 1,116,300 $ 1,579,691 Income tax $ (1,344,345) - -
The accompanying notes are an integral part of these financial statements. F-6 44 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS OF THE COMPANY: BUSINESS Solo Serve Corporation ("the Company") was incorporated in the State of Texas on June 1, 1979 and was a majority-owned subsidiary of General Atlantic Corporation ("GAC") until its initial public offering of shares of common stock on April 29, 1992. The Company was reincorporated in Delaware in December 1991. The Company is engaged in the operation of off-price retail department stores located in Texas, Louisiana and Alabama. The Company has a 52/53 week fiscal year ending on the Saturday closest to January 31. REORGANIZATION AND MANAGEMENT'S PLANS On July 21, 1994 (the "Petition Date"), the Company filed a petition (the "Filing") under Chapter 11 of the Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Texas (the "Bankruptcy Court"). On July 6, 1995, the Bankruptcy Court approved a Proposed Plan of Reorganization (the "Plan") jointly sponsored by the Official Committee of Unsecured Creditors and Texas Commerce Bank San Antonio, N.A. ("TCB"), which became effective on July 18, 1995. Under the Plan, the Unsecured Creditors agreed to a distribution of 72.5% of pre- petition unsecured allowed claims. The total amount of pre-petition unsecured allowed claims was $15.6 million. Additionally, the Plan allowed for cash distributions for certain secured and priority claims which totaled $2.2 million. On the effective date of the Plan, the Company issued 1,388,889 shares of convertible Preferred Stock for an aggregate consideration of $2.5 million. All of the Preferred Stock was purchased by the Company's largest stockholder. On July 31, 1995, the Company disbursed $10.2 million to its creditors in accordance with the First Distribution as proposed by the Plan. The second and final distribution, which occurred on December 20, 1995, was approximately $3.5 million. The second distribution was financed in part by $2.5 million of funds in escrow which were the proceeds from the sale of the Company's Preferred Stock. On April 17, 1996, the Bankruptcy Court entered the Final Decree, which administratively closed Solo Serve Chapter 11 bankruptcy case. As of February 1, 1997 the Company has settled all known claims. Pursuant to the Plan the Company's existing common stock was subject to a one-for-two reverse split. The Preferred Stock issued in connection with the Plan has a liquidation value of $1.80 per share, is convertible to an equal number of common shares, has voting rights on an as converted basis, and pays no preferential dividends. With the issuance of Preferred Stock mentioned above, GAC has increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. The settlement of the Company's pre-petition liabilities reduced the Company's net operating loss carryforwards and other tax credit carryforwards by approximately $4.2 million. The above mentioned equity infusion by GAC has not caused an ownership change that would limit the future utilization of the Company's remaining net operating loss carryforwards and other tax credit carryforwards. However, future ownership changes could result in such limitations. Since the effective date of the Plan, the Company has continued to experience lower than anticipated sales and continuing operating losses. The Company's business has been affected by a number of factors, including increased competition in its principal markets, weakness in the apparel industry, unfavorable economic conditions in certain markets and other factors, many of which are not within the Company's control. The Company continues to experience increased competitive pressure on both price points and market share. Increased competitive pricing and promotional strategies have put significant downward pressure on price points, and competitors have opened additional store locations in the Company's principal markets. During the second quarter of Fiscal 1996, the Company experienced a number of executive management changes. The new management group has implemented a strategy designed to (i) achieve a higher gross margin percentage at reduced sales levels, (ii) reduce administrative costs to levels consistent with planned operating levels, (iii) improve the brand quality of the inventory mix and (iv) reduce inventory levels. Through the end of Fiscal 1996, the Company has experienced a reduction in inventory levels and administrative costs. While management plans to continue the implementation of its new strategy in Fiscal 1997, there is no assurance its efforts can overcome the competitive factors discussed above. F-7 45 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS OF THE COMPANY: (CONTINUED) ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant accounting principles used are described below. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions have been eliminated. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined by the specific identification method. The cost effects of permanent retail reductions for slow moving items are charged to cost of goods sold in the period such reductions are incurred. DEPRECIATION AND AMORTIZATION Depreciation of property and equipment is computed using the straight-line method over estimated useful lives of the related assets. Maintenance and repairs are expensed as incurred. Costs allocated to goodwill and service marks are amortized over estimated lives of 20 and 16 years, respectively, on a straight-line basis. INCOME TAXES Deferred income taxes are provided to reflect temporary differences between the tax and book bases of assets and liabilities. The Company provides valuation allowances for its deferred tax assets pursuant to the provisions of Statement of Financial Accounting Standards No. 109. PRE-OPENING EXPENSES Pre-opening expenses are charged to income within the fiscal year in which they are incurred. LAYAWAY SALES Layaway sales are recognized in full when the layaway deposit is received, and the unpaid balance is recorded as accounts receivable. Cancelations result in a decrease in recorded sales and cost of sales. Cancelation fees and service fees required to place a purchase in layaway are recognized as revenue. RENTAL EXPENSE Rental expense for leases with escalation clauses is recorded on a straight-line basis. EARNINGS PER SHARE The computation of earnings per share is based on the weighted average number of common shares outstanding and dilutive common stock equivalents (stock options and voting, convertible preferred stock) outstanding during each period (Note 9). Weighted average common shares outstanding and the related per share amounts of the results of operations for the year ended January 28, 1995 have been retroactively restated to give effect to the one-for-two reverse stock split that occurred during the year ended February 3, 1996. F-8 46 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 2 - OTHER CURRENT ASSETS: Other current assets are comprised of:
FEBRUARY 3, 1996 FEBRUARY 1, 1997 ---------------------------------- Accounts receivable $ 399,808 $ 344,856 Advance payments to factors 935,579 - Supplies 310,454 225,011 Other 627,789 418,602 ---------------------------------- $ 2,273,630 $ 988,469 ==================================
Subsequent to emergence from Chapter 11, the Company made advance payments to certain factors totaling $935,579 at February 3, 1996. These advances were applied to inventory purchases during 1996. NOTE 3 - PROPERTY AND EQUIPMENT: Property and equipment stated at cost is comprised of:
YEARS OF USEFUL LIFE FEBRUARY 3, 1996 FEBRUARY 1, 1997 -------------------- ------------------------------------- Land $ 2,006,031 $ 2,006,031 Furniture, fixtures and equipment 3-10 19,040,779 17,306,704 Leasehold improvements 10-15 5,764,178 4,541,925 Buildings 20-40 8,683,897 8,683,897 ------------------------------------- 35,494,885 32,538,557 Less accumulated depreciation 19,860,618 19,603,235 ------------------------------------- $ 15,634,267 $ 12,935,322 =====================================
During July 1994, in conjunction with the reorganization, the Company agreed to sell its eight stores in Houston, Texas, including the facility leases, to another retailer. The Company also decided to close its eight stores operating under the name of Half & More and its Solo Serve store in Waco, Texas. These transactions were completed in August 1994. The accompanying consolidated financial statements include a fiscal year 1994 charge of approximately $3.3 million in net leasehold and other asset write-offs, inventory adjustments, employee costs and lease terminations related to the sold and closed stores. In addition, the Company chose to discontinue its implementation of a fully integrated merchandising software package due to vendor delays and increased costs and recorded a nonrecurring charge of approximately $1.0 million for the capitalized value of the system. During the second quarter of 1995, the Company closed its Solo Serve store in Montgomery, Alabama and recorded a loss on the disposal of approximately $550,000. During July, 1996, the Company closed one of its Solo Serve stores in Austin, Texas and recorded a loss on the disposal of approximately $68,000. During the second quarter of fiscal 1997, the Company plans to close one store and is finalizing plans to either close or operate in some reduced capacity, two additional stores. Based on the revised cash flow estimates from these locations, the Company wrote down the non-recoverable net book value ($525 thousand) of leasehold improvements and fixtures and equipment associated with the locations in accordance with FAS 121. F-9 47 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 4- ACCRUED EXPENSES: Accrued expenses are comprised of:
FEBRUARY 3, 1996 FEBRUARY 1, 1997 -------------------------------------- Accrued rent $ 1,033,637 $ 756,471 Accrued sales and property taxes 937,041 534,612 Accrued state taxes 33,790 31,826 Voluntary benefits 142,000 217,078 Employee benefits 108,767 372,213 Incentive compensation 100,000 20,390 Layaway escrow 105,417 21,621 Other 749,358 385,404 -------------------------------------- $ 3,210,010 $ 2,339,615 ======================================
NOTE 5 - LIABILITIES SUBJECT TO COMPROMISE AND CONTINGENCIES RESULTING FROM THE BANKRUPTCY PROCEEDING: As of February 3, 1996, the Company had "Contested Claims" of approximately $461,000. The Company filed objections to these claims in the Bankruptcy Court, and these claims were all ultimately settled in the first quarter of fiscal 1996. NOTE 6 - LONG-TERM DEBT: Long-term debt consists of the following:
FEBRUARY 3, 1996 FEBRUARY 1, 1997 ------------------------------------- Notes payable to bank, interest at prime plus 1/2% (8.75% at February 1, 1997) secured by properties $ 5,437,572 $ 5,131,406 Note payable to insurance company, interest at 8%; secured by equipment and properties 1,006,861 654,132 Mortgage notes payable to insurance companies, interest at 9.5%; secured by the distribution center 5,810,403 5,760,664 Congress Loan Agreement, interest at prime plus 1% (9.25% at February 1, 1997); secured primarily by inventory 3,565,000 4,185,000 ------------------------------------- 15,819,836 15,731,202 Less current portion 683,951 770,602 ------------------------------------- Long-term portion $ 15,135,885 $ 14,960,600 =====================================
As part of its Plan of Reorganization, the Company restructured its pre-petition secured indebtedness. Under the Plan, the Company assumed a $5.8 million mortgage note, secured by the Company's corporate office and distribution center in San Antonio, Texas. The mortgage note carries an interest rate of 9.5% per annum and requires monthly payments of principal and interest of $49,773 until December 2002, when the balance is due. The Company also modified and assumed a note payable to MetLife Capital Corporation ("MetLife"), which is secured by various equipment and fixtures located at the corporate office and certain stores. The MetLife note carries an interest rate of 8.0% and requires equal monthly payments, including principal and interest, of $35,044 until September 1998, when the balance is due. The Company also entered into a term note payable to TCB which carries an interest rate of prime plus one-half percent and is due in equal monthly installments of principal and interest of $64,117 until January 1999, when the balance is due. F-10 48 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 6 - LONG-TERM DEBT: (CONTINUED) Prior to the effective date of the Plan, in accordance with Statement of Position 90-7 (SOP 90-7), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company did not accrue interest on those obligations for which the amount of pre-petition debt exceeded the value of the related collateral. Contractual interest is the amount that would have accrued on the entire obligation. The Company continued to accrue interest on its mortgage notes related to its distribution center. The Company entered into a loan agreement with Congress Financial Corporation (Southwest) ("Congress") on June 20, 1995, which became effective on the effective date of the Plan. Under the terms of the loan agreement, which is in effect until July 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. The loan bears interest at prime plus 1%. In addition, the Company pays a commitment fee equal to 1/2% per annum of the amount of the unused facility. The loan is secured by substantially all the assets of the Company other than those subject to other existing liens. In May, 1997, the Company and Congress amended certain financial covenants in the loan agreement. Effective for the remaining term of the note the Company shall maintain minimum working capital of $3.25 million, minimum net worth of $800 thousand, and shall 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 loan agreement, Congress may establish and revise availability reserves in its sole discretion to cover risks or events it perceives may affect its security under the loan or the business or prospects of the Company. The current availability reserve under the loan agreement approximates $660,000. 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. At February 1, 1997, the Company had approximately $2.1 million available to borrow on the line. Future maturities of long-term debt by fiscal year are as follows:
Fiscal ------ 1997 770,602 1998 5,129,641 1999 4,250,986 2000 72,507 2001 79,671 Thereafter 5,427,795 ------------ $ 15,731,202 ============
Based on borrowing rates currently available to the Company for bank loans with similar terms and maturities, the fair value of long-term debt is estimated to be $15.9 million at February 1, 1997, including amounts payable within one year. F-11 49 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 7- NON-RECURRING CHARGE The Company recognized and recorded an unanticipated and non-recurring charge of $464 thousand in January 1997 which related to fiscal 1996. In recent years, the Company self-insured workers' compensation and medical insurance for its employees and purchased stop-loss coverage to limit its maximum exposure. In late fiscal 1996, a dependent of one of the Company's former employees who is covered by COBRA required expensive medical treatment which was not covered by the stop-loss provider, and the majority of this accrual relates to this claim. The Company's stop-loss providers have denied coverage for these claims, and the Company has accrued management's best estimate of the Company's maximum exposure. Management also believes that it is possible that some of these costs may be recovered from the stop-loss provider. Effective January 1, 1997, the Company purchased fully insured coverage for medical and workers' compensation insurance. NOTE 8 - INCOME TAXES The principal reasons for the difference between the statutory federal income tax rate and the Company's provision for income taxes were:
FISCAL 1994 FISCAL 1995 FISCAL 1996 -------------------------------------------- Tax benefit at statutory federal rate $ (4,037,500) $ (1,642,307) $ (1,864,746) Tax credits - - - Nondeductible bankruptcy related expenses and other, net (26,342) 573,952 47,175 Increase in state net operating loss carryovers (492,264) (241,099) (64,263) Valuation allowance for net deferred asset 8,217,586 1,309,454 1,881,834 -------------------------------------------- $ 3,661,480 $ 0 $ 0 --------------------------------------------
The approximate tax effect of temporary differences that give rise to deferred tax assets (liabilities) is as follows:
FEBRUARY 3, 1996 FEBRUARY 1, 1997 ---------------------------------------- Markdowns $ 228,495 $ 276,239 Uniform inventory capitalization 388,746 343,710 Voluntary benefits accrual 48,280 73,807 Medical benefits accrual 36,981 126,552 Accrued rent 351,436 257,199 Layaway sales (20,164) (22,782) Difference in book and tax basis of property and equipment 1,411,791 1,780,172 Postretirement benefit obligation 192,168 - Net operating loss carryover 6,393,842 8,015,698 General business credit carryover (expiring during the years 1996-2000) 356,638 356,638 Alternative minimum tax carryover 100,131 100,131 State net operating loss carryover 733,363 797,626 Other, net (80,668) (82,117) Valuation allowance (10,141,039) (12,022,873) ---------------------------------------- $ 0 $ 0 ========================================
Due to the increased operating loss carryforwards generated from the Company's continuing operations and reorganization, management believes that uncertainties exist such that it is unlikely that the Company's deferred tax assets will be realized in the future and therefore have recorded a valuation allowance equal to 100% of its existing net deferred tax asset. In fiscal 1994, in accordance with SFAS 109, the Company recorded a net $3.7 million deferred tax charge to fully reserve its $1.8 and $1.9 million current and deferred tax assets, respectively. In fiscal 1995 and 1996, the Company recorded an additional valuation allowance of $1,309,454 and $1,881,834, respectively for deferred tax assets generated in those years. The Company's net operating loss carryforward of approximately $23.7 million expires in the years 2008-2011. F-12 50 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 9- STOCK OPTION PLAN: In fiscal 1988, the Company established a stock option plan for certain key employees. The following table summarizes option activity for fiscal years 1994, 1995,and 1996:
Weighted Average Exercise Stock Options Shares Price - ------------- Outstanding January 29, 1994 605,900 $ 5.08 - ---------------------------- Granted 160,000 1.12 Canceled (247,320) 6.08 Exercised (59,800) 1.88 ---------- Outstanding January 28, 1995 458,780 3.50 Granted 460,000 1.61 Canceled (468,780) 3.46 Exercised - - ---------- Outstanding February 3, 1996 450,000 1.61 Granted 281,000 .28 Canceled (370,000) 1.50 Exercised - - ---------- Outstanding February 1, 1997 361,000 $ 0.69 ==========
At January 28, 1995, February 3, 1996 and February 1, 1997, exercisable stock options totaled 188,156, 56,799 and 176,500, shares and had weighted average exercise prices of $3.50, $1.61, and $0.69, respectively. The weighted average fair value of options granted during the two years ended February 3, 1996 and February 1, 1997 was $1.61 and $0.28, respectively. On the effective date of the Plan of Reorganization, all existing stock options were canceled. A new Stock Incentive Plan was implemented on the Effective Date. The new plan provides for 500,000 shares to be available for grant after taking into effect the one-for-two reverse split. The 370,000 shares granted on August 8, 1995 were canceled during 1996, and were replaced by options to purchase 10,000, 25,000, 20,000, 75,000 and 151,000 shares at exercise prices of $.375, $.375, $.4375, $.25 and $.25, respectively. These options are exercisable as follows: 176,500 in 1996; 76,834 in 1997; 24,333 in 1998 and 3,333 in 1999. On September 1, 1995 options to purchase 80,000 shares at an exercisable price of $2.125 per share were granted to Directors. The Directors' options are exercisable as follows: 48,000 in 1996; 16,000 in 1997 and 16,000 in 1998. All options are exercisable for 10 years from the date of issuance, with the exception of options for 25,000 shares, which are exercisable for five years. The average remaining contractual life of these options is nine years. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock option plans as allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation". Accordingly, the Company has not recognized compensation expense for its stock options granted subsequent to December 15, 1994, the effective date of the statement. Had compensation expense for the Company's stock options granted in fiscal 1996 and fiscal 1995 been determined based on the fair value at the grant dates consistent with the methodology of FAS No. 123, such compensation expense would have been $85,106 and $151,045 in fiscal 1995 and 1996, respectively, and pro forma net loss and loss per share would have been as follows: F-13 51 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 9- STOCK OPTION PLAN: (CONTINUED)
FISCAL 1995 1996 ---- ---- Pro forma net loss $(4,916,346) $(5,635,592) Pro forma net loss per share (1.36) (1.97)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED ----------- FEBRUARY 3, 1996 FEBRUARY 1, 1997 ---------------- ---------------- Assumptions used in determining the fair value of options granted: Expected volatility 2.63 2.63 Expected dividend yield - - Expected life (term) 6 years 6 years Risk-free interest rate 5.29% 5.40%
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, options valuation models require the input of highly subjective assumptions including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its employees' stock options. NOTE 10- RETIREMENT SAVINGS PLAN AND TRUST: The Company adopted the Solo Serve 401(k) Retirement Savings Plan and Trust effective January 1, 1993. Participation in the Retirement Savings Plan is offered to eligible employees of the Company. Generally, all employees of the Company who are 21 years of age and who have six months of service are eligible for participation in the plan. The Retirement Savings Plan is a defined contribution plan which provides that participants generally may make voluntary salary deferral contributions, on a pre-tax basis, from 1% to 15% of their compensation in the form of voluntary payroll deductions. The Company may make discretionary contributions from its annual profits. During fiscal years 1994 and 1995, the Company's contributions totaled $46,005 and $45,775, respectively. The contribution is at the sole discretion of the Company and may be changed. No contribution was made during fiscal 1996. F-14 52 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 11 - ASSOCIATE STOCK PURCHASE PLAN: The Company adopted the Solo Serve Associate Stock Purchase Plan effective January 1, 1993. The Plan was terminated in December, 1996. Participation in the Plan was offered to eligible employees of the Company. Generally, all employees of the Company, excluding members of the Board of Directors and Officers of the Company, were eligible for participation in the Plan. The Associate Stock Purchase Plan enabled eligible associates through voluntary payroll deductions to purchase in the open market shares of common stock of the Company at market prices current at the time of purchase through individual accounts opened by such associates with the transfer agent. NOTE 12 - POSTRETIREMENT BENEFITS: In fiscal 1996, the Company terminated its postretirement benefits plan. Those participants currently receiving benefits under the Plan at the time of the Plan's termination will continue to receive benefits. The Plan's termination is not expected to have a material impact on the results of the Company's operations or financial position. Prior to the Plan's termination, postretirement life and medical benefits were provided to former employees who had met the requirements for postretirement benefits. Generally, all employees of the Company who had completed ten years of service, had attained age 55 and were enrolled in the medical plan at least one year prior to retirement were eligible for postretirement benefits. Life insurance and medical benefits were offered to retirees on a combined basis, which meant that a retiree participated in both plans or neither. The life insurance plan was provided to retirees on a contributory basis. The medical plan, which was self-insured, covered dependents of retirees in addition to former employees. Contributions were also required in the case of medical benefits. The Company's policy was to fund the cost of the postretirement health care and life insurance benefits in the period in which the costs are incurred. The following table summarizes the plans' combined status at February 3, 1996 and February 1, 1997.
FEBRUARY 3, 1996 FEBRUARY 1, 1997 -------------------------------------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION Retirees and dependents $ 19,200 - Fully eligible active plan participants 42,800 - Other active plan participants 503,200 - -------------------------------------- Postretirement benefit obligation $ 565,200 - ======================================
The weighted average discount rates used in determining the APBO at February 3, 1996 was 7.25%. Net periodic postretirement benefit expense for 1995 and 1996:
HEALTH CARE LIFE INSURANCE TOTAL --------------------------------------------------------------------------- 1995 1996 1995 1996 1995 1996 Service Cost $ 12,400 -- $ 2,600 -- $ 15,000 -- Interest Cost 8,900 -- 2,300 -- 11,200 -- Amortization of (gains)/losses (35,500) (434,400) (9,800) (121,800) (45,300) (565,200) --------------------------------------------------------------------------- Net periodic postretirement benefit expense ($14,200) ($434,400) ($4,900) ($121,800) ($19,100) ($565,200) ===========================================================================
The weighted average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) was 8.0% for 1994 and was assumed to decrease gradually to 6.0% by 2020 and remain at that level thereafter. F-15 53 SOLO SERVE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 13- COMMITMENTS AND CONTINGENCIES: The Company has operating leases for most of its retail store facilities. Rental expense for the years ended January 28, 1995, February 3, 1996, and February 1, 1997 amounted to $5,205,241, $4,169,183, and $4,080,767 respectively. The Company has granted a license to an independent vendor to occupy 200 square feet of selling space and operate a fine jewelry department in each of the Company's twelve San Antonio stores. The following table summarizes payment under these leases:
NET FUTURE FUTURE MINIMUM SUBLEASE MINIMUM FISCAL LEASE PAYMENTS INCOME LEASE PAYMENT --------------------------------------------------------------- 1997 $ 4,463,983 $ 252,000 $ 4,211,983 1998 4,226,832 288,000 3,938,832 1999 3,660,251 168,000 3,492,251 2000 3,148,354 - 3,148,354 2001 2,354,011 - 2,354,011 AFTER 7,120,276 - 7,120,276 --------------------------------------------------------------- $ 24,973,707 $ 708,000 $ 24,265,707 ===============================================================
Some of the Company's operating leases have additional rentals contingent on individual store sales. The Company may be required to pay additional rentals if certain sales levels are achieved. For the years ended January 28, 1995, February 3, 1996, and February 1, 1997 the Company paid $11,578, none, and none, respectively, under additional rental agreements. The Company has an employment contract with its chief executive officer and president that provides for compensation arrangements. The Company also has a consulting agreement with the Chairman of the Board of Directors that expires in July 1998. The Company is involved in litigation arising in the normal course of business. In the opinion of management, the outcome of this litigation will not have a material effect on the consolidated financial statements of the Company. F-16 54 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Solo Serve Corporation Our audits of the consolidated financial statements referred to in our report dated May 14, 1997 appearing on page F-2 of this Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a)(2) of the Form 10-K (and appearing on the following page S-2). In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Antonio, Texas May 14, 1997 F-17 55 SCHEDULE X SOLO SERVE CORPORATION SUPPLEMENTARY CONSOLIDATED STATEMENTS OF OPERATIONS INFORMATION
FISCAL 1994 FISCAL 1995 FISCAL 1996 Maintenance and repairs $ 1,212,377 $ 1,184,744 $ 1,155,092 ========================================================== Depreciation of owned assets 2,971,380 2,141,933 1,841,329 Amortization of leasehold improvements 650,243 552,559 459,539 Amortization of intangibles 126,383 120,532 120,000 ========================================================== Total $ 3,748,006 $ 2,815,024 $ 2,420,868 ========================================================== Advertising Costs $ 4,774,355 $ 3,742,498 $ 2,978,114 ==========================================================
F-18 56 INDEX TO EXHIBITS
Exhibit Number Description of Exhibit - ------ ---------------------- 2.1 First Amended Plan of Reorganization of Solo Serve Corporation dated May 17, 1995 2.2 Non-material Modifications to First Amended Plan of Reorganization of Solo Serve Corporation, entered July 6, 1995 3.1 Restated Certificate of Incorporation of the Company 3.2 Certificate of Designation of Rights and Preferences of Preferred Stock 3.3 Bylaws of the Company, as amended and restated 4.1 Specimen Certificate for Common Stock of the Registrant (representing shares of common stock of the Company after giving effect to the previously reported 1-for-2 reverse split effected July 18, 1995) 10.1 Registration Rights Agreement among General Atlantic Corporation, Robert J. Grimm and the Company 10.2 Agreement Regarding Tax Consequences of Deconsolidation between the Company and General Atlantic Corporation 10.3 Tax Allocation Agreement between the Company and General Atlantic Corporation 10.4 Form of Indemnity Agreement between Directors, Executive Officers and the Company 10.5 Associate Stock Purchase Plan of the Company 10.6 Retirement Savings Plan and Trust of the Company 10.7 Mortgage Note A, dated November 20, 1992, in principal amount of $4,940,000, with the Company as Maker and Nationwide Life Insurance Company as Holder 10.8 Mortgage Note B, dated November 20, 1992, in principal amount of $1,000,000, with the Company as Maker and Employers Life Insurance Company of Wausau as Holder 10.9 Asset Purchase Agreement between the Company and Ross Stores, Inc. 10.10 Employment Agreement between the Company and David P. Dash 10.11 Employment Agreement between the Company and Robert J. Grimm, as amended 10.12 Subscription Agreement between the Company and General Atlantic Corporation 10.13 Solo Serve Corporation 1995 Stock Incentive Plan 10.14 Solo Serve Corporation Director Stock Option Plan 10.15 Escrow Agreement, dated July 18, 1995, by and between Texas Commerce Bank, National Association, Borrower, General Atlantic Corporation and the Official Committee of Unsecured Creditors of Solo Serve Corporation 10.16 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) 10.17 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve Corporation and MetLife Capital Corporation 10.18 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation, Nationwide Life Insurance Company, and Employers Life Insurance Company 10.19 Promissory Note, dated July 31, 1995, in principal amount of $5,565,000, with the Company as Maker, and Texas Commerce Bank National Association as Holder 10.20 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) 10.21 Employment Agreement between the Company and Timothy L. Grady 10.22 Employment Agreement between the Company and Janet Pollock 10.23 Consulting Services Agreement between the Company and Robert J. Grimm 10.24 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest)
57 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 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 10.27 Letter of Credit and Security Agreement between Solo Serve Corporation and General Atlantic Corporation dated as of June 26, 1996 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 10.29 Consulting Agreement between the Company and Charles Siegel 10.30 Employment Agreement between the Company and Charles Siegel 10.31 Amendment No. 4 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated as of September 1, 1996 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 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 10.34 Letter Agreement dated July 8, 1996 by and between the Company and Ross E. Bacon. 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. 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Accountants 27 Financial Data Schedule
- ------------ *INCORPORATED BY REFERENCE. SEE PAGE 35 FOR REFERENCES. EX-3.3 2 BY-LAWS OF THE COMPANY 1 EXHIBIT 3.3 AMENDED AND RESTATED BY-LAWS OF SOLO SERVE CORPORATION ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section l. Time and Place of Meeting. All meetings of the stockholders shall be held at such time and at such place within or without the State of Delaware as shall be designated by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. An annual meeting of the stockholders shall be held each year on such date and at such time as shall be designated from time to time by the Board of Directors, and stated in the notice of the meeting, at which meeting the stockholders shall elect, in accordance with the Certificate of Incorporation, a board of directors and transact such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of the stockholders, for any proper purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation of the Corporation, may be called at any time by the Board of Directors or the President pursuant to a resolution adopted by a majority of the entire Board of Directors. Such request shall state the purpose or purposes of the proposed 2 meeting. Business transacted at special meetings shall be confined to the purpose or purposes stated in the notice of the meeting. Section 4. Notice. Written or printed notice stating the place, date and hour of any meeting of stockholders, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (6O) days before the date of the meeting, either personally or by mail, by or at the direction of the President, a Vice President, the Secretary, an Assistant Secretary or the person calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the stockholder at his address as it appears on the stock ledger of the Corporation. Section 5. List of Stockholders. The officer or agent of the Corporation having charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before each meeting of the stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list, for a period of ten (10) days prior to such meeting, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting or, if not so specified, at the place where the meeting is to be held. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine such list or stock ledger, or to vote at any meetings of stockholders. Section 6. Quorum. The holders of a majority of the capital stock issued and outstanding and entitled to be cast thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time until a quorum shall be present or represented without notice of the adjourned meeting other than announcement of the time and place thereof at the meeting at which the adjournment is taken. When any adjourned meeting is reconvened and a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty (3O) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 3 Section 7. Voting. When a quorum is present at any meeting, the vote of the holders of the shares present or represented by proxy at such meeting and representing a majority of the votes entitled to be cast by each class of stock shall decide any question brought before such meeting, unless the vote of a different number is expressly required by statute, the Certificate of Incorporation or these By-Laws. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders in his discretion, may require that any votes cast at such meeting shall be cast by written ballot. Section 8. Proxy. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share having voting power held by such stockholder. Every proxy must be executed in writing (which shall include telegraphing, facsimile transmission or cabling) by the stockholder or by his duly authorized attorney-in-fact, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 9. Action Without a Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing (which shall include telegraphing, facsimile transmission or cabling), setting forth the action so taken, shall be signed by the holders of outstanding shares of the Corporation having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 10. Notice of Business. At any meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 10 of this Article II, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 10 of this Article II. For business to be properly brought before a meeting of stockholders by a stockholder, the stockholder shall have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than 120 days prior to the meeting; provided, however, that in the event that less than 100 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first 4 occurs. Such stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and, in the event that such business includes a proposal to amend either the Certificate of Incorporation or By-Laws of the Corporation, the language of the proposed amendment, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the class and number of shares of capital stock of the Corporation which are beneficially owned by such stockholder and (d) any material interest of such stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section 10 of this Article II. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the By-Laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 10 of this Article II, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 10 of this Article II. ARTICLE III DIRECTORS Section 1. Number and Election of Directors. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three (3) nor more than eleven (11) persons, who need not be residents of the State of Delaware or stockholders of the Corporation. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the directors then in office. The directors shall be divided into three classes, designated Class I, Class II and Class III, with the term of office of Class I to expire at the 1993 Annual Meeting of Stockholders, of Class II to expire at the 1994 Annual Meeting of Stockholders and of Class III to expire at the 1995 Annual Meeting of Stockholders. Each class shall consist, as nearly as may be possible, of an equal total number of directors. At each annual meeting of stockholders beginning in 1993, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his 5 term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation, if any, shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of the Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 1 of this Article III unless expressly provided by such terms. Section 2. Vacancies and Additional Directorships. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify. In the event a person serving on the Board of Directors is removed (either for cause or without cause), resigns or fails or refuses to act for any reason, then a majority of the remaining members of the Board of Directors shall elect such person's successor to serve on the Board of Directors. Section 3. General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, which may exercise all powers of the Corporation and do all such lawful acts and things as are not by statute, or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Section 4. Place of Meetings. The Directors of the Corporation may hold their meetings, both regular and special, either within or without the State of Delaware. Section 5. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman, if there be one, the President or any two directors. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, electronic facsimile or telegram on twenty-four (24) hours notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Section 6. Quorum; Voting. Unless otherwise provided by statute, the Certificate of Incorporation or these By-Laws, at all meetings of the Board of Directors, the presence of a majority of the number of directors constituting the whole Board shall be 6 necessary and sufficient to constitute a quorum for the transaction of business, and the affirmative vote of a majority of the number of Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum is not present at any meeting of the Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. Upon attainment of representation by a quorum, subsequent to an adjournment of the meeting, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent allowed by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 8. Compensation of Directors. Directors who are not also officers of the Corporation shall be compensated at the rate of $6,000 per annum, payable in quarterly amounts of $1,500.00. Such directors shall also be paid $1,000.00 for each duly called meeting of the Board of Directors and shall be reimbursed for reasonable expenses of travel, meals and accommodations in connection with such meeting. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor." Section 9. Action Without a Meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee designated by the Board of Directors may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or Committee. Section 10. Meetings by Conference Call, Etc. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of 7 the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 11. Reliance Upon Books. Directors and members of any committee designated by the Board of Directors shall, in the performance of their duties, be fully protected in relying in good faith upon the books of accounts or reports made to the Corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the Board of Directors or by any such committee, or in relying in good faith upon other records of the Corporation. ARTICLE IV NOTICES Section 1. Form of Notice. Whenever under the provisions of the Certificate of Incorporation, these By-Laws or by statute, notice is required to be given to any director or stockholder, and no provision is made as to how such notice shall be given, it shall not be construed to mean personal notice, but any such notice may be given in writing and personally delivered or sent by mail, postage prepaid, addressed to such director or stockholder at such address as appears on the books of the Corporation, and any such notice required or permitted to be given by mail shall be deemed to be given at the time when the same be thus deposited in the United States mail as aforesaid; such notice may also be given by some form of electronic transmission, in which case it shall be so addressed as to be received by such director or stockholder at the address of such director or stockholder as it appears on the books of the Corporation or at a regular place of such director's or stockholder's business, in which case such notice shall be deemed to be given at the time when the recipient of such transmission acknowledges its receipt. Section 2. Waiver. Whenever any notice is required to be given to any director or stockholder of the Corporation under the provisions of the statutes, the Certificate of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the attendance is for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. 8 ARTICLE V OFFICERS Section 1. General. The officers of the Company shall be elected by the Board of Directors and shall be a President, a Vice President, a Secretary and a Treasurer. The Board of Directors may, in its discretion, elect one or more Vice Presidents, one or more Assistant Secretaries and one or more Assistant Treasurers, all of whom shall also be officers. The Board of Directors may also, in its discretion, elect a Chairman of the Board of Directors (who must also be a director) who shall not be an officer. Two or more offices may be held by the same person, unless the Certificate of Incorporation or these By-laws otherwise provide. The officers of the Company need not be stockholders of the Company nor need such officers be directors of the Company. Section 2. Election. The Board of Directors at its first meeting held after each Annual Meeting of Stockholders shall elect the officers of the Corporation, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. Section 4. Chairman of the Board of Directors. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. Except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform 9 such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 5. President. The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and the Board of Directors. The President shall also perform such other duties and may exercise such other powers as from time to time may be assigned to him by these By-Laws or by the Board of Directors. Section 6. Vice Presidents. At the request of the President or in his absence or in the event of his inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President or the Vice Presidents if there is more than one (in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Section 7. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision he shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to 10 affix the seal of the Corporation and to attest the affixing by his signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 9. Assistant Secretaries. Except as may be otherwise provided in these By-Laws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of his disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 10. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of his disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 11. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be 11 assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE VI CERTIFICATES REPRESENTING SHARES Section 1. Form of Certificates. The Corporation shall deliver certificates representing all shares to which stockholders are entitled. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors and shall be numbered consecutively and entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder's name, the number, class of shares, and the par value of the shares or a statement that the shares are without par value. They shall be signed by the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, and may be sealed with the seal of the Corporation or a facsimile thereof if the Corporation shall then have a seal. If any certificate is countersigned by a transfer agent or registered by a registrar, either of which is other than the Corporation or an employee of the Corporation, the signatures of the Corporation's officers may be facsimiles. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed on such certificate, shall cease to be such officer, transfer agent or registrar, whether because of death, resignation or otherwise, before such certificate has been delivered by the Corporation or its agents, such certificate may nevertheless be issued and delivered with the same effect as if he were such officer, transfer agent or registrar at the date of issue. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions or such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Lost Certificates. The Board of Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that 12 fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issue of a new certificate, the Board of Directors, in its discretion and as a condition precedent to the issuance thereof, may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or give the Corporation a bond in such form, in such sum, and with such surety or sureties as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfer of Shares. Shares of stock of the Corporation shall be transferrable in the manner prescribed by law and in these By-Laws. Shares of stock shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney and, upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation or the transfer agent of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 4. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owners of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 13 ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the statutes and of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting. Dividends may be declared and paid in cash, in property, or in shares of the capital stock of the Corporation, provided that all such declarations and payments of dividends shall be in strict compliance with all applicable laws and the Certificate of Incorporation. Section 2. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 3. Seal. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Section 4. Annual Statement. The Board of Directors shall present at each annual meeting and when called for by vote of the stockholders at any special meeting of the stockholders, a full and clear statement of the business and condition of the Corporation. ARTICLE VIII INDEMNIFICATION Section 1. Power to Indemnify in Actions, Suits or Proceedings Other Than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall 14 indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer, of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. To the extent, however, that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith, without the necessity of authorization in the specific case. Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe his conduct was unlawful, if his action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to him by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 4 of this Article VIII shall mean any 15 other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provision of this Section 4 of this Article VIII shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 1 and 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because he has met the applicable standards of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 of this Article VIII shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application. Section 6. Expenses Payable in Advance. Expenses incurred by a director or officer in defending or investigating a threatened or pending action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of any undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to his Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-Law, agreement, contract, vote of stockholders or disinterested directors or pursuant to the direction (howsoever embodied) of any court of competent jurisdiction or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 1 and 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or Section 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify 16 under the provisions of the General Corporation Law of the State of Delaware, or otherwise. Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power or the obligation to indemnify him against such liability under the provisions of this Article VIII. Section 9. Certain Definitions. For purposes of this Article VIII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors and officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII with respect to the resulting or surviving corporation as such indemnification relates to his acts while serving in any of the foregoing capacities, of such constituent corporation, as he would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VIII, references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director or officer of the Corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VIII. Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer in connection with 17 a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation. Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation. ARTICLE IX AMENDMENTS Section 1. Amendments. Except as otherwise provided in the Certificate of Incorporation, these By-Laws may be altered, amended or repealed, in whole or in part, or new By-Laws may be adopted by the stockholders or by the Board of Directors, provided, however, that notice of such alteration, amendment, repeal or adoption of new By-Laws shall be contained in the notice of such meeting of stockholders or Board of Directors as the case may be. Except as otherwise provided in the Certificate of Incorporation, all such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office. Section 2. Entire Board of Directors. As used in this Article IX and in these By-Laws generally, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. EX-10.32 3 AMENDMENT NO. 5 TO LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.32 AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT SOLO SERVE CORPORATION 1610 Cornerway Boulevard San Antonio, Texas 78219 March 31, 1997 Congress Financial Corporation (Southwest) 1201 Main Street Dallas, Texas 75250 Gentlemen: Congress Financial Corporation (Southwest) ("Lender") and Solo Serve Corporation ("Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated June 20, 1995, between Lender and Borrower, as amended by Amendment No. 1 to Loan and Security Agreement, dated October 27, 1995, Amendment No. 2 to Loan and Security Agreement, dated January 31, 1996, Amendment No. 3 to Loan and Security Agreement, dated June 26, 1996 and Amendment No. 4 to Loan and Security Agreement, dated September 16, 1996 (and as amended hereby and as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement", together with all agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, collectively, the "Financing Agreements"). Borrower has requested that Lender agree to certain amendments to the Loan Agreement, and Lender is willing to agree to such amendments, subject to the terms and conditions contained herein. By this Amendment, Lender and Borrower desire and intend to evidence such amendments. In consideration of the foregoing and the agreements and covenants contained herein, the parties hereto agree as follows: 1. Definitions. (a) Additional Definition. As used herein, the following term shall mean, and the Loan Agreement is hereby amended to include, in addition and not in limitation, the following: "Net Recovery Cost Percentage" shall mean the fraction, expressed as a percentage, (a) the numerator of which is the amount equal to the recovery on the aggregate amount of Inventory at such time on a "going out of business" basis as set forth in the most recent 2 acceptable appraisal of Inventory received by Lender in accordance with Section 7.3, net of operating expenses, liquidation expenses and commissions, and (b) the denominator of which is the original Value of the aggregate amount of the Inventory subject to such appraisal." (b) Interpretation. All capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement, unless otherwise defined herein. 2. Loans. Section 2.1(a) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(a) Subject to, and upon the terms and conditions contained herein, Lender agrees to make Revolving Loans to Borrower from time to time in amounts requested by Borrower up to the amount equal to: (i) the least of the following: (A) for the period from and including March 1 through and including May 15 and for the period from and including September 1 through and including November 30 of each year, sixty percent (60%) of the Value of Eligible Inventory and, at all other times, fifty-five percent (55%) of the Value of Eligible Inventory; or (B) the amount equal to (1) the percentage equal to eighty (80%) percent of the Net Recovery Cost Percentage, multiplied by (2) the Value of Eligible Inventory; or (C) the Maximum Credit; less (ii) the sum of: (A) for the period from and including March 1 through and including May 15 and for the period from and including September 1 through and including November 30 of each year, forty percent (40%) of the then undrawn amounts of Letter of Credit Accommodations issued for the purpose of purchasing Eligible Inventory and, at all other times, forty-five percent (45%) of the then undrawn amounts of Letter of Credit Accommodations issued for the purpose of purchasing Eligible Inventory, plus (B) one hundred percent (100%) of the face amount of the outstanding Letter of Credit Accommodations issued for any purpose other than as set forth in Section 2.1(a)(ii)(A) above; less (iii) the amount equal to all Obligations outstanding at any time and from time to time (other than Obligations otherwise set forth in Section 2.1(a)(ii) hereof); less (iv) any Availability Reserves." 3. Letter of Credit Accommodations. Section 2.2(c) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(c) No Letter of Credit Accommodations shall be available unless on the date of the proposed issuance of any Letter of Credit Accommodations, the Revolving Loans available to Borrower (subject to the Maximum Credit, any Availability Reserves and any other limitations imposed by Section 2.1 hereof) are equal to or greater than: (i) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, the sum of, for the period from and including March 1 through and including May 15 and for the period from and including 3 September 1 through and including November 30 of each year, forty percent (40%) and, at all other times, forty-five percent (45%) of the sum of (1) the cost of such Eligible Inventory plus (2) freight, taxes, duty and other amounts which Lender estimates must be paid in connection with such Inventory upon arrival and for delivery to one of Borrower's locations for Eligible Inventory within the United States of America, and (ii) if the proposed Letter of Credit Accommodation is for any other purpose, an amount equal to one hundred (100%) percent of the face amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. Effective on the issuance of each Letter of Credit Accommodation, the amount of Revolving Loans which might otherwise be available to Borrower shall be reduced by the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii)." 4. Adjusted Net Worth. Section 9.15 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "9.15 Adjusted Net Worth. Borrower shall at all times maintain Adjusted Net Worth of not less than $3,750,000." 5. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to Lender pursuant to the Financing Agreements, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements): (a) No Event of Default exists on the date of this Amendment (after giving effect to the amendment to the Loan Agreement made by this Amendment). (b) This Amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. 6. Conditions Precedent. The effectiveness of the amendments contained herein shall be subject to the satisfaction of the following conditions precedent in a manner satisfactory to Lender and its counsel: (a) the receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower; (b) no Event of Default shall have occurred and be continuing and no event shall have occurred or condition be existing and continuing which, with notice or passage of time or both, would constitute an Event of Default; 7. Facility Fee. Borrower shall pay to Lender, in addition to all other amounts payable under the Financing Agreements, an annual facility fee in an amount equal to $10,000 4 while the Loan Agreement is in effect and for so long thereafter as any Obligations are outstanding, which fee shall be fully earned as of and payable in advance commencing with the date hereof and, thereafter, on March 1 of each year. When so earned and payable, such facility fee shall constitute part of the Obligations and may, at Lender's option, be charged directly to any account(s) of the Borrower maintained with Lender. 8. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Financing Agreements are intended or implied and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and construed as one agreement. 9. Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary or desirable to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of Texas (without giving effect to principles of conflicts of law). 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Please sign the enclosed counterpart of this Amendment in the space provided below, whereupon this Amendment, as so accepted by Lender, shall become a binding agreement between Borrower and Lender. Very truly yours, SOLO SERVE CORPORATION By: /s/ Ross E. Bacon ----------------------------------- Title: Chief Operating Officer and Chief Financial Officer 5 AGREED: CONGRESS FINANCIAL CORPORATION (SOUTHWEST) By: /s/ Edward Franco ----------------------------------- Title: Senior Vice President Acknowledged and Consented to (and also acknowledging and consenting to Amendment No. 4 to Loan and Security Agreement, dated September 16, 1996): GENERAL ATLANTIC CORPORATION By /s/ Julie Lefkowitz ----------------------------------- Title: Vice President EX-10.33 4 LETTER AGREEMENT DATED MARCH 28, 1997 1 EXHIBIT 10.33 March 28, 1997 MetLife Capital Corporation 10900 N.E. 4th Street, Suite 500 Bellevue, Washington 98009 Attn: John Konchak, Senior Credit Analyst Re: Loan and Security Agreement between MetLife Capital Corporation ("MetLife") and Solo Serve Corporation ("Solo Serve"); as amended on July 18, 1995 (the "Loan Agreement") Dear John: Pursuant to our letter agreement of January 23, 1996, this letter shall serve as formal notice that Congress Financial Corporation and Solo Serve Corporation are planning on amending Solo Serve's existing credit facility with Congress Financial Corporation to reduce the minimum "Adjusted Net Worth" covenant contained in the documents governing said facility to the amount of $3,750,000.00. Congress Financial Corporation has also agreed to amend Solo Serve's working capital requirement. Under the credit facility as amended, Solo Serve must now maintain working capital of not less than $4,500,000 at all times after September 1, 1996. When reviewing our files, we noticed that when Solo Serve and MetLife amended Section 5(n)2 of the Loan Agreement, we did not amend Section 5(n)1 (MetLife's working capital requirement) of the Loan Agreement, therefore we hereby request that Section 5(n)1 of the Loan Agreement be amended effective September 1, 1996 to read as follows: "Section 5(n)1. Working Capital: Borrower must maintain Working Capital as defined in Borrower's Credit Facility with Congress Financial Corporation, at the level required under said facility, as it must be amended from time to time. Solo Serve will notify MetLife in writing prior to any and all future amendments. In the event that Solo Serve's credit facility with Congress Financial Corporation should terminate, for whatever reason, Section 5(n)1 shall return to the original definition in the Amended Loan and Security Agreement dated July 18, 1995." 2 If this proposal is acceptable to you, please execute where indicated below and return at your earliest convenience. Should you have any questions, please contact the undersigned. SOLO SERVE CORPORATION By: /s/ Ross E. Bacon ----------------------------------- Ross E. Bacon, Chief Financial Officer AGREED: METLIFE CAPITAL CORPORATION By: /s/ John F. Konchak -------------------------------------- John F. Konchak, Senior Credit Analyst EX-10.34 5 LETTER AGREEMENT DATED JULY 8, 1996 1 EXHIBIT 10.34 SOLO SERVE CORPORATION 1610 Cornerway Boulevard San Antonio, Texas 78219 July 8, 1996 Ross E. Bacon 2279 Encino Loop San Antonio, TX 78247 Re: Confirmation of Offer of Employment Dear Ross: Confirming our conversation, listed below are what you accepted and agreed to as conditions of your employment with Solo Serve Corporation. You will be employed in the capacity of Vice president and Chief Financial Officer, reporting to David Dash, President and Chief Executive Officer. You will be responsible for all Accounting and Financial functions, Management Information Systems, Insurance Contracts and Services, and other duties as assigned by the President. Your salary will be paid during the time you are actively employed with the Company at the rate of ninety thousand dollars ($90,000) per year. Salary is currently paid semi-monthly on the 15th and last day of the month. You will receive a grant of twenty thousand (20,000) shares on the day you commence employment which will be fully vested and exercisable one year from the date of hire. The shares will be fully vested sooner if there is a change in the ownership control of Solo Serve. Options will be priced in accordance with the terms of the Option Plan. If your employment is terminated by the Company for any reason other than "for cause," as defined in attachment A, you will receive severance pay as follows: Three (3) months base salary as severance pay if termination occurred in the first six (6) months; and six (6) months base salary as severance pay if your employment is terminated after six (6) months from the date of hire. The severance pay would be payable on the 15th and last day of the month for the qualifying period of time. Should you find employment prior to the severance payments expiring, and your salary is less than your salary at Solo Serve, then the amount of severance payments due would be reduced by the amount of your 2 Ross E. Bacon July 8, 1996 Page 2 earnings. If your salary is greater than your salary at Solo Serve, there would be no further severance payments due. You will be entitled to receive a one week paid vacation at an agreed time prior to December 31, 1996, and two weeks paid vacation after December 31, 1996. You will be eligible for long-term disability, medical/life, and dental upon your date of hire. Other benefits include free travel/accident insurance, associate discount, paid Company and personal holidays, and the executive sick pay plan. You are eligible to participate in the 401(k) Retirement Savings Plan after one year of service on the earliest enrollment date permitted by the Plan. All associates are employed "At-Will," and either Solo Serve Corporation or yourself is free to terminate the employment relationship at any time, with or without notice, and with or without reason. This letter is not intended to be an employment contract for any definite period of time, but rather to confirm an understanding as to the terms and conditions of your employment. Ross, if the above is your understanding of the conversation, please indicate so by signing below and returning the original to me. Sincerely, /s/ Jim Miranda - --------------------------- Jim Miranda, Director of Human Resources /s/ Ross E. Bacon - --------------------------- --------------------------------- Date Ross E. Bacon 3 ATTACHMENT A July 8, 1996 RE: Offer of Employment to Ross E. Bacon Termination "for cause" "Cause" shall mean the occurrence of any one or more of the following events: 1. The employee has engaged in willful misconduct, including embezzlement, fraud, or malfeasance in the performance of his duties as prescribed from time to time by the President of the Company; 2. The employee has breached a policy or procedure of the Company which is generally applicable to officers of the Company, which breach is material and continues for a period of 30 days after being given notice of such breach by the Company. 3. The employee has failed to perform his duties as prescribed and amended from time to time by the President which failure continues for a period of 30 days after being given notice of such breach by the Company. 4. The employee has been charged by a governmental agency or department with any violation of law, regulation or ordinance of a governmental entity (other than traffic violations and similar minor offenses) or has violated any judicial decree applicable to the Company or the employee; 5. The employee has materially breached any written agreement between employee and the Company which breach continues for a period of 30 days after being given notice of such breach by the Company; or 6. The employee's representations and warranties prove to be materially false in any manner. EX-10.35 6 AMENDMENT NO. 6 TO LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.35 AMENDMENT NO. 6 TO LOAN AND SECURITY AGREEMENT SOLO SERVE CORPORATION 1610 Cornerway Boulevard San Antonio, Texas 78219 May 19, 1997 Congress Financial Corporation (Southwest) 1201 Main Street Dallas, Texas 75250 Gentlemen: Congress Financial Corporation (Southwest) ("Lender") and Solo Serve Corporation ("Borrower") have entered into certain financing arrangements pursuant to the Loan and Security Agreement, dated June 20, 1995, between Lender and Borrower, as amended by Amendment No. 1 to Loan and Security Agreement, dated October 27, 1995, Amendment No. 2 to Loan and Security Agreement, dated January 31, 1996, Amendment No. 3 to Loan and Security Agreement, dated June 26, 1996, Amendment No. 4 to Loan and Security Agreement, dated September 16, 1996 and Amendment No. 5 to Loan and Security Agreement, dated March 31, 1997 (and as amended hereby and as the same may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement", together with all agreements, documents and instruments at any time executed and/or delivered in connection therewith or related thereto, collectively, the "Financing Agreements"). Borrower has requested that Lender agree to certain amendments to the Loan Agreement, and Lender is willing to agree to such amendments, subject to the terms and conditions contained herein. By this Amendment, Lender and Borrower desire and intend to evidence such amendments. In consideration of the foregoing and the agreements and covenants contained herein, the parties hereto agree as follows: 1. Interpretation. All capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement, unless otherwise defined herein. 2. Renewal Term. All References to the term "Renewal Rate" in the Loan Agreement shall be deemed, and each such reference is hereby amended, to mean July 31, 1999. 2 Congress Financial Corporation (Southwest) May 19, 1997 Page 2 3. Working Capital. Section 9.14 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "9.14 Working Capital. Borrower shall at all times on and after March 1, 1997 maintain Working Capital of not less than $3,250,000." 4. Adjusted Net Worth. Section 9.15 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "9.15 Adjusted Net Worth. Borrower shall at all times on and after March 1, 1997 maintain Adjusted Net Worth of not less than $800,000." 5. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrower to Lender pursuant to the Financing Agreements, Borrower hereby represents, warrants and covenants with and to Lender as follows (which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof and shall be incorporated into and made a part of the Financing Agreements): (a) No Event of Default exists on the date of this Amendment (after giving effect to the amendment to the Loan Agreement made by this Amendment). (b) This Amendment has been duly executed and delivered by Borrower and is in full force and effect as of the date hereof, and the agreements and obligations of Borrower contained herein constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. 6. Conditions Precedent. The effectiveness of the amendments contained herein shall be subject to the satisfaction of the following conditions precedent in a manner satisfactory to Lender and its counsel: 3 Congress Financial Corporation (Southwest) May 19, 1997 Page 3 (a) The receipt by Lender of an original of this Amendment, duly authorized, executed and delivered by Borrower. (b) No Event of Default shall have occurred and be continuing and no event shall have occurred or condition be existing and continuing which, with notice or passage of time or both, would constitute an Event of Default (after giving effect to the amendment to the Loan Agreement made by this Amendment). 7. Effect of this Amendment. Except as modified pursuant hereto, no other changes or modifications to the Financing Agreements are intended or implied and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent of conflict between the terms of this Amendment and the other Financing Agreements, the terms of this Amendment shall control. The Loan Agreement and this Amendment shall be read and construed as one agreement. 8. No Waiver. Lender has not waived and is not by this Amendment waiving, and has no intention of waiving any Event of Default which may have occurred on or prior to the date hereof or may be continuing on the date hereof or may occur after the date hereof, and Lender reserves the right, in its discretion, to exercise any or all of its rights and remedies arising under the terms of the Financing Agreements as a result of any such other Event of Default which may have occurred on or prior to the date hereof or may be continuing on the date hereof or may occur after the date hereof. 9. Further Assurances. The parties hereto shall execute and deliver such additional documents and take such additional action as may be necessary or desirable to effectuate the provisions and purposes of this Amendment. 10. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the laws of the State of Texas (without giving effect to principles of conflicts of law). 4 Congress Financial Corporation (Southwest) May 19, 1997 Page 4 11. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 12. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. Please sign the enclosed counterpart of this Agreement in the space provided below, whereupon this Amendment, as so accepted by Lender, shall become a binding agreement between Borrower and Lender. Very truly yours, SOLO SERVE CORPORATION By: /s/ Ross E. Bacon -------------------------------- Title: Executive Vice President AGREED: CONGRESS FINANCIAL CORPORATION (SOUTHWEST) By:/s/ Edward Franco -------------------------------- Title: Senior Vice President ACKNOWLEDGED AND CONSENTED TO BY: GENERAL ATLANTIC CORPORATION By: /s/ Julie Leftkowitz -------------------------------- Title: Vice President EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 Subsidiaries of the Registrant None. EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in each of the Registration Statements of Solo Serve Corporation on Forms S-8 (Nos. 33-99000 and 33-99670) filed on November 20, 1995, of our report dated May 14, 1997 appearing on Page F-1 of this Annual Report on Form 10-K. We also consent to the incorporation of our report on the Financial Statement Schedule, which appears on page S-1 of this Form 10-K. PRICE WATERHOUSE LLP San Antonio, Texas EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE REGISTRANT SET FORTH IN THE REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED 02-1-97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT. YEAR FEB-01-1997 FEB-01-1997 1,065,564 0 0 0 11,107,938 13,161,971 12,935,322 0 26,387,293 7,094,115 14,960,600 0 13,889 28,562 4,290,127 26,387,293 95,237,689 95,237,689 67,484,703 67,484,703 31,613,213 0 1,624,320 (5,484,547) 0 (5,484,547) 0 0 0 (5,484,547) (1.92) (1.92)
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