-----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, O/hqYaFKKknT+zcL9v85+g+UG+VXOnneIAB4qoOM04fzrfSmSsz9WwUj0pJERobv jDNAnpuHCmo70Y58ClEGAg== 0000950134-98-003771.txt : 19980505 0000950134-98-003771.hdr.sgml : 19980505 ACCESSION NUMBER: 0000950134-98-003771 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980501 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: SEC FILE NUMBER: 000-19994 FILM NUMBER: 98608873 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 JANUARY 31, 1998 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 FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 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 29, 1998 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 29, 1998, were 3,565,812 and 679,203 shares, respectively. Affiliates of the registrant held 2,038,595 shares of the Common Stock, and all of the shares of Preferred Stock, outstanding on April 29, 1998. 2 FORM 10-K TABLE OF CONTENTS
PART I Page ---- Item 1. Business.............................................................................. 3 Item 2. Properties............................................................................ 10 Item 3. Legal Proceedings..................................................................... 11 Item 4. Submission of Matters to a Vote of Security Holders................................... 11 Item 4a. Executive Officers of the Company..................................................... 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 12 Item 6. Selected Financial Data............................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 14 Item 8. Financial Statements.................................................................. 20 Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure.......................................................................... 20 PART III Item 10. Directors and Executive Officers...................................................... 21 Item 11. Executive Compensation................................................................ 21 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................................................... 21 Item 13. Certain Relationships and Related Transactions........................................ 21 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................................................................ 22 Index to Financial Statements and Schedules...................................................... F-1
2 3 PART I ITEM 1. BUSINESS GENERAL Solo Serve Corporation, a Texas corporation (the "Company" or "Solo Serve"), 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 in certain locations and quality home furnishings. The Company currently operates 27 Solo Serve stores in Texas and Louisiana. 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." The Company's common stock is not actively traded. On July 21, 1994, the Company filed a petition 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. 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 shares of Preferred Stock were purchased by General Atlantic Corporation ("GAC"), the Company's largest stockholder. On April 17, 1996, the Bankruptcy Court entered the Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy case. Pursuant to the Plan, the Company's existing common stock was subject to a one-for-two reverse split. The shares of Preferred Stock issued in connection with the Plan have a liquidation value of $1.80 per share, are convertible to an equal number of shares of Common Stock, have voting rights on an as converted basis, and are entitled to no preferential dividends. With the issuance of shares of Preferred Stock mentioned above, GAC increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. In October 1997 and March 1998 certain members of Company management (the "Management Holders") acquired a total of 1,964,686 shares of the Company's Common Stock from GAC. This represented all of GAC's shares of Common Stock and 709,686 of its shares of Preferred Stock, which were converted into shares of Common Stock at the time of the sale. GAC continues to own 679,203 shares of the Company's Preferred Stock, which represents approximately 16% of the aggregate voting stock of Solo Serve and all of the Company's issued and outstanding shares of Preferred Stock. Currently the Company has a significant net operating loss carryforward. Under applicable law and regulations, the Company's ability to utilize its net operating loss carryforward to offset future earnings could be severely limited if the Company experiences an ownership change as defined in Section 382 of the Internal Revenue Code of 1986. The above mentioned equity infusion by GAC and stock acquisition by the Management Holders have not caused an ownership change as defined in Section 382. However, the Company's ability to utilize its net operating loss carryforward could be adversely affected if a purchaser were to acquire five percent (5%) or more of the Company's stock. The Management Holders and GAC have entered into a Stockholders Agreement which provides that no party thereto will sell, exchange, transfer or otherwise dispose of shares of the Company's Common Stock or Preferred Stock owned by such stockholder without the prior written consent of the other parties thereto and no party will exercise incentive stock options or other rights to acquire capital stock or will otherwise acquire capital stock of the Company without the prior written consent of the others. The Stockholders Agreement provides that the certificates representing shares of capital stock of the Company 3 4 currently held by the parties, as well as any additional shares issued to the parties, shall each bear a legend evidencing the existence of the Stockholders Agreement and the restrictions upon transfer contained therein. The Stockholders Agreement terminates on March 17, 2001 unless terminated earlier or extended by agreement of all parties. 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. Increased promotional activities by other retailers as well as the opening of additional store locations in the Company's principal markets have resulted in significant sales decreases. The Company has maintained inventory at planned levels; however, the Company has experienced and continues to experience an unstable credit environment, principally with third party factors, which has from time to time resulted in constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities. 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 signing. 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. Display fixtures along with capacity racks are used to highlight the store's broad merchandise assortment. In-store signs and product displays highlight famous designers' and manufacturers' names and reinforce the Company's value pricing. Store entrances are designed to create a brand, price, fashion and service statement specifically geared to appeal to the customer profile of each store which usually features fragrance showcases, prominent branded men's and women's apparel and a customer service desk. In the fourth quarter of fiscal 1997 and continuing into fiscal 1998, the Company has continued to refine its analysis of sales and margin results by department and category of product and their performance in relationship to space location and allocation of selling square footage. Management believes the adjustments in store fixtures, department location and selling square footage made as a result of its analysis were instrumental in the Company's improved margin and sales over prior year late in the fourth quarter of fiscal 1997. Solo Serve stores have historically been located in metropolitan areas in large strip shopping centers. 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. In July and October 1997, the Company opened two new stores in Texas markets smaller than those historically served by the Company. The Company faces less direct competition from larger off-price retailers, traditional department and specialty stores in these smaller markets and can operate under a lower occupancy expense structure than that generally experienced in stores located in metropolitan areas. Management believes that the early results of these two stores indicate that future expansion into these type of markets can be successful and plans to seek attractive opportunities for new stores in these types of markets in fiscal 1998. The Company has entered into an agreement whereby the landlord will buyout and terminate the lease of one under-performing store in Austin, Texas. The Company previously closed a store in Shreveport, Louisiana in July 1997, but remained subject to continuing lease payment obligations for the term of the lease. Due to changing market conditions in Shreveport, the Company intends to relocate the assets of the Austin store to the Shreveport, Louisiana location and reopen the store in June 1998. 4 5 MERCHANDISING STRATEGY The Company emphasizes nationally-recognized branded merchandise in its 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 into the store. The Company's broadest merchandise selection is in apparel for women, men and children. Women's merchandise lines include dresses, separates, coordinates, activewear, and outerwear and is further segmented into juniors, misses, petites and plus sizes. Handbags, sleep and lounge wear, intimate apparel and casual and dress shoes in some stores complement the women's apparel group. Men's apparel includes name brand product in dress shirts, ties, basics, casual sportswear, activewear, dress slacks, jeans, and outerwear. The children's department also features name brand product and 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, dresses, lingerie, sleep wear, active wear, 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. During 1997 the Company expanded its product offering of domestics, home decor and gifts. This department now offers a wider assortment of name brand bedding, linens, glassware, decorative accents, furniture and gift items than in years past. Also, the Company has expanded the square footage of the department, upgraded the display fixtures and in some cases relocated the department to a more prominent position on the selling floor. Solo Serve stores also offer an extensive and in-depth selection of prestige fragrances in a department store format under an exclusive supply agreement (the "Model Agreement") with a major fragrance supplier, Model Imperial, Inc. ("Model"). The Company operates the department in its stores and sells Model's fragrances. Under the terms of the Model Agreement, the Company supplies staffing 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 on July 18, 1996. On September 15, 1997 the court approved Model's plan of reorganization. The Company has not experienced any disruption in its supply of fragrances from Model. The Company had granted a license to an independent licensee to operate fine jewelry departments in the 12 San Antonio Solo Serve stores. Under the license agreement, which was to expire August 31, 1999, the licensee 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 occupied 200 square feet of selling space in each of the 12 San Antonio stores. In February 1998, the Company terminated the agreement and entered into an agreement with another entity to operate similar departments in six of the San Antonio stores. During fiscal 1998, management plans to continue placing special emphasis on merchandising and marketing specifically to the econo-socio-ethnic background of the trade area and customer base of individual stores. This includes, but is not 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 continue to 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. 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. 5 6 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 general merchandise manager. Management periodically monitors its competitors' prices in order 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 1997, management reduced promotional pricing activity and increased selective initial markups as compared to 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 In the fourth quarter of fiscal 1997, the Company initiated a new marketing strategy that involves direct mail and a frequent shopper program. The Company utilized internal resources and external consultants to develop a database of people who shop in the Company's stores, and began marketing to them through special direct mail promotions. Customers who are members of the frequent shopper program, Solo Savers Club, receive special discounts one day each week and on their birthday, are eligible for special monthly prize drawings, and receive advance notice of special promotional events. During 1998, the Company plans to expand its database, target potential new customers, and increase its use of direct mail promotions and special events to encourage frequent shopping at Solo Serve and customer loyalty. The above strategy will continue to be supported by an advertising and promotional program designed principally to reinforce Solo Serve's image as a value-priced retailer for the entire family. Some advertising will continue to be directed at the general population through newspaper advertisements, special promotional events, television and radio and be focused on advertising specific merchandise or categories offered at opportunistic or at discounted prices. The Company will continue 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. 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 In an effort 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. 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 maintains an office without staff) 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 supervised by the general merchandise manager who reports to the Chief Executive Officer. 6 7 The Company actively pursues additional branded sources of supply and is continually attempting to upgrade its merchandise assortments. During fiscal year 1997, the Company purchased goods from approximately 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. Favorable merchandise costs are also realized by purchasing from vendors offering in-season cancellations by major retailers, manufacturers' overruns, end-of-season close outs, product ranges 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 in the future for all of the Company's departments or that there will not be delays or disruptions in the flow of merchandise to the Company's stores. See "Management's Discussion and Analysis." INVENTORY MANAGEMENT AND MERCHANDISE DISTRIBUTION The Company's current inventory management strategy 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 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 floor ready. The Company utilizes its distribution personnel and systems to assign merchandise to stores based primarily 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 and product ranges 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 The Company operates a computerized merchandise planning system that management believes improves inventory management by allowing for timely response to business trends, and the management of lower average store inventories. The system allows personnel to manage inventory allocation and store inventory planning by department and category. During 1997, the Company began to utilize some of the information collected by the system to perform more detailed analysis of sales by product category and market than had previously been possible. Management believes this information improved buying and allocating decisions during fiscal 1997, and that the Company's performance can be improved by continued and expanded analysis available as additional historical data is accumulated. During 1997 the Company piloted a new point of sale ("POS") cash register system at three stores. The new system speeds customer check-out, improves customer service, and enhances reporting capabilities. Subject to securing acceptable financing, the Company plans to install the new system in all of its stores during fiscal 1998. 7 8 IMPACT OF YEAR 2000 An issue affecting most businesses today, including the Company, is whether computer systems and applications will properly function from and after the year 2000 (the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any information system that uses dates to function may recognize a date using "00" as the year 1900 rather than the year 2000 or may otherwise fail to process information accurately due to the Year 2000 Issue, which could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company is in the process of reviewing potential system problems related to the Year 2000 Issue, and management believes that the Company will modify or replace significant portions of its hardware and software to address the Year 2000 Issue, including cash registers in the Company's stores. The Company is not yet able to estimate the cost to of its compliance efforts with respect to the Year 2000 Issue. Although no assurances can be made, management presently does not expect such costs to have a material adverse effect on the future results of operations of the Company. The Company is contacting its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. However, there can be no guarantee that the systems of the other companies on which the Company's systems rely will be timely converted, or that the failure of such third party systems to adequately address the Year 2000 Issue would not have an adverse effect on the Company's ability to do business. The Company will utilize both internal and external resources to reprogram, upgrade and test its information systems Year 2000 Issue modifications. The Company currently anticipates completing the Year 2000 Issue project not later than February 28, 1999, which is prior to any anticipated impact on its operating systems. Management presently believes that with modifications to and replacement of existing software and hardware, the Year 2000 Issue will not pose significant operational problems for its information systems. If remediation efforts are not timely made, if appropriate modifications are not made by the Company's suppliers on a timely basis, or if the actual costs of the remediation efforts exceed management's expectations, the Year 2000 Issue could have a material adverse impact on the operations and financial results of the Company. 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 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. 8 9 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. The Company hopes to overcome these disadvantages by being more responsive to its customers' preferences in product mix and presentation than its competitors and by expanding its store base into smaller markets where it will face less direct competition. See "Management's Discussion and Analysis." EMPLOYEES During fiscal year 1997, the Company's work force consisted of an average of approximately 950 forty-hour equivalent employees, referred to by the Company as "associates." This employee base consisted of approximately 475 full-time associates and an additional 475 part-time associates. Substantial seasonality is associated with employment levels. The Company expects the employee base in fiscal 1998 to be approximately the same as 1997 except for increases directly associated with any increase in the number of stores. 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. The Solo Serve 401(k) Retirement Savings Plan and Trust is also available to eligible associates. All associates also receive discounts on purchases of Company merchandise in the stores. The Company considers its relationship with its associates to be satisfactory. 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. 9 10 ITEM 2. PROPERTIES STORE LOCATIONS AND PROPERTIES The table below shows the location and opening dates of each of the Company's 27 stores in operation at the end of fiscal 1997:
STORE MARKET STORE MARKET LOCATION OPENING DATE LOCATION OPENING DATE - --------------- ------------ --------------- ------------ San Antonio, TX 1919 San Antonio, TX September 1988 San Antonio, TX May 1959 San Antonio, TX August 1989 San Antonio, TX May 1970 Corpus Christi, TX March 1990 San Antonio, TX February 1981 San Antonio, TX October 1990 San Antonio, TX July 1981 McAllen, TX September 1992 Austin, TX November 1981 Austin, TX October 1990 New Orleans, LA July 1983 Laredo, TX July 1991 New Orleans, LA September 1983 San Antonio, TX March 1992 New Orleans, LA October 1984 Brownsville, TX August 1992 Corpus Christi, TX March 1985 San Antonio, TX March 1994 New Orleans, LA September 1985 Austin, TX March 1994 New Orleans, LA November 1985 San Angelo, TX July 1997 San Antonio, TX November 1985 Brownwood, TX October 1997 San Antonio, TX April 1988
In fiscal 1995 the Company closed its one store located in Montgomery, Alabama. In fiscal 1996 the Company closed one of its Austin stores. In fiscal 1997 the Company closed its three stores in Mobile, Alabama, Baton Rouge, Louisiana and Shreveport, Louisiana. The Company plans to reopen the Shreveport store in mid-1998. 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 4 months to 14 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. Subsequent to year end, on April 6, 1998, the Company sold and leased back its 440,000 square foot distribution center and corporate office in San Antonio, Texas. The buyer assumed the outstanding mortgage notes, and the Company realized approximately $1 million in cash, net of selling costs, debt assumption, and deposits. The Company has signed a 10 year lease for the property, and will continue to occupy the facility. The Company has entered into an agreement to sell and lease back the three owned store locations. The buyer recently extended its option to purchase the properties for 120 days and paid an additional $150,000 in nonrefundable earnest money directly to the Company. Although the transaction is expected to close by September 1, 1998, there can be no assurance that the agreement will be consummated. 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. 10 11 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. 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 January 31, 1998. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY Charles M. Siegel, age 59, 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 53, 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 and 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. Mark J. Blankenship, age 45, became Senior Vice President of Planning and Allocation of the Company in June 1997. He had joined the Company in April 1994 as Vice President - Divisional Merchandise Manager. Prior to joining the Company, Mr. Blankenship was Senior Vice President - General Merchandise Manager of Stage Stores, Inc. in Houston, Texas. Terry Lalosh, age 50, became Senior Vice President - General Merchandise Manager of the Company in June 1997. He joined the Company in August, 1995 as Divisional Merchandise Manager. From 1992 until July 1995, Mr. Lalosh was Vice President - Divisional Merchandise Manager of Marshalls, a national off-price retailer headquartered in Andover, Massachusetts. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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 high and low 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 ---- --- February 9, 1996 to May 4, 1996 $0.1250 $0.1250 Quarter ended August 3, 1996 .2500 .1250 Quarter ended November 2, 1996 .4375 .1875 Quarter ended February 1, 1997 .1875 .0938 Quarter ended May 3, 1997 .1563 .0938 Quarter ended August 2, 1997 .1875 .1563 Quarter ended November 1, 1997 .4375 .1563 Quarter ended January 31, 1998 .5625 .3750
These price quotations reflect inter-dealer prices, without adjustments for retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. On April 29, 1998, there were 3,565,812 shares of common stock outstanding, held by 162 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. 12 13 ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from the Company's audited financial statements, including those found elsewhere in this Annual Report on Form 10-K for the year ended January 31, 1998. 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 financial statements.
Fiscal Year Ended ------------------------------------------------------------------- Jan. 29, Jan. 28, Feb. 3, Feb. 1, Jan. 31, 1994 1995 1996 1997 1998 ---------- --------- --------- --------- ---------- (in thousands, except operating and per share data) Number of Weeks in Fiscal Year 52 52 53 52 52 INCOME STATEMENT DATA: Net revenues $ 169,053 $ 138,925 $ 109,823 $ 95,238 $ 82,046 Cost of goods sold (including buying and distribution excluding depreciation shown below) 120,293 100,687 83,474 67,485 57,303 --------- --------- --------- --------- --------- Gross profit 48,760 38,238 26,349 27,753 24,743 Selling, general and administrative expense 50,000 39,013 29,620 28,203 26,414 Depreciation and amortization 4,075 3,748 2,815 2,421 2,062 Store closure expense 1,500 -- -- -- 622 Write off of property and equipment -- -- -- 525 -- Non recurring item -- -- -- 464 -- --------- --------- --------- --------- --------- Operating income (loss) (6,815) (4,523) (6,086) (3,860) (4,355) Interest expense, net 1,237 1,090 1,129 1,624 1,934 --------- --------- --------- --------- --------- Income (loss) before income taxes, reorganization items, and extraordinary item (8,052) (5,613) (7,215) (5,484) (6,289) Reorganization items -- 6,262 1,787 -- -- Provision for (benefit from) income taxes (3,070) 3,661 (1,418) -- -- --------- --------- --------- --------- --------- Income (loss) before extraordinary item (4,982) (15,536) (7,584) (5,484) (6,289) Extraordinary item -- -- 2,753 -- (267) --------- --------- --------- --------- --------- Net income (loss) $ (4,982) $ (15,536) $ (4,831) $ (5,484) $ (6,556) ========= ========= ========= ========= ========= Income (loss) per common share before extraordinary item $ (1.70) $ (5.45) $ (2.10) $ (1.92) $ (2.20) Net income (loss) per common share (basic and diluted)(1) $ (1.70) $ (5.45) $ (1.34) $ (1.92) $ (2.30) Dividends declared per common share -- -- -- -- -- Weighted average shares outstanding 2,919 2,850 3,605 2,856 2,856 BALANCE SHEET DATA (AT PERIOD END): Total assets $ 57,753 $ 54,692 $ 33,300 $ 26,387 $ 26,384 Long-term debt (including capital lease obligations) $ 17,998 $ 5 $ 15,136 $ 14,961 $ 13,341 Note payable to stockholder -- -- -- -- $ 500 Liabilities subject to compromise $ -- $ 33,385 $ 461 $ -- $ -- Total stockholders' equity (deficit) $ 27,572 $ 12,148 $ 9,817 $ 4,333 $ (2,223) OPERATING DATA: Number of stores in operation at end of period 46 30 29 28 27 Number of stores opened during period 8 2 -- -- 2 Number of stores closed during period 3 18 1 1 3 Comparable store net sales increase (decrease)(2) (5.9%) (11.2%) (5.6%) (10.6%) (11.4%) Selling square footage in operation at end of period (in thousands) 996 701 675 657 626 Sales per selling square foot $ 187 $ 169 $ 161 $ 143 $ 123 Average sales per store (in thousands) $ 4,244 $ 3,984 $ 3,758 $ 3,360 $ 2,860
(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. 13 14 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 1995 Fiscal 1996 Fiscal 1997 ----------- ----------- ----------- Beginning of year 30 29 28 First Quarter Additions 0 0 0 First Quarter Dispositions 0 0 0 Second Quarter Additions 0 0 1 Second Quarter Dispositions (1) 0 (2) Third Quarter Additions 0 0 1 Third Quarter Dispositions 0 (1) 0 Fourth Quarter Dispositions 0 0 (1) -- -- -- END OF YEAR 29 28 27 -- -- --
RESULTS OF OPERATIONS As a percentage of sales
Fiscal 1995 Fiscal 1996 Fiscal 1997 ----------- ----------- ----------- Net revenues 100.0% 100.0% 100.0% Cost of goods sold, including buying and distribution costs 76.0 70.9 69.8 ----- ----- ----- Gross profit 24.0 29.1 30.2 Selling, general and administrative expense 27.0 29.6 32.2 Depreciation and amortization 2.6 2.5 2.5 Store closure expense -- -- 0.8 Write down of property and equipment -- 0.5 -- Non recurring item -- 0.5 -- ----- ----- ----- Operating loss (5.6) (4.0) (5.3) Interest expense 1.0 1.7 2.4 ----- ----- ----- Loss before income taxes, reorganization and extraordinary items (6.6) (5.7) (7.7) ----- ----- ----- Reorganization items (1.6) -- -- (Provision for) benefit from income taxes 1.3 -- -- ----- ----- ----- Loss before extraordinary item (6.9) (5.7) (7.7) Extraordinary item, net of tax 2.5 -- (0.3) ----- ----- ----- Net loss (4.4)% (5.7)% (8.0)% ===== ===== =====
14 15 PLAN OF REORGANIZATION On July 21, 1994, the Company filed a petition 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. 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 shares of Preferred Stock were purchased by General Atlantic Corporation ("GAC"), the Company's largest stockholder. On April 17, 1996, the Bankruptcy Court entered the Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy case. Pursuant to the Plan, the Company's existing common stock was subject to a one-for-two reverse split. The shares of Preferred Stock issued in connection with the Plan have a liquidation value of $1.80 per share, are convertible to an equal number of shares of Common Stock, have voting rights on an as converted basis, and are entitled to no preferential dividends. With the issuance of shares of Preferred Stock mentioned above, GAC increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. In October 1997 and March 1998 certain members of Company management (the "Management Holders") acquired a total of 1,964,686 shares of the Company's Common Stock from GAC. This represented all of GAC's shares of Common Stock and 709,686 of its shares of Preferred Stock, which were converted into shares of Common Stock at the time of the sale. GAC continues to own 679,203 shares of the Company's Preferred Stock, which represents approximately 16% of the aggregate voting stock of Solo Serve and all of the Company's issued and outstanding shares of Preferred Stock. Currently the Company has a significant net operating loss carryforward. Under applicable law and regulations, the Company's ability to utilize its net operating loss carryforward to offset future earnings could be severely limited if the Company experiences an ownership change as defined in Section 382 of the Internal Revenue Code of 1986. The above mentioned equity infusion by GAC and stock acquisition by the Management Holders have not caused an ownership change as defined in Section 382. However, the Company's ability to utilize its net operating loss carryforward could be adversely affected if a purchaser were to acquire five percent (5%) or more of the Company's stock. The Management Holders and GAC have entered into a Stockholders Agreement which provides that no party thereto will sell, exchange, transfer or otherwise dispose of shares of the Company's Common Stock or Preferred Stock owned by such stockholder without the prior written consent of the other parties thereto and no party will exercise incentive stock options or other rights to acquire capital stock or will otherwise acquire capital stock of the Company without the prior written consent of the others. The Stockholders Agreement provides that the certificates representing shares of capital stock of the Company currently held by the parties, as well as any additional shares issued to the parties, shall each bear a legend evidencing the existence of the Stockholders Agreement and the restrictions upon transfer contained therein. The Stockholders Agreement terminates on March 17, 2001 unless terminated earlier or extended by agreement of all parties. 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. Increased promotional activities by other retailers as well as the opening of additional store locations in the Company's principal markets have resulted in significant sales decreases. The Company has maintained inventory at planned levels; however, the Company has experienced and continues to experience an unstable credit environment, principally with third party factors, which has from time to time resulted in constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities. 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. 15 16 FISCAL 1997 VERSUS FISCAL 1996 Net revenues for fiscal 1997 decreased 13.9% from the prior year to $82.0 million from $95.2 million. Comparable stores net sales decreased 11.4%. 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 and less promotional activities than in prior years. Additionally the Company continues to experience an unstable credit environment, principally with third party factors, which results in periodic and occasionally significant constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities, and which management believes negatively impacted sales. Gross profit for fiscal 1997 decreased $3.1 million to $24.7 million from $27.8 million in the prior year. Gross profit as a percentage of net revenues increased to 30.1% from 29.1% in fiscal 1996. The increase in gross profit percentage resulted principally from reduced shrinkage, reduced markdown expense, and reduced buying and distribution costs from those experienced in fiscal 1996. The Company has experienced declines in these costs as a percent of sales over the past two years. Selling, general and administrative ("SG&A") expenses for fiscal 1997 decreased $1.8 million, or 6.4%, to $26.4 million from $28.2 million for the prior year. The decrease was primarily the result of reductions in payroll costs, and the closing of three under-performing stores. Depreciation and amortization expenses for fiscal 1997 decreased 12.5% to $2.1 million from $2.4 million primarily due to some assets becoming fully depreciated and the write down of assets under FAS 121 in fiscal 1996. The Company experienced an operating loss of $4.4 million in fiscal 1997 compared to an operating loss of $3.9 million in fiscal 1996. This was primarily the result of decreased sales not being fully offset by increased margins. Net interest expense increased to $1.9 million in fiscal 1997 from $1.6 million in the prior year, primarily due to increased borrowings on the line of credit. During fiscal 1997, management has continued the business strategy developed and implemented in fiscal 1996, which seeks to achieve higher gross margins on lower comparable store sales than in prior years. The key elements of this strategy are lower average store inventories, quick price reduction on slower moving merchandise, constant flow of fresh merchandise, less promotional pricing, and a significantly reduced expense structure. The Company has also reduced SG&A expenses and buying and distribution costs. 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. The gains during fiscal 1997 in gross profit percent and reduced expenses have been offset by these sales declines during fiscal 1997 and the 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 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 attributed 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 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 16 17 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. Expenses attributable to SG&A 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 offset 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. At fiscal year end 1996, based on the revised cash flow estimates from the planned closure of two store 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. 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, for less-than the accrued estimate previously made. During fiscal 1997 the claim was resolved and the Company's liability discharged. 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 bankruptcy 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. 17 18 SEASONALITY AND QUARTERLY FLUCTUATIONS The following tables 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 1996 ------------------------------------------------------------- 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (in thousands, except per share data) 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 (basic $ (.34) $ (.43) $ (.52) $ (.63) and diluted)
FISCAL 1997 ------------------------------------------------------------ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------- ----------- ----------- ----------- (in thousands, except per share data) Net revenues $ 19,603 $ 21,365 $ 16,745 $ 24,333 Gross Profit 5,617 5,991 5,017 8,118 Net loss (2,633) ( 474) (2,179) (1,270) Net loss per share of common stock (basic and diluted) $ (.92) $ (.17) $ (.76) $ (.45)
COMPARABLE STORE SALES The following table sets forth for fiscal 1995, fiscal 1996, and fiscal 1997 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 1997 -------------------------------------------------------------------------------------------- Fiscal Fiscal First Second Third Fourth 1995 1996 Quarter Quarter Quarter Quarter Year ------ ------ ------- ------- ------- ------- ---- Total (6%) (11%) (12%) (19%) (16%) (2%) (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 and less promotional activities than in prior years. Additionally the Company continues to experience an unstable credit environment, principally with third party factors, which results in periodic and occasionally significant constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities, and which management believes negatively impacted sales. Management believes that fiscal 1997 fourth quarter sales were positively impacted by the Company's ability to receive appropriate quantities of quality goods for the Christmas selling season. Trade credit support was improved over that experienced in the comparable period of fiscal 1996, and the Company was able to improve both sales and gross profit as a result. 18 19 LIQUIDITY AND CAPITAL RESOURCES Cash used by operating activities before reorganization items in fiscal 1997 was $2.5 million. The increased usage was primarily the result of the net loss. Capital expenditures were approximately $758,000 and consisted primarily of replenishment and refurbishment of existing equipment and facilities, a new POS register system at three of the Company's stores, new copy equipment for the advertising department, and upgrades in some computer equipment in the data processing department. The Company has a term note payable to Texas Commerce Bank ("TCB") which carries an interest rate of prime plus one-half percent and is due in equal monthly payments of principal and interest of $64,117 until January 1999, when the remaining principal balance of $4.5 million is due. The TCB note is secured by the Company's three owned store locations. These properties are currently subject to a contract for sale and leaseback, which, if completed is expected to result in the retirement of the TCB indebtedness. The Company also has a note payable to MetLife Capital Corporation (the "MetLife Note"), 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. The Company also had two mortgage notes payable, with identical terms (the "Mortgage Notes"), each of which was secured by the Company's corporate office and distribution center in San Antonio, Texas. The Mortgage Notes each carried an interest rate of 9.5% per annum and required aggregate monthly payments of principal and interest of $49,773 until December 2002, when the remaining aggregate principal balance of $5.4 million was to become due. Subsequent to January 31, 1998, the Company sold and leased back the distribution center and corporate office. The buyer, in turn, assumed the outstanding Mortgage Notes, which released the Company from any future liability on this indebtedness. (See Note 11.) On October 2, 1997, the Company replaced its previous revolving credit facility with a $12 million revolving credit facility with Sanwa Business Credit Corporation ("Sanwa"). The loan matures October 2, 2000. Principal will be due at maturity and interest only is due and payable in monthly installments. Under the loan agreement, the advance rate under the Sanwa credit facility is in an amount equal to 70% of the Company's eligible inventory during the period May 1 through December 10 of each year and 65% of eligible inventory at all other times. In addition to advances made based upon the percentage of eligible inventory, Sanwa made available an additional $750,000 upon receipt of a letter of credit in such amount from GAC, one of the Company's principal stockholders. In consideration for GAC's providing the $750,000 standby letter of credit to Sanwa, the Company granted GAC a second lien security interest (subordinated to Sanwa) on the assets of the Company pledged to Sanwa. Covenants under the loan agreement require the Company to maintain certain financial ratios. On March 17, 1998, the Company amended its loan agreement with Sanwa. The amendment waives compliance with the financial covenants at January 31, 1998, eliminates the Company's minimum net worth covenant entirely, and revises the interest coverage ratios for 1998. The amendment also increases the advance rate on the Company's eligible inventory from 65% to 70% from the date of the amendment through December 10, 1998 and provides an additional $600,000 available to borrow based upon a new $600,000 letter of credit in favor of Sanwa provided by GAC. The new $600,000 letter of credit, which is anticipated to terminate thirty days after consummation of the pending sale of the Company's three owned store locations, is in addition to the previously discussed $750,000 letter of credit provided by GAC, which is anticipated to terminate December 31, 1998. The letters of credit are secured by a second lien on substantially all of the assets of the Company other than real estate. On October 2, 1997, Charles M. Siegel, President and Chief Executive Officer of the Company, and a related family trust loaned the Company an aggregate amount of $500,000 (the Siegel Loan). The loan bears interest at a rate of prime plus 1%, and requires monthly payments of interest only for a period of five years, at which time the principal becomes due (October 31, 2002). The Siegel Loan is subordinate to the Sanwa credit facility and to repayment by the Company of any amounts advanced under the letter of credit issued by GAC. The Company may not repay any principal due under the Siegel Loan without Sanwa's prior consent and may make interest payments to Mr. Siegel only if there is no existing default by the Company under the Sanwa credit facility. In related transactions, Mr. Siegel purchased from GAC all of its common stock in the Company, and his employment contract with the Company was amended. In addition to the Sanwa 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 $900 thousand more at fiscal year end 1997 than at fiscal year end 1996 and accounts payable increased $3.3 million. 19 20 During the first quarter of fiscal 1998 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. Increased promotional activities by other retailers as well as the opening of additional store locations in the Company's principal markets have resulted in significant sales decreases. The Company has maintained inventory at planned levels; however, the Company has experienced, and continues to experience an unstable credit environment, principally with third party factors, which has from time to time resulted in constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities. 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. If initiatives implemented in 1997 and early 1998 are not successful in improving overall financial performance and meeting liquidity requirements, the Company would consider other alternatives, including, without limitation, implementation of additional measures designed to enhance capital and reduce expenses and/or additional debt or equity financings. 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 Financial Statements and Schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On September 18, 1997, primarily as a result of the closing of its San Antonio office, the Company dismissed Price Waterhouse LLP as its independent accountants as previously reported in the Company's Current Report on Form 8-K for that date. The dismissal was approved by the Audit Committee and the Company's Board of Directors. Price Waterhouse LLP's reports on the financial statements for the two most recent fiscal years did not contain an adverse opinion, disclaimer of opinion, qualification or modification as to uncertainty, audit scope or accounting principles, except that such reports included an explanatory paragraph expressing substantial doubt as to the Company's ability to continue as a going concern. Furthermore, during the two most recent fiscal years and through September 18, 1997, there were no disagreements with Price Waterhouse LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Price Waterhouse LLP, would have caused that firm to make reference to the subject matter of such disagreements in its reports on the financial statements for such years. On September 18, 1997, the Company appointed Ernst & Young LLP as its independent accountants. During the two most recent fiscal years and through September 18, 1997, the Company had not consulted with Ernst & Young LLP regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements. 20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Incorporated by reference to the Proxy Statement expected to be filed by the Company no later than May 30, 1998. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Proxy Statement expected to be filed by the Company no later than May 30, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Proxy Statement expected to be filed by the Company no later than May 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Proxy Statement expected to be filed by the Company no later than May 30, 1998. 21 22 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 Financial Statements and Schedule on page F-1 of this Report. Reports of Independent Accountants Balance Sheets Statements of Operations Statements of Changes in Stockholders' Equity (Deficit) Statements of Cash Flows Notes to Financial Statements (a)2. Financial Statement Schedule The following financial statement schedule is included following the Index to Financial Statements and Schedule on page F-1 of this Report. Report of Independent Accountants on Financial Statement Schedule X. Supplementary 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 financial statements or related notes thereto. 22 23 (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 - ------ ---------------------- 3.1 Restated Certificate of Incorporation of the Company (7) 3.2 Certificate of Designation of Rights and Preferences of Preferred Stock (7) 3.3 Bylaws of the Company, as amended and restated (14) 4.1 Specimen Certificate for Common Stock of the Registrant (representing shares of common stock of the Company after giving effect to the previously reported 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 Subscription Agreement between the Company and General Atlantic Corporation (7) 10.10 Solo Serve Corporation 1995 Stock Incentive Plan (8) + 10.11 Solo Serve Corporation Director Stock Option Plan (8) + 10.12 First Amendment to Solo Serve Corporation Director Stock Option Plan *+ 10.13 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (7) 10.14 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve Corporation and MetLife Capital Corporation (8) 10.15 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation, Nationwide Life Insurance Company, and Employers Life Insurance Company (8) 10.16 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) 10.17 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (9) 10.18 Consulting Services Agreement between the Company and Robert J. Grimm (10) + 10.19 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (11) 10.20 Letter Agreement dated January 23, 1996 by and between the Company and MetLife Capital Corporation modifying the Loan and Security Agreement between the Company and MetLife Capital Corporation, as amended on July 18, 1995 (11) 10.21 Amendment No. 3 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 26, 1996 (12) 10.22 Letter of Credit and Security Agreement between Solo Serve Corporation and General Atlantic Corporation dated as of June 26, 1996 (12) 10.23 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) 10.24 Consulting Agreement between the Company and Charles Siegel (13) + 23 24 10.25 Employment Agreement between the Company and Charles Siegel (13) + 10.26 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) 10.27 Amendment No. 5 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated as of March 31, 1997 (14) 10.28 Letter Agreement dated March 28, 1997 by and between the Company and MetLife Capital Corporation modifying the Loan and Security Agreement between the Company and MetLife Capital Corporation, as amended on July 18, 1995 (14) 10.29 Letter Agreement dated July 8, 1996 by and between the Company and Ross E. Bacon (14)+ 10.30 Amendment No. 6 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated as of May 19, 1997 (14) 10.31 Agency Agreement by and between Solo Serve Corporation and Hilco/Great American Group dated May 7, 1997, as amended together with related agreements (15) 10.32 Amendment No. 7 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 16, 1997 (15) 10.33 Standby Guarantee and Indemnification Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 16, 1997 (15) 10.34 Commitment Letter of Sanwa Business Credit Corporation dated September 8, 1997 (16) 10.35 Letter of Price Waterhouse LLP dated September 18, 1997 (17) 10.36 Loan and Security Agreement by and between the Company and Sanwa Business Credit Corporation (18) 10.37 Employment Agreement by and between the Company and Charles M. Siegel (18)+ 10.38 Subordinated Promissory Note of the Company to Charles Siegel in Principal Amount of $400,000 (18) 10.39 Subordinated Promissory Note of the Company to The Siegel Family Trust in Principal Amount of $100,000 (18) 10.40 Letter of Credit and Security Agreement by and between the Company and General Atlantic Corporation (18) 10.41 Subordination and Intercreditor Agreement by and among the Company, Sanwa Business Credit Corporation, and General Atlantic Corporation (18) 10.42 Subordination and Intercreditor Agreement by and among the Company, Sanwa Business Credit Corporation, Charles M. Siegel, and The Siegel Family Trust (18) 10.43 First Amendment to Loan and Security Agreement by and between the Company and Sanwa Business Credit Corporation (19) 10.44 Amended and Restated Letter of Credit and Security Agreement by and between the Company and General Atlantic Corporation (19) 10.45 Stockholder Agreement (19) 10.46 Employment Agreement between the Company and Ross Bacon (19)+ 10.47 Employment Agreement between the Company and Mark Blankenship (19)+ 10.48 Employment Agreement between the Company and Terry Lalosh (19)+ 10.49 Lease Agreement between the Company and Koontz/McCombs 1, Ltd.* 10.50 Earnest Money Contract between the Company and Koontz/McCombs, LLC* 10.51 Escrow and Security Agreement by and among the Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wasuau, Koontz/McCombs 1, Ltd. and Holliday Fenoglio Fowler, L.P.* 10.52 Assumption Agreement by and among the Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wasuau, Koontz/McCombs 1, Ltd., Koontz/McCombs, LLC and Bart C. Koontz* 21.1 Subsidiaries of the Registrant (14) 23.1 Consent of Independent Accountants * 23.2 Consent of Independent Accountants * 27 Financial Data Schedule * -------------- * Filed herewith. + Management Compensatory Plan or Arrangement 24 25 (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. (14) Incorporated by reference to the Exhibits filed to the Company's Annual Report on Form 10-K for the Fiscal Year ended February 1, 1997. (15) Incorporated by reference to the Exhibits filed to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 3, 1997. (16) Incorporated by reference to the Exhibits filed to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 2, 1997. (17) Incorporated by reference to the Exhibits filed on the Company's Current Report on Form 8-K for September 18, 1997. (18) Incorporated by reference to the Exhibits filed to the Company's Current Report on Form 8-K for October 2, 1997. (19) Incorporated by reference to the Exhibits filed to the Company's Current Report on Form 8-K for March 17, 1998. (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: 25 26 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 ------------------------------------------------ Charles M. Siegel President and Chief Executive Officer By: /s/ Ross E. Bacon ------------------------------------------------ Ross E. Bacon, Executive Vice President and Chief Operating and Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) DATED: May 1, 1998 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 1, 1998 - ----------------------------- Officer, Director Charles M. Siegel /s/ Ross E. Bacon Executive Vice President and May 1, 1998 - ----------------------------- 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 1, 1998 - ----------------------------- Robert J. Grimm /s/ Stephen P. Reynolds Director May 1, 1998 - ----------------------------- Stephen P. Reynolds /s/ John C. Seiler Director May 1, 1998 - ----------------------------- John C. Seiler /s/ Walter H. Teninga Director May 1, 1998 - ----------------------------- Walter H. Teninga
26 27 SOLO SERVE CORPORATION INDEX TO FINANCIAL STATEMENTS AND SCHEDULES As of January 31, 1998 and for the 3 years ended February 3, 1996, February 1, 1997 and January 31, 1998 Reports of Independent Auditors.............................................................. F-2 Balance Sheets............................................................................... F-3 Statements of Operations..................................................................... F-4 Statements of Changes in Stockholders' Equity (Deficit)...................................... F-5 Statements of Cash Flows..................................................................... F-6 Notes to Financial Statements................................................................ F-7 Financial Statement Schedule Reports of Independent Auditors on Financial Statement Schedule.............................. S-1 Schedule X - Supplementary Statements of Operations Information.............................. S-3
Schedules not included above have been omitted because they are not applicable or the required information is shown in the financial statements or related notes. F-1 28 Report of Independent Auditors Board of Directors and Stockholders Solo Serve Corporation We have audited the accompanying balance sheet of Solo Serve Corporation as of January 31, 1998, and the related statements of operations, changes in stockholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Solo Serve Corporation at January 31, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern. As more fully described in Note 1, the Corporation'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 Corporation's recurring operating losses since the effective date of the Plan of Reorganization raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to future operations are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Ernst & Young LLP April 10, 1998 F-2 29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Solo Serve Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respect, the financial position of Solo Serve Corporation and its subsidiary (the Company) at February 1, 1997, and the results of their operations and their cash flows for each of the two 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 its 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-2A 30 SOLO SERVE CORPORATION BALANCE SHEETS ITEM 1. Financial Statements
ASSETS FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ----------------- CURRENT ASSETS: Cash $ 1,065,564 $ 1,042,357 Inventory 11,107,938 12,030,628 Other current assets 988,469 1,412,914 ------------ ------------ Total current assets 13,161,971 14,485,899 Property and equipment, net 12,935,322 11,897,807 Goodwill, net 290,000 -- ------------ ------------ TOTAL ASSETS $ 26,387,293 $ 26,383,706 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable $ 3,983,898 $ 7,295,493 Accrued expenses 2,339,615 2,329,506 Current portion of long-term debt 770,602 5,140,895 ------------ ------------ Total current liabilities 7,094,115 14,765,894 Long-term debt 14,960,600 13,340,959 Note payable to stockholder -- 500,000 Commitments and contingencies -- -- ------------ ------------ TOTAL LIABILITIES 22,054,715 28,606,853 ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock, $.01 par value, 2,000,000 shares authorized, 1,388,869 shares issued and outstanding at February 1, 1997 and January 31, 1998 13,889 13,889 Common stock, $.01 par value; 8,000,000 shares authorized, 2,856,126 shares issued and outstanding at February 1, 1997 and January 31, 1998 28,562 28,562 Capital in excess of par value 24,410,290 24,410,290 Retained earnings (deficit) (20,120,163) (26,675,888) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 4,332,578 (2,223,147) ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 26,387,293 $ 26,383,706 ============ ============
The accompanying notes are an integral part of these financial statements. F-3 31 SOLO SERVE CORPORATION STATEMENTS OF OPERATIONS
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996 FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ---------------- ---------------- Number of weeks in fiscal year 53 52 52 ---------------- ---------------- ---------------- Net revenues $ 109,823,364 $ 95,237,689 $ 82,045,778 Cost of goods sold (including buying and distribution, excluding depreciation shown below) 83,474,450 67,484,703 57,302,606 ------------- ------------- ------------- Gross profit 26,348,914 27,752,986 24,743,172 Selling, general, and administrative expense 29,620,266 28,203,345 26,414,436 Depreciation and amortization expense 2,815,024 2,420,868 2,062,041 Store closure expense -- -- 622,224 Write down of property and equipment -- 525,000 -- Non-recurring charge -- 464,000 -- ------------- ------------- ------------- Operating loss (6,086,376) (3,860,227) (4,355,529) Interest expense, (contractual interest of $1,791,412 for the 53 weeks ended February 3, 1996) 1,129,346 1,624,320 1,933,853 ------------- ------------- ------------- Loss before reorganization items, income taxes and extraordinary items (7,215,722) (5,484,547) (6,289,382) ------------- ------------- ------------- Reorganization Items: Loss on disposal of stores 553,222 -- -- Provision for other reorganization expenses 1,421,754 -- -- Interest earned on accumulated cash resulting from Chapter 11 proceedings (188,283) -- -- ------------- ------------- ------------- 1,786,693 -- -- ------------- ------------- ------------- Loss before income taxes and extraordinary items (9,002,415) (5,484,547) (6,289,382) ------------- ------------- ------------- Provision for (benefit from) income taxes: Deferred (1,418,200) -- -- ------------- ------------- ------------- (1,418,200) -- -- ------------- ------------- ------------- Loss before extraordinary items (7,584,215) (5,484,547) (6,289,382) Extraordinary items: Gain on discharge of debt (net of tax effect of ($1,418,200) 2,752,975 -- -- -- -- (266,343) Loss on early retirement of debt (net of tax effect) ------------- ------------- ------------- Net loss $ (4,831,240) $ (5,484,547) $ (6,555,725) ============= ============= ============= Loss per common share before extraordinary item $ (2.10) $ (1.92) $ (2.20) ============= ============= ============= Extraordinary gain (loss) per common share $ 0.76 -- $ (0.10) ============= ============= ============= Net loss per common share (basic and diluted) $ (1.34) $ (1.92) $ (2.30) ============= ============= ============= Weighted average common shares outstanding 3,604,853 2,856,126 2,856,126 ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-4 32 SOLO SERVE CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock Preferred Common Stock Preferred Common Capital in Capital in Stock Shares Shares Stock $.01 Stock $.01 Excess of Excess of Outstanding Outstanding par value par value par value par value ------------ ------------- ---------- ---------- ---------- ------------ 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 --------- --------- ------- ------- ---------- ------------ Net Loss ========= ========= ======= ======= ========== ============ Balance at January 31, 1998 1,388,889 2,856,126 $13,889 $28,562 $2,486,111 $ 21,924,179 ========= ========= ======= ======= ========== ============
Retained Earnings (Deficit) Total ---------- ----------- 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 ------------ ---------- Net Loss (6,555,725) (6,555,725) ============ =========== Balance at January 31, 1998 $(26,675,888) $(2,223,147) ============ ===========
The accompanying notes are an integral part of these financial statements. F-5 33 SOLO SERVE CORPORATION STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996 FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) before extraordinary items $ (4,831,239) $ (5,484,547) $ (6,289,382) Extraordinary Items 2,752,975 -- (266,343) ------------- ------------- ------------- Net loss (7,584,214) (5,484,547) (6,555,725) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH Depreciation 2,694,492 2,300,868 1,772,041 Amortization of intangibles 120,532 120,000 290,000 Loss on retirement and write down of leasehold improvements 208,070 652,573 23,770 and property and equipment Changes in assets and liabilities (Increase) decrease in inventories 738,648 3,102,242 (922,690) (Increase) decrease in other current assets 181,519 1,285,161 (424,445) (Increase) decrease in non-current receivables 1,662,935 -- -- Decrease (increase) in long-term deferred income taxes (1,418,200) -- -- Increase (decrease) in accounts payable (1,652,125) 557,077 3,311,595 (Decrease) increase in accrued expenses (606,607) (870,395) (10,109) (Decrease) increase in long-term postretirement benefit 63,900 (565,200) -- obligation ------------- ------------- ------------- Total adjustments 1,993,164 6,582,326 4,040,162 ------------- ------------- ------------- Net cash provided by (used in) operating activities before reorganization items (5,591,050) 1,097,779 (2,515,563) OPERATING CASH FLOWS FROM REORGANIZATION ITEMS: Payments made on reorganization costs (1,185,823) -- -- Non cash items from reorganization (1,132,424) (460,612) -- Loss on disposal of stores 553,222 -- -- Provision for other reorganization expenses 257,139 -- -- ------------- ------------- ------------- Net cash provided by (used in) operating activities (7,098,936) 637,167 (2,515,563) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (877,402) (254,494) (758,296) ------------- ------------- ------------- Net cash provided by (used in) investing activities (877,402) (254,494) (758,296) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under long-term debt 25,067,240 103,367,509 90,527,193 Payments under long-term debt (21,969,755) (103,456,145) (87,776,541) Borrowings from stockholder -- -- 500,000 ------------- ------------- ------------- Net cash provided by (used in) finance activities before 3,097,485 (88,636) 3,250,652 reorganization items FINANCING CASH FLOWS FROM REORGANIZATION ITEMS: Distributions to claimants under plan of reorganization (13,933,177) -- -- Sale of preferred stock 2,500,000 -- -- ------------- ------------- ------------- Net cash provided by (used in) financing activities (8,335,692) (88,636) 3,250,652 ------------- ------------- ------------- Net increase (decrease) in cash (16,312,030) 294,037 (23,207) Cash at beginning of year 17,083,557 771,527 1,065,564 ------------- ------------- ------------- Cash at end of year $ 771,527 $ 1,065,564 $ 1,042,357 ============= ============= ============= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,116,300 $ 1,579,691 $ 1,826,707
The accompanying notes are an integral part of these financial statements. F-6 34 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: 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 and Louisiana. The Company has a 52/53 week fiscal year ending on the Saturday closest to January 31. 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. INVENTORY Inventory is 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. 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 expense over the first twelve months of operations. REVENUE RECOGNITION The Company recognizes revenue as merchandise is sold. LAYAWAY SALES Layaway sales are recognized in full when the layaway deposit is received, and the unpaid balance is recorded as accounts receivable. Cancellations result in a decrease in recorded sales and cost of sales. Cancellation 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. ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising expense for the fiscal years 1995, 1996 and 1997 was $3,742,000, $2,978,000 and $2,652,000, respectively. F-7 35 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) EARNINGS PER SHARE The computation of basic and diluted 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 7). REORGANIZATION AND MANAGEMENT'S PLANS On July 21, 1994, the Company filed a petition 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. 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 shares of Preferred Stock was purchased by General Atlantic Corporation ("GAC"), the Company's largest stockholder. On April 17, 1996, the Bankruptcy Court entered the Final Decree, which administratively closed Solo Serve's Chapter 11 bankruptcy case. Pursuant to the Plan, the Company's existing common stock was subject to a one-for-two reverse split. The shares of Preferred Stock issued in connection with the Plan have a liquidation value of $1.80 per share, are convertible to an equal number of shares of Common Stock, have voting rights on an as converted basis, and are entitled to no preferential dividends. With the issuance of shares of Preferred Stock mentioned above, GAC increased its percentage ownership of the voting shares of the Company to approximately 62% from its pre-reorganization interest of approximately 44%. In October 1997 and March 1998 certain members of Company management (the "Management Holders") acquired a total of 1,964,686 shares of the Company's Common Stock from GAC. This represented all of GAC's shares of Common Stock and 709,686 of its shares of Preferred Stock which were converted to shares of Common Stock. GAC continues to own 679,203 shares of the Company's Preferred Stock, which represents approximately 16% of the aggregate voting stock of Solo Serve and all of the Company's issued and outstanding shares of Preferred Stock. Currently the Company has a significant net operating loss carryforward. Under applicable law and regulations, the Company's ability to utilize its net operating loss carryforward to offset future earnings could be severely limited if the Company experiences an ownership change as defined in Section 382 of the Internal Revenue Code of 1986. The above mentioned equity infusion by GAC and stock acquisition by the Management Holders have not caused an ownership change as defined in Section 382. However, the Company's ability to utilize its net operating loss carryforward could be adversely affected if a purchaser were to acquire five percent (5%) or more of the Company's stock. The Management Holders and GAC have entered into a Stockholders Agreement which provides that no party thereto will sell, exchange, transfer or otherwise dispose of shares of the Company's Common Stock or Preferred Stock owned by such stockholder without the prior written consent of the other parties thereto and no party will exercise incentive stock options or other rights to acquire capital stock or will otherwise acquire capital stock of the Company without the prior written consent of the others. The Stockholders Agreement provides that the certificates representing shares of capital stock of the Company currently held by the parties, as well as any additional shares issued to the parties, shall each bear a legend evidencing the existence of the Stockholders Agreement and the restrictions upon transfer contained therein. The Stockholders Agreement terminates on March 17, 2001 unless terminated earlier or extended by agreement of all parties. 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. Increased promotional activities by other retailers as well as the opening of additional store locations in the Company's principal markets have resulted in significant sales decreases. The Company has maintained inventory at planned levels; however, the Company has experienced and continues to experience an unstable credit environment, principally with third party factors, which has from time to time resulted in constraints on the Company's ability to receive certain merchandise at optimum times and in optimum quantities. Continuing unfavorable business conditions and financial performance could heighten vendor and factor concern F-8 36 regarding the Company's creditworthiness, which could adversely affect the Company's ability to receive sufficient trade credit support to acquire adequate levels of inventory in the future. In response to these conditions, management restructured its lending arrangements, opened stores in markets smaller than it has traditionally served, and entered into contracts to sell and leaseback all of its owned properties. If current plans to improve overall financial performance and meet liquidity requirements are not successful, the Company would consider other alternatives designed to enhance liquidity, including additional debt or equity financings, or other strategic alternatives NOTE 2 - PROPERTY AND EQUIPMENT: Property and equipment stated at cost is comprised of:
ESTIMATED USEFUL LIFE FEBRUARY 1, 1997 JANUARY 31, 1998 ------------------------ ---------------- ---------------- Land $ 2,006,031 $ 2,006,031 Furniture, fixtures and equipment 3-10 17,306,704 17,662,200 Leasehold improvements 10-15 4,541,925 4,831,406 Buildings 20-40 8,683,897 8,683,897 ------------- --------------- 32,538,557 33,183,534 Less accumulated depreciation 19,603,235 21,285,727 ============= =============== $ 12,935,322 $ 11,897,807 ============= ===============
During the second quarter of 1995, the Company closed its store in Montgomery, Alabama and recorded a loss on the disposal of approximately $553,000, which is included in reorganization items. During the second quarter of fiscal 1997, the Company closed two stores and during the fourth quarter closed a third, all in Louisiana. This resulted in a charge of approximately $622,000 to store closure expense for inventory adjustments, and lease terminations related to these stores. In fiscal 1996, based on the revised cash flow estimates from these three locations, the Company recorded a $525,000 write-down of the net book value of leasehold improvements and fixtures and equipment associated with these locations. F-9 37 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 3 - ACCRUED EXPENSES: Accrued expenses are comprised of:
FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ----------------- Accrued rent $ 756,471 $ 703,224 Accrued sales and property taxes 534,612 526,311 Voluntary benefits 217,078 105,500 Employee benefits 372,213 -- Incentive compensation 20,390 52,561 Layaway escrow 21,621 36,532 Reserve for store closing -- 290,097 Other 417,230 615,281 ========== ========== $2,339,615 $2,329,506 ========== ==========
NOTE 4 - LONG-TERM DEBT: Long-term debt consists of the following:
FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ---------------- Notes payable to bank, interest at prime plus 1/2% (9.0% at January 31, 1998) secured by properties $ 5,131,406 $ 4,808,716 Note payable to insurance company, interest at 8.0%; secured by equipment and properties 654,132 272,127 Mortgage notes payable to insurance companies, interest at 9.5%; secured by the distribution center 5,760,664 5,706,011 Revolving credit facility, interest at prime plus 1% (9.5% at January 31, 1998); secured primarily by inventory 4,185,000 7,695,000 ----------- ----------- 15,731,202 18,481,854 Less current portion 770,602 5,140,895 ----------- ----------- Long-term portion $14,960,600 $13,340,959 =========== ===========
The Company has a term note payable to Texas Commerce Bank ("TCB") due in equal monthly payments of principal and interest of $64,117 until January 1999, when the remaining principal balance of $4.5 million is due. The TCB note is secured by the Company's three owned store locations. These properties are currently subject to a contract for sale and leaseback, which, if completed is expected to result in the retirement of the TCB indebtedness. The Company also has a note payable to MetLife Capital Corporation (the "MetLife Note"), which is secured by various equipment and fixtures located at the corporate office and certain stores. The MetLife Note requires equal monthly payments, including principal and interest, of $35,044 until September 1998. The Company also has two mortgage notes payable, with identical terms (the "Mortgage Notes"), each of which is secured by the Company's corporate office and distribution center in San Antonio, Texas. The Mortgage Notes require aggregate monthly payments of principal and interest of $49,773 until December 2002, when the remaining aggregate principal balance of $5.4 million is due. Subsequent to January 31, 1998, the Company sold and leased back the distribution center and corporate office. The buyer, in turn, assumed the outstanding Mortgage Notes, which released the Company from any future liability on this indebtedness. (See Note 11.) On October 2, 1997, the Company replaced its previous revolving credit facility with a $12 million revolving credit facility with Sanwa Business Credit Corporation ("Sanwa"). The loan matures October 2, 2000. Principal will be due at maturity and interest only is due and payable in monthly installments. F-10 38 Under the loan agreement, the advance rate under the Sanwa credit facility is in an amount equal to 70% of the Company's eligible inventory during the period May 1 through December 10 of each year and 65% of eligible inventory at all other times. In addition to advances made based upon the percentage of eligible inventory, Sanwa made available an additional $750,000 upon receipt of a letter of credit in such amount from GAC, one of the Company's principal stockholders. In consideration for GAC's providing the $750,000 standby letter of credit to Sanwa, the Company granted GAC a second lien security interest (subordinated to Sanwa) on the assets of the Company pledged to Sanwa. Covenants under the loan agreement require the Company to maintain certain financial ratios. On March 17, 1998, the Company amended its loan agreement with Sanwa. The amendment waives compliance with the financial covenants at January 31, 1998, eliminates the Company's minimum net worth covenant entirely, and revises the interest coverage ratios for 1998. If the Company fails to meet the revised interest coverage ratio, the entire balance due under the loan agreement would be reclassified as a current liability. The amendment also increases the advance rate on the Company's eligible inventory from 65% to 70% from the date of the amendment through December 10, 1998 and provides an additional $600,000 available to borrow based upon a new $600,000 letter of credit in favor of Sanwa provided by GAC. The new $600,000 letter of credit, which is anticipated to terminate thirty days after consummation of the pending sale of the Company's three owned store locations, is in addition to the previously discussed $750,000 letter of credit provided by GAC, which is anticipated to terminate December 31, 1998. The letters of credit are secured by a second lien on substantially all of the assets of the Company other than real estate. On October 2, 1997, Charles M. Siegel, President and Chief Executive Officer of the Company, and a related family trust loaned the Company an aggregate amount of $500,000 (the Siegel Loan). The loan bears interest at a rate of prime plus 1%, and requires monthly payments of interest only for a period of five years, at which time the principal becomes due (October 31, 2002). The Siegel Loan is subordinate to the Sanwa credit facility and to repayment by the Company of any amounts advanced under the letter of credit issued by GAC. The Company may not repay any principal due under the Siegel Loan without Sanwa's prior consent and may make interest payments to Mr. Siegel only if there is no existing default by the Company under the Sanwa credit facility. In related transactions, Mr. Siegel purchased from GAC all of its common stock in the Company, and his employment contract with the Company was amended. The Company has issued an unused $75,000 Letter of Credit in favor of Liberty Mutual Insurance Company. Future maturities of long-term debt by fiscal year are as follows:
Fiscal ------ 1998 5,140,895 1999 65,986 2000 7,767,507 2001 79,671 2002 5,427,795 ----------- $18,481,854 ===========
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 $18.5 million at January 31, 1998, including amounts payable within one year. F-11 39 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 5 - NON-RECURRING CHARGE: The Company recognized and recorded an unanticipated and non-recurring charge of $464,000 in 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. During fiscal 1997 the claim was resolved and the Company's liability discharged. Effective January 1, 1997, the Company purchased fully insured coverage for medical and workers' compensation insurance. NOTE 6 - 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 1995 FISCAL 1996 FISCAL 1997 ----------- ----------- ------------ Tax benefit at statutory federal rate $(1,642,307) $(1,864,746) $(2,138,390) Other 573,952 47,175 74,215 Increase in state net operating loss carryovers (241,099) (64,263) (197,443) Valuation allowance for net deferred asset 1,309,454 1,881,834 2,261,618 =========== =========== =========== $ 0 $ 0 $ 0 =========== =========== ===========
The approximate tax effect of temporary differences that give rise to deferred tax assets (liabilities) is as follows:
FEBRUARY 1, 1997 JANUARY 31, 1998 ---------------- ----------------- Markdowns $ 276,239 $ 260,554 Uniform inventory capitalization 343,710 309,710 Voluntary benefits accrual 73,807 35,870 Medical benefits accrual 126,552 -- Accrued rent 257,199 239,095 Layaway sales (22,782) (22,472) Difference in book and tax basis of property and equipment 611,690 873,628 Difference in book and tax basis of building 1,168,482 1,168,482 Store closing reserve -- 98,633 Net operating loss carryover 8,015,698 9,949,889 General business credit carryover (expiring during the years 1996-2000) 356,638 356,638 Alternative minimum tax carryover 100,131 97,860 State net operating loss carryover 797,626 995,069 Other, net (82,117) (78,465) ------------ ------------ Total net tax assets 12,022,873 14,284,491 Valuation allowance (12,022,873) (14,284,491) ============ ============ Deferred tax asset $ 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 1995, 1996 and 1997, the Company recorded an additional valuation allowance of $1,309,454, $1,881,834 and $2,261,618, respectively for deferred tax assets generated in those years. The Company's net operating loss carryforward of approximately $29.5 million expires in the years 2008-2012. F-12 40 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 7 - STOCK OPTION PLAN: The Company has a stock option plan for certain key employees. The following table summarizes option activity for fiscal years 1995, 1996 and 1997:
Weighted Average Exercise Stock Options Shares Price - ------------- ------ -------- 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 January 31, 1997 361,000 $0.69 Granted -- -- Canceled (21,000) .25 Exercised -- -------- ----- Outstanding January 31, 1998 260,000 $0.69 ======== =====
At February 3, 1996, February 1, 1997, and January 31, 1998 exercisable stock options totaled 56,799; 176,500; and 300,334 shares and had weighted average exercise prices of $1.61, $0.69, 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. No new options were granted during fiscal 1997. On the effective date of the Plan, 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. The outstanding options are exercisable as follows: 141,000 in 1996; 95,334 in 1997; 20,333 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. On June 17, 1997 the Directors' options were repriced at $.1875. 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 eight 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. 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, $151,045 and $35,071 in fiscal 1995, 1996 and 1997, respectively, and pro forma net loss and loss per share would have been as follows: F-13 41 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 7 - STOCK OPTION PLAN: (CONTINUED)
FISCAL 1995 1996 1997 ---- ---- ---- Pro forma net loss $(4,916,346) $(5,635,592) $(6,590,796) Pro forma net loss per share, basic and diluted $(1.36) $(1.97) $(2.31)
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 the Black-Scholes option pricing model with the following weighted-average assumptions:
YEAR ENDED ------------------------------------------------ FEBRUARY 3, FEBRUARY 1, JANUARY 31, 1996 1997 1998 ----------- ----------- ----------- Assumptions used in determining the fair value of options granted: Expected volatility 2.63 2.63 1.72 Expected dividend yield - - - Expected life (term) 6 years 6 years 6 years Risk-free interest rate 5.29% 5.40% 6.50%
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 8 - 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 year 1995, the Company's contributions totaled $45,775. No contribution was made during fiscal 1996 or fiscal 1997. F-14 42 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 9 - COMMITMENTS AND CONTINGENCIES: The Company has operating leases for most of its retail store facilities. Rental expense for the years ended February 3, 1996, February 1, 1997 and January 31, 1998 amounted to $4,169,183, $4,080,767 and $4,128,871 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 six of the Company's stores. The following table summarizes payment under these leases:
NET FUTURE FUTURE MINIMUM SUBLEASE MINIMUM FISCAL LEASE PAYMENTS INCOME LEASE PAYMENT -------------- ----------- ----------- 1998 4,338,164 108,000 4,230,164 1999 3,833,611 63,000 3,770,611 2000 3,326,718 -- 3,326,718 2001 2,514,975 -- 2,514,975 2002 2,192,399 -- 2,192,399 AFTER 5,497,877 -- 5,497,877 =========== =========== =========== $21,703,744 $ 171,000 $21,532,744 =========== =========== ===========
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 February 3, 1996, February 1, 1997, and January 31, 1998 the Company paid nothing under additional rental agreements. The Company has an employment contract with its chief executive officer and president that provides for compensation arrangements. Subsequent to January 31, 1998, the Company entered into employment agreements with each of Messrs. Bacon, Lalosh and Blankenship which also provide for compensation arrangements. 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 financial statements of the Company. F-15 43 SOLO SERVE CORPORATION NOTES TO FINANCIAL STATEMENTS - (CONTINUED) NOTE 10 - CALCULATION OF BASIC AND DILUTED EARNINGS PER SHARE: The following table sets forth the computation of basic and diluted earnings per share:
FOR THE FISCAL YEAR ENDED ------------------------------------------------- FEBRUARY 3, FEBRUARY 1, JANUARY 31, 1996 1997 1998 ------------- ----------- ------------- NUMERATOR Income (loss) before extraordinary item $ (7,584,215) $(5,484,547) $ (6,289,382) Extraordinary item 2,752,975 -- 266,343 ------------- ----------- ------------- Numerator for basic earnings (loss)per share- income available to common stock holders (4,831,240) (5,484,547) (6,555,725) Effect of dilutive securities -- -- -- ------------- ----------- ------------- Numerator for diluted earnings (loss) per share- income available to common stockholders after assumed conversions (4,831,240) (5,484,547) (6,555,725) ============= =========== ============= DENOMINATOR: Denominator for basic earnings (loss) per share weighted-average shares 3,604,853 2,856,126 2,856,126 Effect of dilutive securities Employee stock options -- -- -- ------------- ----------- ------------- Denominator for diluted earnings (loss) per share- adjusted weighted-average shares, no assumed dilutions due to losses 3,604,853 2,856,126 2,856,126 ============= =========== ============= Basic earnings (loss) per common share: Loss before extraordinary item $ (2.10) $ (1.92) $ (2.20) Extraordinary item $ 0.76 -- $ (0.10) Net loss $ (1.34) $ (1.92) $ (2.30) Diluted earnings (loss) per common share: Loss before extraordinary item $ (2.10) $ (1.92) $ (2.20) Extraordinary item $ 0.76 -- $ (0.10) Net loss $ (1.34) $ (1.92) $ (2.30)
NOTE 11 - EVENTS SUBSEQUENT TO YEAR END: On April 6, 1998, the Company sold and leased back its 440,000 square foot distribution center and corporate office in San Antonio, Texas. The buyer assumed the outstanding mortgage notes, and the Company realized approximately $1 million in cash, net of selling costs, debt assumption; and deposits. The Company has signed a 10 year lease for the property, and will continue to occupy the facility. In addition, each of three members of senior management acquired 236,562 shares of the Company's common stock from GAC, which shares GAC received upon conversion of an equal number of shares of the Company's preferred stock. Also, the Company's chief executive officer transferred to each of these three members of senior management, 80,000 shares of common stock. F-16 44 Report of Independent Auditors Board of Directors Solo Serve Corporation We have audited the financial statements of Solo Serve Corporation as of January 31, 1998, and for the year then ended, and have issued our report thereon dated April 10, 1998. Our audit also included the financial statement schedule listed in the Index at Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP San Antonio, Texas April 10, 1998 S-1 45 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-2A 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-3). In our opinion, this Financial Statement Schedule presents fairly, in all material respects, for each of the two years in the period ended February 1, 1997, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP San Antonio, Texas May 14, 1997 S-2 46 SCHEDULE X SOLO SERVE CORPORATION SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION
FISCAL 1995 FISCAL 1996 FISCAL 1997 ----------- ----------- ----------- Maintenance and repairs $1,184,744 $1,155,092 $1,017,652 ========== ========== ========== Depreciation of owned assets 2,141,933 1,841,329 1,372,824 Amortization of leasehold improvements 552,559 459,539 399,217 Amortization of intangibles 120,532 120,000 290,000 ---------- ---------- ---------- Total $2,815,024 $2,420,868 $2,062,041 ========== ========== ========== Advertising Costs $3,742,498 $2,978,114 $2,651,516 ========== ========== ==========
S-3 47 EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------ ---------------------- 3.1 Restated Certificate of Incorporation of the Company (7) 3.2 Certificate of Designation of Rights and Preferences of Preferred Stock (7) 3.3 Bylaws of the Company, as amended and restated (14) 4.1 Specimen Certificate for Common Stock of the Registrant (representing shares of common stock of the Company after giving effect to the previously reported 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 Subscription Agreement between the Company and General Atlantic Corporation (7) 10.10 Solo Serve Corporation 1995 Stock Incentive Plan (8) + 10.11 Solo Serve Corporation Director Stock Option Plan (8) + 10.12 First Amendment to Solo Serve Corporation Director Stock Option Plan *+ 10.13 Loan and Security Agreement, dated as of June 20, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (7) 10.14 Amended Loan and Security Agreement, dated July 18, 1995, by and between Solo Serve Corporation and MetLife Capital Corporation (8) 10.15 Loan Modification Agreement, dated July 18, 1995, by and among Solo Serve Corporation, Nationwide Life Insurance Company, and Employers Life Insurance Company (8) 10.16 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) 10.17 Loan Modification Agreement, dated October 27, 1995, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (9) 10.18 Consulting Services Agreement between the Company and Robert J. Grimm (10) + 10.19 Second Amendment to Loan and Security Agreement, dated January 31, 1996, by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) (11) 10.20 Letter Agreement dated January 23, 1996 by and between the Company and MetLife Capital Corporation modifying the Loan and Security Agreement between the Company and MetLife Capital Corporation, as amended on July 18, 1995 (11) 10.21 Amendment No. 3 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 26, 1996 (12) 10.22 Letter of Credit and Security Agreement between Solo Serve Corporation and General Atlantic Corporation dated as of June 26, 1996 (12) 10.23 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) 10.24 Consulting Agreement between the Company and Charles Siegel (13) +
48 10.25 Employment Agreement between the Company and Charles Siegel (13) + 10.26 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) 10.27 Amendment No. 5 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated as of March 31, 1997 (14) 10.28 Letter Agreement dated March 28, 1997 by and between the Company and MetLife Capital Corporation modifying the Loan and Security Agreement between the Company and MetLife Capital Corporation, as amended on July 18, 1995 (14) 10.29 Letter Agreement dated July 8, 1996 by and between the Company and Ross E. Bacon (14)+ 10.30 Amendment No. 6 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated as of May 19, 1997 (14) 10.31 Agency Agreement by and between Solo Serve Corporation and Hilco/Great American Group dated May 7, 1997, as amended together with related agreements (15) 10.32 Amendment No. 7 to Loan and Security Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 16, 1997 (15) 10.33 Standby Guarantee and Indemnification Agreement by and between Solo Serve Corporation and Congress Financial Corporation (Southwest) dated June 16, 1997 (15) 10.34 Commitment Letter of Sanwa Business Credit Corporation dated September 8, 1997 (16) 10.35 Letter of Price Waterhouse LLP dated September 18, 1997 (17) 10.36 Loan and Security Agreement by and between the Company and Sanwa Business Credit Corporation (18) 10.37 Employment Agreement by and between the Company and Charles M. Siegel (18)+ 10.38 Subordinated Promissory Note of the Company to Charles Siegel in Principal Amount of $400,000 (18) 10.39 Subordinated Promissory Note of the Company to The Siegel Family Trust in Principal Amount of $100,000 (18) 10.40 Letter of Credit and Security Agreement by and between the Company and General Atlantic Corporation (18) 10.41 Subordination and Intercreditor Agreement by and among the Company, Sanwa Business Credit Corporation, and General Atlantic Corporation (18) 10.42 Subordination and Intercreditor Agreement by and among the Company, Sanwa Business Credit Corporation, Charles M. Siegel, and The Siegel Family Trust (18) 10.43 First Amendment to Loan and Security Agreement by and between the Company and Sanwa Business Credit Corporation (19) 10.44 Amended and Restated Letter of Credit and Security Agreement by and between the Company and General Atlantic Corporation (19) 10.45 Stockholder Agreement (19) 10.46 Employment Agreement between the Company and Ross Bacon (19)+ 10.47 Employment Agreement between the Company and Mark Blankenship (19)+ 10.48 Employment Agreement between the Company and Terry Lalosh (19)+ 10.49 Lease Agreement between the Company and Koontz/McCombs 1, Ltd.* 10.50 Earnest Money Contract between the Company and Koontz/McCombs, LLC* 10.51 Escrow and Security Agreement by and among the Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wasuau, Koontz/McCombs 1, Ltd. and Holliday Fenoglio Fowler, L.P.* 10.52 Assumption Agreement by and among the Company, Nationwide Life Insurance Company, Employers Life Insurance Company of Wasuau, Koontz/McCombs 1, Ltd., Koontz/McCombs, LLC and Bart C. Koontz* 21.1 Subsidiaries of the Registrant (14) 23.1 Consent of Independent Accountants * 23.2 Consent of Independent Accountants * 27 Financial Data Schedule *
-------------- * Filed herewith. + Management Compensatory Plan or Arrangement 49 (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. (14) Incorporated by reference to the Exhibits filed to the Company's Annual Report on Form 10-K for the Fiscal Year ended February 1, 1997. (15) Incorporated by reference to the Exhibits filed to the Company's Quarterly Report on Form 10-Q for the Quarter ended May 3, 1997. (16) Incorporated by reference to the Exhibits filed to the Company's Quarterly Report on Form 10-Q for the Quarter ended August 2, 1997. (17) Incorporated by reference to the Exhibits filed on the Company's Current Report on Form 8-K for September 18, 1997. (18) Incorporated by reference to the Exhibits filed to the Company's Current Report on Form 8-K for October 2, 1997. (19) Incorporated by reference to the Exhibits filed to the Company's Current Report on Form 8-K for March 17, 1998.
(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: EX-10.12 2 AMENDED CORPORATE STOCK OPTION PLAN 1 EXHIBIT 10.12 SOLO SERVE CORPORATION FIRST AMENDMENT TO DIRECTOR STOCK OPTION PLAN This Amendment to the Solo Serve Corporation Director Stock Option Plan is dated as of the 17th day of June, 1997. WITNESSETH: WHEREAS, Solo Serve Corporation, a Delaware Corporation (the "Company") has previously adopted a Solo Serve Corporation Director Stock Option Plan (the "Plan"); and Whereas, the Company desires to amend the Plan as set forth herein; NOW, THEREFORE, the Plan is hereby amended, effective as of the date hereof, as follows: 1. Section 6(b) of the Plan is hereby amended to read, in its entirety, as follows: On September 1, 1995, each person who is, as of September 1, 1995, an Eligible Participant shall be granted an NSO to purchase 20,000 shares of Company Stock (the "Initial Formula Grants"). Each person who becomes an Eligible Participant on or after September 1, 1995 shall be granted, on the date such person becomes an Eligible Participant, an NSO to purchase 20,000 shares of Company Stock. 2. Section 8 of the Plan is hereby amended to read, in its entirety, as follows: The Exercise Price of an Option shall be equal to one hundred percent (100%) of the Fair Market Value of the shares of Common Stock of the Company on the date that such Option shall be granted. Notwithstanding anything else in the Plan, the Exercise Price of the Initial Formula Grants shall be equal to $.1875 per share. The Fair Market Value of the shares of Common Stock of the Company shall be the closing bid price in the over-the-counter market on any given date or, if no Stock is traded on such date, the most recent prior date on which Stock was traded, as reported by the National Quotation Bureau. 3. All other terms and conditions of the Plan shall remain in full force and effect. EX-10.49 3 LEASE AGREEMENT 1 EXHIBIT 10.49 LEASE AGREEMENT BETWEEN KOONTZ/MCCOMBS 1, LTD. AS LANDLORD, AND SOLO SERVE CORPORATION, AS TENANT 2 LEASE BETWEEN KOONTZ/MCCOMBS 1, LTD., AS LANDLORD, AND SOLO SERVE CORPORATION, AS TENANT TABLE OF CONTENTS RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 TERMS OF LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Article I: Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Lease Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4 Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.5 Landlord's Mortgagee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.6 Landlord's Property Manager . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Article II: Lease Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Permitted Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Memorandum of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Article III: Term and Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.3 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.4 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Article IV: Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.1 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.2 Base Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4.3 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.4 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.5 Payment of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.6 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.7 Security Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
i 3 Article V: Use of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.1 Use of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 5.2 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Article VI: Property Taxes and Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.1 Ad Valorem Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 6.2 Payment of Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.3 Tax Protests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6.4 Personal Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.5 Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Article VII: Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.1 Utility Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 7.2 Interruption of Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Article VIII: Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.1 Minimum Acceptable Insurance Coverage Requirements . . . . . . . . . . . . . . 13 8.2 Insurance Company Requirement . . . . . . . . . . . . . . . . . . . . . . . . 14 8.3 Insurance Certificate Requirements . . . . . . . . . . . . . . . . . . . . . . 15 8.4 Additional Insureds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.5 Mortgage Endorsement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8.6 Renewals, Lapses or Deficiencies . . . . . . . . . . . . . . . . . . . . . . . 16 8.7 Payment of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Article IX: Furniture, Fixtures and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.1 Furniture, Fixtures and Equipment . . . . . . . . . . . . . . . . . . . . . . 17 9.2 Landlord's Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.3 Removal of Furniture, Fixtures, and Equipment at Expiration of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.4 Right to Affix Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Article X: Maintenance of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 10.1 Obligation to Maintain the Premises . . . . . . . . . . . . . . . . . . . . . 18 10.2 Specific Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 10.3 Surrender of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . 20 10.4 No Obligation of Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ii 4 Article XI: Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11.1 Right to Make Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11.2 Tenant Shall Not Render Premises Liable for Any Lien . . . . . . . . . . . . . 20 Article XII: Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Article XIII: Indemnity and Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 13.1 Indemnification by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . 21 13.2 No Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Article XIV: Waiver of Subrogation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14.1 Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 14.2 Waiver Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Article XV: Partial and Total Destruction of the Premises . . . . . . . . . . . . . . . . . . . 23 Article XVI: Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 16.1 Condemnation Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 16.2 Termination of Lease Due to Condemnation . . . . . . . . . . . . . . . . . . . 24 Article XVII: Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 17.1 Tenant's Right of Assignment and Subletting . . . . . . . . . . . . . . . . . 25 17.2 Landlord's Right of Assignment . . . . . . . . . . . . . . . . . . . . . . . . 25 Article XVIII: Default and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 18.2 Landlord's Remedies on Tenant Default . . . . . . . . . . . . . . . . . . . . 26 18.3 Effect of Tenant's Default . . . . . . . . . . . . . . . . . . . . . . . . . . 30 18.4 Right of Landlord to Re-Enter . . . . . . . . . . . . . . . . . . . . . . . . 30 18.5 Surrender of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 18.6 Default by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 18.7 Interest Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Article XIX: Subordination, Attornment and Estoppel . . . . . . . . . . . . . . . . . . . . . . 31 19.1 Subordination and Non-Disturbance . . . . . . . . . . . . . . . . . . . . . . 31 19.2 Attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 19.3 Estoppel Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
iii 5 Article XX: Tenant's Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Article XXI: Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 21.1 Notice Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 21.2 Payments Under Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Article XXII: Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 22.1 Recovery of Attorneys' Fees and Costs of Suit . . . . . . . . . . . . . . . . 33 22.2 Party to Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 22.3 Non-Jury Trial; Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Article XXIII: Relationship of Parties, Waiver and Consent . . . . . . . . . . . . . . . . . . 35 23.1 Relationship of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 23.2 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 23.3 No Obligation to Give consent . . . . . . . . . . . . . . . . . . . . . . . . 35 Article XXIV: Authority to Make Lease; Covenant of Quiet Enjoyment . . . . . . . . . . . . . . 35 24.1 Full Power and Authority to Enter Lease . . . . . . . . . . . . . . . . . . . 35 24.2 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Article XXV: Hazardous Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 25.1 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 25.2 Tenant's Responsibility for Hazardous Materials . . . . . . . . . . . . . . . 36 25.3 Landlord's Responsibility for Hazardous Materials . . . . . . . . . . . . . . 36 25.4 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Article XXVI: General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.1 Gender; Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.2 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.3 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.5 Drafting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26.6 Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.7 Joint and Several Liability . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.10 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.11 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.12 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
iv 6 26.13 Independent Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 26.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 SCHEDULE OF EXHIBITS Exhibit "A" - Legal Description of Real Property Exhibit "B" - Permitted Exceptions Exhibit "C" - Memorandum of Lease Exhibit "D-1" - Sanwa Lien Waiver Exhibit "D-2" - MetLife Lien Waiver Exhibit "E" - Security Agreement Exhibit "F" - Insurance from Deed of Trust
v 7 LAND AND BUILDING LEASE AGREEMENT This Land and Building Lease Agreement (this "Lease"), this 6th day of April, 1998, is made by and between KOONTZ/MCCOMBS 1, LTD., a Texas limited liability company ("Landlord") and SOLO SERVE CORPORATION, a Delaware corporation ("Tenant") with reference to the recitals set forth below. RECITALS A. Landlord is the owner of a building containing approximately Four Hundred Forty Thousand (440,000) square feet of space together with other improvements and appurtenances located thereon (collectively the "Building") on an approximate 18.323 acre tract being Lot 2, Block 1, NCB 16131, Cornerstone Subdivision Unit 3-A, in San Antonio, Bexar County, Texas, as depicted on Exhibit "A", attached hereto and incorporated herein by reference, and commonly known as 1610 Cornerway Blvd., San Antonio, Bexar County, Texas 78219 (the "Land"). The Building and the Land, together with all licenses, rights, privileges and easements appurtenant thereto, shall be collectively known as the "Premises". B. Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord pursuant to the provisions of this Lease. TERMS OF LEASE ARTICLE I: CERTAIN DEFINITIONS The following terms, when used in this Lease, shall have the meaning set forth in this Section. 1.1 Lease Year. The term "Lease Year" shall mean the first twelve (12) full calendar months after the Commencement Date (as defined in Section 3) and each subsequent twelve (12) month period thereafter commencing on the anniversary date thereof during the term and any extensions. Provided however, if the Commencement Date is a day other than the first day of a calendar month, the first Lease Year shall include that period of time from the Commencement Date to the first day of the next calendar month. 1.2 Business Day. The term "Business Day" means any day other than (i) Saturday or Sunday, or (ii) a day on which banks in Texas are required by law to be closed or are customarily closed. 1.3 Hazardous Material. The term "Hazardous Material" means any substance, material, or waste which is toxic, ignitable, reactive, or corrosive and which is or becomes regulated by any local or state governmental authority or the United States Government. The term "Hazardous Material" includes, without limitation, any material or substance 1 8 which is (i) defined as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous substance," or "hazardous material," by any local or state law, (ii) oil and petroleum products and their by-products, (iii) asbestos, or asbestos-containing materials, (iv) designated as a "hazardous substance" pursuant to the Federal Water Pollution Control Act, (v) defined as a "hazardous waste" pursuant to the Federal Resource Conservation and Recovery Act, or (vi) defined as a "hazardous substance" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act. 1.4 Environmental Law. The term "Environmental Law" shall mean any law, statute, regulation, order, or rule now or hereafter promulgated by any governmental entity, whether local, state, or federal, relating to air pollution, water pollution, noise control, and/or transporting, storing, handling, discharge of or disposal of Hazardous Material, including, without limitation, the following: the Clean Air Act; the Resource Conservation and Recovery Act, as amended by the Hazardous Waste and Solid Waste Amendments of 1984; the Comprehensive Environmental Response Compensation and Liability act, as amended by the Superfund Amendments and Reauthorization Act of 1986; the Toxic Substances Control Act; the Federal Insecticide, Fungicide and Rodenticide Act, as amended; the Safe Drinking Water Act; OSHA; the Hazardous Material Pipeline Safety Act; the Hazardous Materials Transportation Act; and the National Environmental Policy Act, as the same may be amended from time to time. 1.5 Landlord's Mortgagee. The term "Landlord's Mortgagee" means any holder of a lien evidenced by a mortgage or deed of trust on property which includes the Premises, or any subsequent purchaser, transferee or assignee of the right of any such holder(s) (or person holding a beneficial interest in the rights of any such purchaser, transferee or assignee), as to each of which Landlord has given notice to Tenant in accordance with Article XXIII. 1.6 Landlord's Property Manager. The term "Landlord's Property Manager" means any entity and/or individual(s) acting as the managing agent of the Premises for and on behalf of Landlord. ARTICLE II: LEASE PREMISES 2.1 Lease of Premises. Landlord leases to Tenant and Tenant leases from Landlord the Premises, subject to the Permitted Exceptions (defined below) on the terms and conditions set forth in this Lease. 2.2 Permitted Exceptions. Tenant specifically accepts the Premises subject to the encumbrances, exceptions, and obligations described on Exhibit "B", attached hereto and incorporated herein by reference (the "Permitted Exceptions"). Tenant specifically agrees to comply with the terms, conditions and obligations made a part of the Permitted Exceptions. 2 9 2.3 Memorandum of Lease. The parties hereto have simultaneously, with the execution and delivery of this Lease, executed and delivered a "Memorandum of Lease", in the form attached hereto as Exhibit "C", and incorporated herein by reference (the "Memorandum of Lease"). Landlord shall, at its sole expense, cause the Memorandum of Lease to be recorded not later than thirty (30) days from the date of execution of this Lease. In the event of a discrepancy between the Lease and the Memorandum of Lease, this Lease shall control. ARTICLE III: TERM AND OPTIONS TO EXTEND 3.1 Term. The primary term of this Lease (the "Initial Term") shall commence on April 6, 1998 (the "Commencement Date") and shall terminate at midnight on April 15, 2008 [the last day of the tenth (10th) Lease Year following the Commencement Date] (the "Expiration Date"). 3.2 Options to Extend. a. Tenant shall have two (2) successive options to extend the Term of this Lease for an additional period of five (5) years each (the "Renewal Options"), which Renewal Options shall each be exercised by serving written notice (the "Renewal Notice") upon Landlord at least six (6) months, but not more than twelve (12) months, prior to the expiration of the Initial Term (or then extended Option Term, if applicable) of the Lease (collectively the "Option Term(s)"); provided that such option is conditioned upon the Lease being in full force and effect, and there being no Event of Default existing under the Lease, at the time of delivery of the Renewal Notice. Any termination of the Lease during the Initial Term (or then extended Option Term, if applicable) shall terminate all rights of extension hereunder. b. Upon the service of the Renewal Notice, and subject to the conditions set forth herein, the Lease shall be extended without the necessity of the execution of any further instrument or document. Such extended Term shall commence upon the expiration date of the initial Term (or then extended Option Term, if applicable) of the Lease, expire upon the expiration of sixty (60) months thereafter, and be upon the same terms, covenants and conditions as provided in the Lease for the initial Term, except that the Base Rent during the extended Term of the Renewal Options shall be the then Fair Market Rate (as defined below). c. The term "Fair Market Rate" shall mean the annual amount per rentable square foot that a willing, comparable, non-equity, non-renewal, non-expansion, new tenant would pay and a willing, comparable landlord for comparable space of a warehouse/office building in San Antonio, Texas (the "Comparison Area") would accept at arm's length, giving appropriate consideration to, without limiting the scope thereof, annual rental rates per rentable square foot, the type of lease escalation clauses (including, but without limitation, operating expense, real estate taxes, CPI), the extent of liability under the escalation clauses (e.g., whether determined on a "net lease" basis or by 3 10 increases over a particular base year or base dollar amount), brokerage commissions, if any, length of lease term, size and location of premises being leased, and other generally applicable terms and conditions of tenancy for the space in question. d. Within thirty (30) days following Landlord's receipt of the Renewal Notice, Landlord and Tenant shall exercise good faith efforts to agree on the Fair Market Rate for the Premises. Absent an agreement as to the Fair Market Rate value within ninety (90) days following Landlord's receipt of the Renewal Notice, then the Fair Market Rate shall be determined as follows: (i) Landlord and Tenant shall each appoint one arbitrator who shall by profession be a real estate appraiser who shall have been active during the 5-year period ending on the date of Tenant's exercise of said option in the appraisal of commercial and industrial properties in the Comparison Area and who shall not be affiliated with the party nominating said arbitrator. Each such arbitrator shall be appointed within fifteen (15) days after the expiration of the 30-day mutual agreement period described hereinabove. (ii) The two arbitrators so appointed shall within fifteen (15) days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third independent arbitrator who shall be qualified under the same criteria set forth hereinabove to qualify the initial two arbitrators. (iii) The three arbitrators shall within thirty (30) days of the appointment of the third arbitrator reach a decision and notify Landlord and Tenant thereof. (iv) The decision of the majority of the three arbitrators shall be binding upon Landlord and Tenant. Failure of the majority of said arbitrators to reach an agreement shall result in the prevailing fair market rental for similar properties in the Comparison Area being determined by averaging the appraisal of each arbitrator, ignoring for the purpose of such averaging any portion of the high and the low appraisal which is more than ten percent (10%) in excess of or less than the middle appraisal. (v) If either Landlord or Tenant fails to appoint an arbitrator within the time period in subparagraph (a) hereinabove, the arbitrator appointed by either one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator's decision shall be binding upon Landlord and Tenant. (vi) If the two arbitrators fail to agree upon and appoint a third arbitrator, both arbitrators shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association ("AAA"). (vii) The cost of arbitration and/or the arbitrators shall be paid by Landlord and Tenant equally. 4 11 In no event shall the Fair Market Rate with respect to any renewal Term be less than the Base Rent for the term (whether the initial term or the first renewal term, as the case may be) of the Lease immediately preceding such renewal term. 3.3 Term. The Initial Term of the Lease as extended by any Option Term(s) are collectively referred to herein as the "Lease Term" or "Term". 3.4 Holding Over. In the event of holding over by Tenant after expiration or other termination of this Lease without the prior written consent of Landlord (and Landlord shall be under no duty to provide such consent), then (i) such possession shall be an unlawful detainer, (ii) no tenancy or interest shall result from such possession, (iii) any options to renew, options to expand, and/or any rights of first refusal under this Lease shall be terminated to the extent such rights and options have not been properly exercised pursuant to the terms of this Lease, and (iv) Tenant shall be subject to immediate eviction and removal. Tenant shall, throughout the entire holdover periods, pay rent equal to (i) one hundred fifty percent (150.0%) of the Base Rental plus (ii) any and all Additional Rent (including, without limitation Monthly Tax Payments) and other charges which would have been applicable had the Term of this Lease continued through the period of such holding over by Tenant; Landlord and Tenant hereby agree in advance that such rent is a fair rental rate for such tenancy. No holding over by Tenant after the expiration of the Term of this Lease shall be construed to extend the Term of this Lease; and in the event of any holding over, Tenant shall indemnify Landlord against all claims for damages by any other Tenant or prospective Tenant to whom Landlord may have leased all or any part of the Premises effective before or after the expiration of the Term of this Lease, resulting from delay by Landlord in delivering possession of all or any part of the Premises. Notwithstanding any discussions or negotiations of any nature then pending between Landlord and Tenant, any holding over, with or without the consent of Landlord, if any, shall thereafter constitute a tenancy from month-to-month, under the terms and provisions of this Lease to the extent applicable to a tenancy from month-to-month unless and until Landlord and Tenant, in each of their sole and absolute discretion, and with no obligation to do so, enter into a specific written agreement to the contrary. Notwithstanding anything herein to the contrary, pursuant to Section 91.001(c) of the Texas Property Code, Landlord and Tenant specifically agree that no notice to terminate Tenant's tenancy hereunder will be required from and after the expiration of the Term of this Lease under Section 91.001 or Section 24.005 of the Texas Property Code before Landlord files a forcible detainer suit on grounds that the tenant is holding over beyond the end of the rental term or renewal period (if any) hereof; and any sublease hereunder shall not be approved unless it also contains a specific comparable waiver by the subtenant thereunder. ARTICLE IV: RENT 4.1 Net Lease. This is an absolute net lease to Landlord. Tenant shall pay all costs and expenses relating to the Premises during the Term and the business carried on therein to include, but not limited to, taxes, utilities, insurance, and maintenance costs, 5 12 unless otherwise expressly provided in the Lease. It is the intent of the parties hereto that the Base Rent payable under this Lease shall be an absolutely net return to the Landlord and that the Tenant shall pay all costs and expense relating to the Premises and the business carried on therein, unless otherwise expressly provided in this Lease. Any amount or obligation herein relating to the Premises which is not expressly declared to be that of the Landlord shall be deemed to be an obligation of the Tenant to be performed by the Tenant at the Tenant's expense. Base Rent, Additional Rent and all other sums payable hereunder by Tenant, shall be paid without notice (except as expressly provided herein), demand, setoff, counterclaim, abatement, suspension, deduction or defense. 4.2 Base Rent. a. Base Rent. During the Initial Term, Tenant shall pay to Landlord as Base Rent the following sums (the "Base Rent"): Year 1-5 Total: $ 975,000.00 Per Month: $ 81,250.00 Year 6-10 Total: $1,072,500.00 Per Month: $ 89,375.00 The Base Rent for Option Terms shall be determined per the terms of Section 3.2, above. b. Payment of Base Rent. Except as provided in Section 4.2(c), below, the Base Rent shall be due and payable by Tenant to Landlord in advance in equal monthly installments on the first day of each calendar month, without prior notice, invoice, demand, deduction, or offset whatsoever. Landlord shall have the right to accept all rent and other payments, whether full or partial, and to negotiate checks and payments thereof without any waiver of rights, irrespective of any conditions to the contrary sought to be imposed by Tenant. c. Prepaid Rent. Upon execution of this Lease, Tenant will be required to prepay Base Rent payable under the Lease in the amount of Five Hundred Thousand and No/Hundredths Dollars ($500,000.00) (the "Prepaid Rent"). Beginning with the Fourth Lease Year, such Prepaid Rent will be credited against Base Rent, as follows: (i) 4th Lease Year. One Hundred Thousand Dollars ($100,000.00) of the Prepaid Rent will be applied to the Base Rent for the 4th Lease Year as follows: $25,000.00 per month against the Base Rent due and owing for each of the first four (4) months of the 4th Lease Year. 6 13 (ii) 5th Lease Year. One Hundred Thousand Dollars ($100,000.00) of the Prepaid Rent will be applied to the Base Rent for the 5th Lease Year as follows: $25,000.00 per month against the Base Rent due and owing for each of the first four (4) months of the 5th Lease Year. (iii) 6th Lease Year. One Hundred Thousand Dollars ($100,000.00) of the Prepaid Rent will be applied to the Base Rent for the 6th Lease Year as follows: $25,000.00 per month against the Base Rent due and owing for each of the first four (4) months of the 6th Lease Year. (iii) 10th Lease Year. The balance of the Prepaid Rent consisting of Two Hundred Thousand and No/100 Dollars ($200,000.00), will be applied towards the Base Rent due and owing for the last three months of the Initial Term of this Lease. o 10th Month: $ 21,250.00 o 11th Month: $ 89,375.00 o 12th Month: $ 89,375.00 4.3 Additional Rent. a. Any amounts which Tenant is required to pay to Landlord pursuant to this Lease (other than Base Rent), including (without limitation) all Monthly Tax Payments (defined herein), and the Monthly Insurance Payments (defined herein), together with every fine, penalty, interest and cost which may be added pursuant to the terms hereof by reason of Tenant's non-payment or late payment thereof or of Base Rent (including, without limitation, Taxes and Insurance), shall constitute additional rent ("Additional Rent"). If Tenant shall fail to pay any Additional Rent after notice and the expiration of any applicable cure period provided pursuant to the terms of this Lease, Landlord shall have the right, but not the obligation, to pay the same and shall have all rights, powers and remedies with respect thereto as are provided herein in the case of nonpayment of Base Rent. b. Except with respect to the Monthly Tax Payments (which will be payable as provided in Article VI) and the Monthly Insurance Payment (which will be payable as provided in Article VIII) and as indicated herein, Landlord shall submit to Tenant an invoice or invoices for all sums comprising the Additional Rent and shall state the time period relating thereto. Tenant shall pay Landlord the amount invoiced within thirty (30) days from receipt of such invoice or invoices which shall be accompanied by copies of any applicable receipts and backup invoices. Landlord shall provide Tenant within five (5) Business Days of Tenant's request therefor with such additional information as Tenant may reasonably request to determine the amount due from Tenant. Tenant reserves the right, upon reasonable prior notice, to inspect Landlord's records with respect to such accounting for the prior two (2) calendar year period and to make specific 7 14 objections thereto in writing. Any payment hereunder shall be paid within ten (10) Business Days of demand therefor. 4.4 Late Charge. If Tenant fails to pay when due any payment of rent or other charges which Tenant is obligated to pay to Landlord under this Lease, there shall be a late charge, immediately payable by Tenant as Additional Rent, in the amount of Five Hundred and No/Hundredths Dollars ($500.00) (the "Late Rate"). Landlord and Tenant agree that this sum is reasonable to compensate Landlord for accounting and administrative expenses incurred by Landlord. In addition to the late charge, any and all rent or other charges which Tenant is obligated to pay to Landlord under this Lease which are unpaid shall bear interest at the rate set forth in Section 18.7 from the date said payment was due until paid, said interest to be payable by Tenant as Additional Rent. Landlord and Tenant agree that this sum is reasonable to compensate Landlord for the loss of the use of funds. 4.5 Payment of Rent. Tenant hereby agrees to pay Rent to Landlord at Landlord's address provided herein (or such other address as may be designated by Landlord in writing from time to time), monthly, and without further notice or demand. If the Term of this Lease commenced on a day other than the first day of a month , then the installments of Rent for such month or months shall be prorated, based on thirty (30) days per month, and the installment or installments so prorated shall be paid in advance. 4.6 Rent. Base Rent and Additional Rent are collectively referred to herein as "Rent." 4.7 Security Interest. a. Consistent with the terms of the security agreement attached hereto as Exhibit "E", and incorporated herein by reference (the "Security Agreement"), Tenant hereby grants Landlord a lien and security interest in the Prepaid Rent as further security for Tenant's performance under this Lease, including without limitation security for (a) payments of all rent and any other sums due under the Lease; (b) payment of any and all Landlord claims which may arise out of any Tenant Default, whether monetary or non-monetary; (c) payment of any offset for rejection damages incurring as the result of any bankruptcy or insolvency filing; and (d) payment of reasonable attorney's fees, and costs incurred in connection with any Tenant Default, including without limitation reasonable attorneys' fees and costs incurred in connection with any bankruptcy or insolvency proceeding, to the extent not expressly prohibited by applicable law. b. Tenant expressly agrees to execute any such documents required to perfect Landlord's security interest in the Prepaid Rent including without limitation the execution of the notice to the depository institution in which the Prepaid Rents are deposited. 8 15 c. Upon a Default, Tenant further acknowledges and expressly agrees that Landlord may use or apply the whole or any part of the Prepaid Rent for the payment of Tenant's obligations hereunder and, in the event of bankruptcy or other insolvency proceeding against Tenant or any of Tenant's guarantors, the Prepaid Rent shall be deemed automatically applied to the payment of overdue Rent from the earliest time such Rent became overdue prior to the filing of such proceeding. In such event, Landlord may apply any remaining Prepaid Rent to amounts due and owing to Landlord, as it deems appropriate, in its sole and absolute discretion. The use and application of the Prepaid Rent shall not prevent Landlord from exercising any other right or remedy available to Landlord and shall not be construed as liquidated damages. ARTICLE V: USE OF THE PREMISES 5.1 Use of Premises. Tenant shall use the Premises solely for a warehouse and distribution center and corporate headquarters in connection with Tenant's business. Tenant has satisfied itself, and represents to Landlord, that such use is lawful and conforms to all applicable zoning and other use restrictions and regulations applicable to the Premises. 5.2 Compliance with Laws. a. Tenant shall, at Tenant's expense, procure any permits and licenses required for it to transact business in the Premises and comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements now in effect or hereafter enacted or passed during the term or any part of the term hereof, regulating the use and occupancy of the Premises, including, without limitation, the obligation at Tenant's cost, to alter, maintain, or restore the Premises in compliance and conformity with all laws relating to the condition, use, or occupancy of the premises during the Term (including, without limitation, any and all requirements as set forth in the Americans with Disabilities Act, The Architectural Barriers Act of 1968, The Rehabilitation Act of 1973, The Fair Housing Act of 1988, and The Texas Elimination of Architectural Barriers Act). Tenant shall not perform any acts or carry on any practices which may injure the premises. b. Tenant covenants to perform and observe all terms, covenants and conditions of any reciprocal easement or maintenance agreement to which it may at any time be a party or to which the Premises may be subject. Tenant shall, at its expense, use its best efforts to enforce compliance with any reciprocal easement or maintenance agreement benefiting the Premises by any other person subject to such agreement. 9 16 ARTICLE VI: PROPERTY TAXES AND ASSESSMENTS. 6.1 Ad Valorem Taxes. a. Tenant shall be solely responsible for all ad valorem real estate taxes and all assessments, annual benefits, levies, fees, water and sewer rents and charges and all other governmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, levied upon or assessed against the Premises or the use and occupancy thereof by Tenant and allocable to the period commencing with the Commencement Date and continuing through the Lease Term (collectively, "Real Estate Taxes"). b. It is the intention of Tenant and Landlord that all new and increased assessments, taxes, fees, levies, and charges, and all similar assessments, taxes, fees, levies, and charges be included within the definition of Real Estate Taxes for the purpose of this Lease. If at any time during the Lease term the laws concerning the methods of real property taxation prevailing at the commencement of the Lease term are changed so that a tax or excise on rents or any other tax, however described, is levied or assessed against Landlord as a substitution in whole or in part for any real property taxes, then Real Estate Taxes shall include, but not be limited to, any such assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use, or occupancy by Tenant of the Premises, or any portion thereof. c. Tenant shall also pay all taxes or assessments of the state or any political subdivision thereof in which the Premises are located which are levied, assessed or imposed on Landlord or Tenant on account of the use and occupancy of the Premises or receipt by or on behalf of Landlord of Base Rent or Additional Rent payable hereunder. Any such taxes payable by Tenant hereunder shall be deemed to be included in the definition of "Real Estate Taxes" for all purposes of this Lease. d. Except for Real Estate Taxes, nothing herein shall require Tenant to pay or reimburse Landlord for the payment of (i) any income, profit, inheritance, estate, succession, gift, franchise or transfer taxes which are or may be imposed upon Landlord, its successors or assigns, by whatever authority imposed or however designated, (ii) any tax imposed upon the sale of all or a part of the Premises by Landlord, or (iii) any tax, assessment, charge or levy imposed or levied upon or assessed against any property of Landlord other than the Premises or any income to, or business activity of, Landlord not in connection with the Premises. Nothing herein shall require Tenant to pay or reimburse Landlord for the payment of any tax if Tenant's payment of such tax or reimbursement of Landlord for the payment of such tax would violate any applicable law. 6.2 Payment of Real Estate Taxes. a. Tenant shall pay all Real Estate Taxes in advance in monthly installments on or before the first day of each month in an amount reasonably estimated by Landlord in good faith to be one-twelfth (1/12) of the total Real Estate Taxes that will be due and owing for the Calendar Year in which such month comprises a part ("Monthly 10 17 Tax Payments); if Landlord's Mortgagee requires an escrow of Real Estate Taxes, Landlord may, but shall not be obligated to, use the required escrow amount as a basis for its estimate of such monthly installments and such amount shall not be subject to objection by Tenant. Prior to or on the Commencement Date and from time to time throughout the Term, Landlord shall notify Tenant in writing of Landlord's estimate of such monthly installments (the "Estimated Tax Statement"). b. The Monthly Tax Payments shall be payable by Tenant to Landlord in advance in equal monthly installments on the first day of each calendar month in the amounts specified in the Estimated Tax Statement, without prior notice, invoice, demand, deduction, or offset whatsoever, and in addition to the Base Rent and an other Additional Rent charged hereunder. Landlord shall have the right to accept all payments for Monthly Tax Payments, Base Rent, and any Additional Rent, whether full or partial, and to negotiate checks and payments thereof without any waiver of rights, irrespective of any conditions to the contrary sought to be imposed by Tenant. c. After receipt of all tax and assessment bills attributable to any Calendar Year during the Term, Landlord shall furnish Tenant with a written statement of the actual Real Estate Taxes for such Calendar Year and evidence of the payment of such Real Estate Taxes by Landlord (the "Tax Statement"). Landlord shall ensure that the amount of all Real Estate Taxes for the taxing year collected from Tenant and escrowed with Landlord are paid to the appropriate taxing authority, whether or not Landlord's lender pays same to the appropriate taxing entity. If the total of Monthly Tax Payments paid by Tenant during such Calendar Year is less than the sum due from Tenant as shown on the Tax Statement, then Tenant shall pay to Landlord the deficiency within ten (10) days of receipt of such statement; in the event, that the total of Monthly Tax Payments paid by Tenant during such Calendar Year is more than the sum due from Tenant as shown on the Tax Statement, then Landlord shall credit the excess against the subsequent Monthly Tax Payments next due and owing for the subsequent Calendar Year. Landlord's delay or failure to furnish such Tax Statement shall not impair Tenant's continuing obligation to pay any deficiency. A copy of the tax or assessment bill from the applicable taxing authorities shall be sufficient evidence of the amount of Real Estate Taxes. Landlord's and Tenant's obligations under this Article shall survive the expiration or termination of this Lease. d. If the Term of this Lease commenced on a day other than the first day of any Calendar Year , then the Real Estate Taxes due and payable by Tenant (as well as the Estimated Tax Statement determined by Landlord) for such Calendar Year shall be prorated, based on a 365 day Calendar Year. 6.3 Tax Protests. a. Tenant shall have the right to participate in all negotiations of tax assessments or to contest any tax assessments against the Premises. Tenant shall also have the right to contest the validity or the amount of any Real Estate Taxes levied against the 11 18 Premises by such appellate or other proceedings as may be appropriate in the jurisdiction, and may, if applicable, request that Landlord defer payment of such obligations if payment would operate as a bar to such contest; and, if applicable, request that Landlord pay same under protest, or take such other steps as Tenant may deem appropriate, provided, however, that Tenant indemnifies Landlord from any reasonable expense (including reasonable attorney's fees) or liability arising out of such contest, pursues such contest in good faith and with due diligence, posts any bond or security required by law in connection with such contest, gives Landlord prompt written notice of its intention to contest, and takes no action which will cause or allow the institution of any foreclosure proceedings or similar action against the Premises. Notwithstanding the above, Landlord shall not be required to join in any proceedings or contest brought by Tenant unless the provisions of the law require that the proceeding or contest be brought by or in the name of Landlord or the owner of the Premises; in that case, Landlord shall, at Tenant's expense, cooperate in the institution and prosecution of any such proceedings initiated by Tenant and will execute any documents which Landlord may be reasonably required to execute and will make any reasonable appearances which Landlord may be required to make in connection with such proceedings. If, during the protest period, any Default under this Lease occurs and the protested taxes or assessments have not been paid, then, at the request of Landlord, Tenant shall furnish to Landlord a surety bond issued by an insurance company qualified to do business in the state where the Premises are located. The amount of bond shall equal one hundred ten percent (110%) of the total amount of taxes in dispute. The bond shall hold Landlord and the Premises harmless from any damage arising out of the proceeding or contest and shall insure the payment of any judgment that may be rendered. b. Should any of the proceedings referred to in the preceding Section 6.3(a) of this Article VI result in reducing the total annual Real Estate Taxes liability against the Premises, Tenant shall be entitled to receive all refunds by the taxing authorities attributable to the Premises for any period for which Tenant has paid Real Estate Taxes, provided Landlord shall deduct payment of all of Landlord's expenses incurred in any such proceeding in which a refund is paid. Any remaining sum shall be refunded to Tenant. If no refund shall be secured in any such proceeding, the party instituting the proceeding shall bear the entire cost; provided, however, that if Landlord institutes the proceedings at Tenant's request, then Tenant shall bear the entire cost. 6.4 Personal Property Taxes. Tenant shall pay and discharge, when due, all taxes assessed during the term of this Lease against any leasehold interest or personal property of any kind owned by or placed in or on the Premises by Tenant. 6.5 Assessments. If any assessment for a capital improvement made by public or governmental authority shall be levied or assessed against the Premises, and the assessment is payable either in a lump sum or on an installment basis, then (if Landlord's Mortgagee approves) Tenant shall have the right to elect the basis of payment. If Tenant shall elect to pay the assessment on the installment basis, then Tenant shall pay only those installments which shall become due and payable during the term of this Lease. 12 19 ARTICLE VII: UTILITIES 7.1 Utility Payments. Tenant shall promptly pay when due all charges for water, gas, electricity, and all other utilities furnished to or used upon the Premises, including all charges for installation, termination, and relocations of such service, and will save and hold Landlord harmless from any charge or liability for same. 7.2 Interruption of Utilities. Landlord shall not be liable for, and Tenant shall not be entitled to, any damages, howsoever caused or incurred, direct or consequential, nor any abatement or reduction of rent, by reason of any interruption whatsoever in or failure to provide any utility service. In the event of any failure, stoppage, or interruption of utility service(s) furnished by Landlord (if any) Landlord shall use reasonable diligence to restore such service in any circumstances in which such failure, stoppage, or interruption is caused by Landlord. ARTICLE VIII: INSURANCE 8.1 Minimum Acceptable Insurance Coverage Requirements. a. Tenant shall, at Tenant's expense, obtain and keep in full force during the term of this Lease commercial general liability insurance coverage which, without limitation, shall contain combined single limit bodily injury, property damage insurance, and contractual liability insuring Tenant (with Landlord and Landlord's Property Manager, if any, as additional insureds) against any liability arising out of the ownership, use, occupancy, or maintenance of the Premises and all of its appurtenant areas. The insurance shall be in an amount not less than One Million Dollars ($1,000,000.00) per occurrence. The policy shall provide blanket contractual liability coverage; however, the limits of the insurance shall not limit the liability of Tenant under this Lease. b. Tenant shall, at Tenant's expense, obtain and keep in full force during the term of this Lease an additional umbrella liability policy in an amount not less than Ten Million Dollars ($10,000,000.00). c. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises on an "all risk" coverage basis. The insurance shall be in an amount equal to one hundred percent (100.0%) of full replacement cost thereof against all perils of fire, extended coverage, vandalism, malicious mischief, and special extended perils ("All Risks," as such term is used in the insurance industry). In addition, Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage due to earthquake, flood and boiler and machinery (if applicable), if reasonably required by Landlord or Landlord's Mortgagee. 13 20 d. Tenant shall also obtain and keep in force during the term of this Lease a policy of Loss of Rents insurance covering a period of two (2) years. This insurance shall cover all Real Estate Taxes and Insurance costs for the same period in addition to two (2) years' Base Rent and shall name Landlord exclusively as loss payee, Section 8.4 notwithstanding. Landlord agrees that any proceeds from a Loss of Rents policy will be applied by Landlord against any Base Rent and Additional Rent then owed to Landlord. e. Tenant shall also obtain and keep in force during the term of this Lease a worker's compensation policy, insuring against and satisfying Tenant's obligations and liabilities under the worker's compensation laws of the state in which the Premises are located, including Employer's Liability insurance, in an amount of not less than One Million Dollars ($1,000,000.00), with a waiver of subrogation endorsement in favor of Landlord as described in Section 14.1(b), to the extent available. f. Tenant shall also obtain and keep in force during the term of this Lease an automobile liability policy with a combined single limit of $1,000,000.00 which policy shall include coverage for hired and non- owned vehicles. 8.2 General Insurance Requirements. All insurance secured by Tenant under this Lease shall comply with the following: (a) Shall be issued by companies holding a general policyholder's rating of at least "A:X" as set forth in the most current issue of Best's Insurance Guide and authorized to do business in the state in which the Premises are located; if this publication is discontinued, then another insurance rating guide or service generally recognized as authoritative shall be substituted by Landlord; (b) Provide that the insurance may not be cancelled or materially reduced in the scope or amount of coverage unless ten (10) days' prior written notice is given to Landlord, provided Landlord shall receive proof of payment of premium prior to expiration of any insurance policy as set forth in Section 8.6; (c) Have deductibles not greater than $25,000 (or such greater amount with the prior written consent of Landlord) (applicable only to general liability and property casualty policies); (d) Be maintained during the entire Term; and (e) Contain a clause that such policy and the coverage evidenced thereby shall be "primary" with respect to any policies carried by Landlord, and that any coverage carried by Landlord shall be excess insurance. (f) The insurance required to be maintained herein may be carried under blanket policies; provided, however, if the Tenant has other locations that it owns or 14 21 leases, the policy shall include a Ten Million Dollar ($10,000,000.00) aggregate per location endorsement. The insurance shall provide for payment of loss jointly to Landlord and Tenant. A stipulated value or agreed amount endorsement deleting the co-insurance provision to the building policy shall be procured. (g) All insurance secured by Tenant under this Lease shall also comply with Section 8 of the Deed of Trust between Landlord, as Mortgagor, and Nationwide Insurance Company, as Mortgagee, a copy of such Section 8 being attached hereto as Exhibit "F" and incorporated herein by reference. Tenant also agrees to provide, comply with and be bound by the requirements and obligations of Mortgagor as set forth in Exhibit "F," attached, including the requirement to deposit additional funds with Mortgagee as needed to complete the restoration of the Property in the event of a casualty during the Term of this Lease, in the event Landlord's Mortgagee elects to make insurance proceeds available for such restoration, or Landlord agrees to deposit the amount of insurance proceeds applied by Landlord's Mortgagee to Landlord's Note. 8.3 Insurance Certificate Requirements. Tenant shall deliver to Landlord certificates evidencing, without limitation, the existence and amounts of the insurance with loss payable clauses as required herein. No policy shall be cancelable or subject to reduction of coverage or other modification except after ten (10) days' prior written notice to Landlord. 8.4 Additional Insureds. To the extent available, Tenant shall name as additional insureds or a loss payee on all insurance the following: (a) the Landlord, Landlord's successor(s), assignee(s), nominee(s), Nominator(s), and agents with an insurable interest as follows: Landlord, its officers, directors, and all successor(s), assignee(s), subsidiaries, corporations, partnerships, proprietorships, joint ventures, firms, and individuals as heretofore, now, or hereafter constituted on which the named insured has the responsibility for placing insurance and for which similar coverage is not otherwise more specifically provided; and (b) Landlord's Mortgagee and any other lender of Landlord. (c) Landlord's Property Manager. 8.5 Mortgage Endorsement. If requested by Landlord, the policies of insurance required to be maintained hereunder shall bear a standard first mortgage endorsement in favor of any holder or holders of a first mortgage lien or security interest in the property with loss payable to such holder or holders as their interests may appear, insofar as it relates to loss on the Building located on the Land. 15 22 8.6 Renewals, Lapses or Deficiencies. Tenant shall, at least thirty (30) days prior to the expiration of the insurance policies required hereunder, furnish Landlord with renewal certificates of insurance or renewal binders for same. Should Tenant fail to provide to Landlord the renewal certificate or renewal binders, or in the event of a lapse or deficiency of any insurance coverage specified herein for any reason, Landlord may immediately replace the deficient insurance coverage with a policy of insurance covering the Premises of the type and in the limits set forth above. Upon written notice from Landlord of the placement of insurance, Tenant shall immediately pay to Landlord, as Additional Rent, an amount equal to the total cost of the premiums and expense of such insurance placements; but Tenant will nevertheless be in default hereunder (such failure to be deemed an "Event of Default") until Landlord is fully reimbursed for all such costs. Tenant shall not do or permit to be done anything which shall invalidate the insurance policies. If Tenant does or permits to be done anything which shall increase the cost of the insurance policies, then upon Landlord's demand, Tenant shall immediately pay to Landlord, as Additional Rent, an amount equal to the additional premiums attributable to any acts or omissions or operations of Tenant causing the increase in cost. 8.7 Payment of Insurance a. Tenant shall pay the premium for the insurance required to be carried by Tenant hereunder in advance, in monthly installments, on or before the first day of each month in an amount reasonably estimated by Landlord in good faith to be one-twelfth (1/12) of the total insurance premium due and owing for the entire year (the "Monthly Insurance Payment"); if Landlord's Mortgagee requires an escrow of insurance premium, Landlord may, but shall not be obligated to, use the required escrow amount as a basis for its estimate of such monthly installments and such amount shall not be subject to objection by Tenant. Prior to or on the Commencement Date and from time to time throughout the Term, Landlord shall notify Tenant in writing of Landlord's estimate of such monthly installments (the "Estimated Insurance Statement"). b. The monthly insurance payments shall be payable by Tenant to Landlord in advance in equal monthly installments on the first day of each calendar month in the amount specified in the Estimated Insurance Statement, without prior notice, invoice, demand, or offset whatsoever, and in addition to the Base Rent and any other Additional Rent charged hereunder, and the Monthly Tax Payments. Landlord shall have the right to accept all payments for monthly insurance payments, Base Rent, any Additional Rent, and Monthly Tax Payments, whether full or partial, and to negotiate checks and payments thereof without any waiver of rights, irrespective of any conditions to the contrary sought to be imposed by Tenant. c. After receipt of all insurance bills attributable to any calendar year or portion thereof during the term, Landlord shall furnish Tenant with a written statement of the actual insurance premiums for such calendar year in evidence of the payment of such insurance premiums by Landlord (the "Insurance Statement"). Landlord shall ensure that the amount of all insurance premiums for the period billed and collected from Tenant 16 23 and escrowed with Landlord are paid to the appropriate insurance company, whether or not Landlord's Lender pays same to the appropriate insurance company. If the total of the Monthly Insurance Payments paid by Tenant during such calendar year is less than the sum due from Tenant as shown on the Insurance Statement, then Tenant shall pay to Landlord the deficiency within ten (10) days of receipt of such statement; in the event, that the Monthly Insurance Payments paid by Tenant during the year is more than the sum due from Tenant as shown on the Insurance Statement, then Landlord shall credit the excess against the subsequent Monthly Insurance Payment next due and owing for the next year. Landlord's delay or failure to furnish such Insurance Statement shall not impair Tenant's continuing obligation to pay any deficiency. A copy of the insurance bill from the insurance company shall be sufficient evidence of the amount of insurance premium due. Landlord and Tenant's obligations under this article shall survive the expiration or termination of this Lease. d. If the term of this Lease commenced on a day other than the first day of any calendar year, then the insurance premium due and paid by Tenant for such year shall be prorated, based on a 365 day calendar year. ARTICLE IX: FURNITURE, FIXTURES AND EQUIPMENT 9.1 Furniture, Fixtures and Equipment. During the term Tenant may, at Tenant's expense, place or install such furniture, fixtures, and equipment on the Premises as may be needed for the conduct of Tenant's business. 9.2 Landlord's Waiver. Tenant may finance equipment, trade fixtures, signs, and furniture which may be installed in or about the Premises. Landlord shall execute and deliver to any lenders a Landlord's Waiver in such form as may be agreed upon by Tenant's lender, Tenant and Landlord. A copy of Landlord's Lien Waiver with Sanwa Business Credit Corporation and Landlord's Agreement and Subordination with MetLife Capital Corporation is attached hereto as Exhibits D-1 and D-2, respectively, and Landlord agrees to execute said waivers contemporaneously with Landlord's execution of this Lease. Tenant may specifically enforce Landlord's obligations under this Section 9.2. Any furniture, fixtures, and equipment placed in the Premises by Tenant may be replaced by Tenant periodically during the term. 9.3 Removal of Furniture, Fixtures, and Equipment at Expiration of Lease. At the expiration or earlier termination of the Lease, the furniture, fixtures, and equipment, including, without limitation, the conveyor systems, rail systems, racking and decking system and equipment currently in place, shall be removed by Tenant. Tenant immediately shall make such repairs and restoration of the Premises as are necessary to correct any damage to the Premises from the installation and removal of the furniture, fixtures, and equipment by Tenant. Furniture, fixtures, and equipment not so removed shall, at Landlord's option, become the property of Landlord, and Landlord may cause such property to be removed from the Premises and disposed of, but the cost of any such 17 24 removal shall be borne by Tenant. The provisions of this paragraph shall survive the expiration or termination of this Lease with respect to the Premises. 9.4 Right to Affix Signs. a. Tenant shall have the right, at Tenant's expense, to use and maintain the signage as it currently exists at the Premises. Any revisions or changes to signage shall be at the sole cost of Tenant, subject to Landlord's prior written consent. All signage is contingent upon approval by applicable local governmental authorities. b. Upon the termination or expiration of the Term of the Lease or of Tenant's right of possession of the Premises, then Tenant shall, at Tenant's sole expense, (i) "de-indentify" (i.e. remove Tenant's name from) any and all pylon signage on the Premises, and (ii) cause the removal of any other signage in or on the Premises, to the same condition existing prior to its installation or in such condition otherwise acceptable to Landlord. ARTICLE X: MAINTENANCE OF THE PREMISES 10.1 Obligation to Maintain the Premises. a. Tenant acknowledges that it has received the Premises in good condition, repair and maintenance, except as set forth in Section 10.2, below. Tenant shall, at its own expense, promptly perform or cause to be performed all maintenance, replacement, and repair (whether ordinary or extraordinary, structural or non-structural, foreseen or not foreseen, or otherwise) necessary to keep the Premises, and any part thereof, including (without limitation) the Building, in a safe, dry and tenantable condition and good state of repair and appearance (ordinary wear and tear excepted), including (without limitation) (i) the repair and/or replacement of any damage or injury done to the Premises, or any part thereof, caused by Tenant or Tenant's agents, employees, invitees or visitors (including specifically any water damage resulting from any plumbing leak), (ii) all structural and non-structural components of Building and all of its components, to all maintenance, replacement and repair to the roof, outer walls and its electrical, plumbing, heating, ventilating, air conditioning and other operating systems in the Building, and (iii) the maintenance of all outdoor areas located on the Land. Tenant shall promptly make such repairs and replacements as may be necessary, regardless of whether the benefit of such repair or replacement extends beyond the term of this Lease. Such repairs, when made, shall restore the Premises or any part thereof, to the same or as good a condition as existed prior to such injury or damage, and shall be effected in compliance with all building and fire codes and other applicable laws and regulations. b. During the term of this Lease, Tenant shall also maintain a service contract providing for the proper maintenance of the HVAC system and elevators servicing the Building on a quarterly basis. Landlord agrees to assign to Tenant (or enforce for Tenant's benefit) all warranties, extended warranties and guarantees with 18 25 respect to the HVAC system and elevators, and all other systems, of any kind or nature, serving the Premises and which tenant is required to repair hereunder. c. Tenant shall keep the Premises, including, without limitation, sidewalks, drives and loading areas on the Premises, clean and free from rubbish and debris at all times. Tenant shall store all trash and garbage within the Premises and arrange for regular pickup and cartage of such trash and garbage at Tenant's expense. d. If Tenant fails (i) to make such repairs or replacement within thirty (30) days after receipt of written notice from Landlord, or (ii) if such repairs cannot reasonably be complied with within thirty (30) days, to commence repairs within said thirty (30) day period and diligently pursue such repairs until completion (or sooner if required in the case of emergency), then Landlord, may at its option, make such repairs and replacements, and Tenant shall pay the cost thereof to Landlord, as Additional Rent, within thirty (30) days after written demand. In addition, Tenant shall indemnify and hold harmless the Landlord from and against any and all damages and liability incurred by Landlord arising from and out of such failure to make such repairs and replacements. e. Anything to the contrary herein notwithstanding, Landlord and Tenant hereby agree that the costs paid by Tenant for the replacement of a major mechanical component of the HVAC System during the last two (2) years of the Lease Term, if any, shall be prorated based on the number of years in the term of the manufacturer's warranty on said component. If the warranty extends beyond the expiration of the Lease Term, the Landlord shall, within thirty (30) days of receipt of Tenant's final payment of any and all sums due to Landlord under this Lease, reimburse the prorata share of such component replacement cost for the period of warranty extending beyond the expiration of the Lease Term. For the purposes of this section 10.1(e), "Lease Term" shall mean the Initial Term plus any executed Option Term. 10.2 Specific Repairs. It is understood and agreed that the maintenance, repair and replacement obligations of Tenant provided in Section 10.1, above, is intended to specifically include (without limitation) any and all repairs and replacements necessary to cause the Premises to be in a safe, dry and tenantable condition and good state of repair and appearance, as of the Commencement Date of the Lease. Notwithstanding the preceding sentence, specifically excluded from Tenant's obligation to make repairs on the Premises is (i) the repair of the heaving of the ground floor slab in the office area of the Building (other than minor repairs necessary to ensure that the ground floor slab will be kept reasonably safe for use by Tenant and its employees, invitees, agents and contractors), (ii) the obligation to replace the ground floor slab in the office area of the Building, and/or (iii) the obligation to remediate the condition causing the heaving of the ground floor slab in the office area of the Building. Any and all consequential repairs resulting from the heaving of the ground floor slab shall, however, explicitly be the obligation of the Tenant. 19 26 10.3 Surrender of the Premises. Except as otherwise set forth in Sections 10.1(e) and 10.2(a), above, the Premises shall be returned to Landlord at the termination or expiration of this Lease broom clean, and in good condition (ordinary wear and damage by casualty or condemnation excepted). In the event of destruction of the Premises by fire or casualty, the condition of the Premises upon termination of this Lease shall be governed by Section XV. 10.4 No Obligation of Landlord. Notwithstanding anything else contained herein to the contrary, Landlord shall have no obligation to maintain, repair or rebuild, or to make any alterations, replacements or renewals of any nature to the Premises, or any part thereof, whether ordinary or extraordinary, structural or non-structural, foreseen or not foreseen, or otherwise cause the Premises to be maintained in any respect; and Landlord shall have no liability for any damages or injury arising out of any condition or occurrence causing a need for such repairs or maintenance. Tenant hereby expressly waives the right to make any repairs at the expense of Landlord which may be provided for in any law in effect at the time of the commencement of the Term or which may thereafter be enacted. ARTICLE XI: ALTERATIONS 11.1 Right to Make Alterations. Tenant shall not have the right to make alterations, additions, and improvements to the interior or exterior of the Premises and parking areas adjacent to the Premises (except for non- structural repairs under Five Thousand Dollars ($5,000.00)) without the prior written consent of Landlord, which will not be unreasonably withheld or delayed. Any alterations, additions, and improvements approved by Landlord which may be made or installed by Tenant shall remain upon the Premises, and, at the termination or expiration of this Lease, shall be surrendered with the Premises to Landlord. Any alteration, addition, or improvement by Tenant shall be accomplished by Tenant in a good workmanlike manner, with new materials, in conformity with applicable laws and regulations and by a contractor approved by Landlord. Upon completion of any alteration, addition, or improvement for which Landlord gives its written consent, Tenant shall provide to Landlord "as-built" plans, copies of all construction contracts, building permits, inspection reports and all other required governmental approvals, and proof of payment of all labor and materials, and lien waivers. For any and all non-structural alterations made by Tenant under Five Thousand Dollars ($5,000.00), upon completion of any such work, Tenant shall provide to Landlord sketches of any alterations made, and proof of payment of all labor and materials, and lien waivers. Tenant shall pay when due all claims for such labor and materials and shall give Landlord at least ten (10) days' prior written notice of the commencement of any such work. Landlord may enter upon the Premises, in such case, for the purpose of posting appropriate notices, including, but not limited to, notices of non-responsibility. 11.2 Tenant Shall Not Render Premises Liable for Any Lien. Tenant shall have no right, authority, or power to bind Landlord, or any interest of Landlord in the premises, nor to render the Premises liable for any lien or right of lien for the payment of any claim 20 27 for labor, material, or for any charge or expense incurred to maintain, to repair, or to make alterations, additions, and improvements to the Premises. Tenant shall in no way be considered the agent of Landlord in the construction, erection, modification, repair, or alteration of the Premises. Notwithstanding the above, Tenant shall have the right to contest the legality or validity of any lien or claim filed against the Premises. No contest shall be carried on or maintained by Tenant after the time limits in the sale notice of the Premises for any such lien or claim unless Tenant (i) shall have duly paid the amount involved under protest; (ii) shall have procured and recorded a lien release bond from a bonding company acceptable to Landlord in an amount not less than one and one-half (1 1/2) times the amount involved; or (iii) shall have procured a stay of all proceedings to enforce collection. Upon a final adverse determination of any contest, Tenant shall pay and discharge the amount of the lien or claim determined to be due, together with any penalties, fines, interest, cost, and expense which may have accrued, and shall provide proof of payment to Landlord. ARTICLE XII: INSPECTION Landlord and Landlord's authorized representatives shall have the right to enter upon the Premises at all reasonable hours, after reasonable efforts to provide advance notice to Tenant, for the purpose of inspecting the Premises or of making repairs, additions, or alterations in or upon the Premises, and, for the purpose of exhibiting the Premises to prospective tenants, purchasers, or others, provided any such entry does not unreasonably interfere with Tenant's operations. ARTICLE XIII: INDEMNITY AND RELEASE 13.1 Indemnification by Tenant. Other than damages proximately caused by reason of the gross negligence or willful misconduct of Landlord or its agents and employees, or causes for which Landlord expressly assumes responsibility under this Lease, Tenant shall indemnify, defend, and protect Landlord, Landlord's Property Manager and Landlord's Mortgagee, if any, and hold Landlord, Landlord's Property Manager and Landlord's Mortgagee, if any, harmless from any and all loss, cost, damage, expense, liability (including, without limitation, court costs, the amount of the deductible under any insurance policy, and reasonable attorney's fees) incurred in connection with or arising at any time during or prior to the Lease Term, and from any cause whatsoever in or about the Premises, including, without limiting the generality of the foregoing: (i) any default by Tenant in the observance or performance of any of the terms, covenants, or conditions of this Lease on Tenant's part to be observed or performed; (ii) the use or occupancy of the Premises by Tenant or any person claiming by, through, or under Tenant; (iii) except as otherwise agreed in Section 25(c), herein, the condition of the premises or any occurrence or happening on the Premises from any cause whatsoever, or (iv) any acts, omissions, or negligence of Tenant or any person claiming by, through, or under tenant, or of the contractors, agents, servants, employees, visitors, or licensees of Tenant or any such person, in, on, or about the Premises, either prior to or during the Lease Term (including, without limitation, any holdovers in connection therewith), 21 28 including, without limitation, any acts, omissions, or negligence in the making or performance of any alterations. TENANT FURTHER AGREES TO INDEMNIFY AND HOLD HARMLESS LANDLORD, LANDLORD'S AGENT, AND LANDLORD'S MORTGAGEE, IF ANY, FROM AND AGAINST ANY AND ALL LOSS, COST, LIABILITY, DAMAGE, AND EXPENSE (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEY'S FEES) INCURRED IN CONNECTION WITH OR ARISING FROM ANY CLAIMS BY ANY PERSONS BY REASON OF INJURY TO PERSONS OR DAMAGE TO PROPERTY OCCASIONED BY ANY USE, OCCUPANCY, CONDITION, OCCURRENCE, HAPPENING, ACT, OMISSION, OR NEGLIGENCE REFERRED TO IN THE PRECEDING SENTENCE, EXCEPT TO THE EXTENT CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE INDEMNIFIED PARTY, OR AS SET FORTH IN SECTION 25(c), HEREIN. THE INDEMNITY BY TENANT TO LANDLORD AS SET FORTH IN THIS SECTION 13.1 SHALL BE IN EFFECT EVEN IF THE NEGLIGENCE OR STRICT LIABILITY OF LANDLORD IS ALLEGED OR PROVED TO BE A CAUSE THEREOF; PROVIDED, HOWEVER, THIS INDEMNITY SHALL NOT APPLY IF AND TO THE EXTENT THAT LANDLORD'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT IS A CAUSE THEREOF. The provisions of this Section shall survive the expiration or sooner termination of this Lease with respect to any claims or liability occurring prior to such expiration or termination, and shall not be limited by reason of any insurance carried by Landlord and Tenant. Notwithstanding anything to the contrary which may be set forth in this Section 13.1, above, Tenant shall have no duty to cover any loss, damage or cost that may be needed to repair, or replace the ground floor slab, or remediate the condition causing the heaving of the ground floor slab in the office area of the building, to the extent it is specifically excluded in Section 10.2, herein. 13.2 No Liability. Neither the shareholders, officers, directors, trustees, individuals, or partners comprising Landlord or Landlord's Property Manager, nor the shareholders (nor any of the partners comprising same), directors, trustees, officers or partners of any of the foregoing, nor their agents (collectively the "Parties") shall incur any liability for the performance of Landlord's obligations under this Lease. Tenant shall look solely to Landlord to enforce Landlord's obligations hereunder and shall not seek any damages against any of the Parties. The liability of Landlord for Landlord's obligations under this Lease shall not exceed and shall be limited to the value of Landlord's interest in the Premises and the proceeds and rents derived therefrom from and after Landlord's default hereunder, and Tenant shall not look to any other property or assets of Landlord or any of the Parties in seeking either to enforce Landlord's obligations under this Lease or to satisfy a judgment for Landlord's failure to perform such obligations. ARTICLE XIV: WAIVER OF SUBROGATION RIGHTS 14.1 Release; Waiver of Subrogation. Anything in this Lease to the contrary notwithstanding: 22 29 (a) Landlord hereby releases Tenant from any and all liability or responsibility to the Landlord or anyone claiming through or under Landlord, by way of subrogation or otherwise, for any (i) loss or damage to any building, structure, or other tangible property, (ii) liability for personal injury or other tortious conduct or (iii) losses under workers' compensation laws and benefits, even though such loss, damages, or liability might be caused by the negligence of such party, its agents, contractors, invitees, or employees, whether or not such claims are or would be covered by insurance policies carried by Landlord covering the Premises; and (b) Tenant hereby releases Landlord, Landlord's Property Manager, and Landlord's Mortgagee, and their agents, and any other tenant which is leasing space in the Project, from any and all liability or responsibility to the Tenant or anyone claiming through or under Tenant, by way of subrogation or otherwise, for any (i) loss or damage to any building, structure, or other tangible property, (ii) liability for personal injury or other tortious conduct, or (iii) losses under workers' compensation laws and benefits, even though such loss, damages, or liability might be caused by the negligence of such party, its agents, contractors, invitees, or employees (whether or not such claims are or would be covered by insurance policies carried or required to be carried by Tenant hereunder). 14.2 Waiver Provision. a. All insurance policies (other than worker's compensation insurance) which Tenant must carry pursuant to Article VIII of this Lease shall contain one of the following provisions and/or endorsements ("Waiver Provision"): (i) An express waiver of any right of subrogation by the insurance company against Landlord, Landlord's Property Manager, Landlord's Mortgagee, and its agents and employees; or (ii) A statement that the policy shall not be invalidated should the insured waive in writing, prior to a loss, any or all rights of recovery against any party for losses covered by such policies. b. Any property insurance of Landlord covering the Premises shall also contain a Waiver Provision in one of the alternative forms provided in subsection 14.2(a), above; provided, this clause shall not cause Landlord to be obligated to secure any insurance over and above what is specifically contemplated herein. Any increased premium cost incurred by Landlord by reason of such Waiver Provision shall be paid by Tenant, provided, however, if Landlord is unable to obtain a waiver of subrogation from its insured, then any agreement to obtain such a waiver shall be null and void. ARTICLE XV: PARTIAL AND TOTAL DESTRUCTION OF THE PREMISES In the event any part or all of the Premises shall at any time during the term of this Lease be damaged or destroyed, regardless of cause, Tenant shall give prompt notice to 23 30 Landlord, subject to the terms of this Article XV. Tenant shall repair and restore the Premises to its original condition, including buildings and all other improvements on the Premises, as soon as circumstances permit. Provided Tenant maintains the insurance required hereunder, and proceeds are received from the casualty insurance policy to be maintained by Tenant hereunder, in the event that Landlord's Mortgagee requires that any such insurance proceeds be delivered to the Landlord's Mortgagee and applied as a payment on the debt payable to Landlord's Mortgagee, Landlord agrees to contribute the amount of the proceeds delivered to Landlord's Mortgagee and applied as a payment on the Note payable to Lender, up to a maximum of Five Hundred Thousand Dollars ($500,000.00). In the event the amount of insurance proceeds applied to Lender's Note exceeds $500,000.00, Landlord may, in its sole discretion, elect to contribute the additional amount necessary to cover the entire amount of the insurance proceeds applied by Landlord's Mortgagee to the Note. However, if Landlord does not elect to contribute the additional amount necessary, either Landlord or Tenant may elect to terminate this Lease. In the event of a termination of the Lease by either Landlord or Tenant under this Section XV, Tenant shall deliver to Landlord the amount of Tenant's deductible, as well as any amount by which the entire insurance proceeds paid as a result of such casualty would be insufficient to rebuild the Building but for the Landlord's Mortgagee's application of the insurance proceeds hereunder. Tenant shall hold Landlord free and harmless from any and all liability of any nature whatsoever resulting from such damage or destruction, and such repairs and restoration. Tenant, and not Landlord, shall be responsible for paying for any cost of repairs or restoration in excess of the proceeds paid by insurance policies procured by Tenant, but not for any such amounts paid by the insurer but applied by Landlord's Mortgagee as a payment on its debt. Tenant is not entitled to any rent abatement during or resulting from any disturbance on or partial or total destruction of the Premises from Tenant. However, in the event of a termination under this Article XV, once Tenant has delivered to Landlord the sums due from Tenant hereunder, Landlord shall refund to Tenant any remaining rent paid in advance, including, without limitation, the Prepaid Rent. ARTICLE XVI: CONDEMNATION 16.1 Condemnation Damages. In the event of the taking or conveyance of the whole or any part of the Premises by reason of condemnation by any public or quasi-public body, Landlord and Tenant shall represent themselves independently in seeking damages before the condemning body. Each party shall be entitled to the amount awarded respectively to each. Landlord shall not make a claim in such proceedings for any portion of the award attributable to tenant's furniture, fixtures, and equipment installed in the Premises in accordance with this Lease which are to remain in the Premises as a result of such taking. 16.2 Termination of Lease Due to Condemnation. In the event that the taking includes the Building and materially adversely affects the use of the Premises (as defined in Article V), Tenant may terminate the Lease by giving Landlord sixty (60) days' written notice of its intention to terminate the Lease after receiving notice of the Condemnation 24 31 from the condemning authority. The effective date of the termination shall be the actual date of such taking. In the event of termination, the rent for the last month of Tenant's occupancy shall be prorated and Landlord shall refund to Tenant any rent paid in advance and Tenant shall thereupon be released from its obligation to pay rent. ARTICLE XVII: ASSIGNMENT AND SUBLETTING 17.1 Tenant's Right of Assignment and Subletting. a. No Assignment. Tenant shall not voluntarily or by operation of law assign or encumber its interest in this Lease or in the Premises, or sublease all or any part of the Premises, or allow any other person or entity to occupy or use any part of the Premises, without first obtaining the written consent of Landlord, which consent may be granted or withheld in Landlord's sole and absolute discretion. Any assignment, encumbrance, or sublease without Landlord's consent shall be voidable and, at Landlord's election, shall constitute a Default. No transfer permitted by Landlord shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. b. Landlord's Option to Preserve Subtenancies. In the event of Tenant's surrender of this Lease or the termination of this Lease in any other manner, Landlord may, at its option, either terminate any or all subtenancies, if any, or succeed to the interest of Tenant as sublandlord thereunder. No merger shall result from Tenant's sublease of the Premises under this Section, Tenant's surrender of this Lease, or the termination of this Lease in any other manner. Tenant immediately and irrevocably assigns to Landlord, as security for Tenant's obligations under this Lease, all rent from any subletting of all or a part of the Premises as permitted by this Lease. In the event of a default by Tenant, Landlord, as assignee and as attorney-in-fact for Tenant, or a receiver for Tenant appointed on Landlord's application, may collect the rent and apply it toward Tenant's obligations under this Lease. c. Fees and Costs with Regard to Proposed Assignment or Sublease. If Tenant requests Landlord to consent to a proposed assignment or sublease, Tenant shall pay to Landlord, whether or not consent is ultimately given, Landlord's reasonable attorney's fees and other costs incurred in connection with each such request. 17.2 Landlord's Right of Assignment. Landlord shall be free at all times, without need of consent or approval by Tenant, to assign its interest in this Lease and/or to convey fee title to the Premises. Each conveyance by Landlord of Landlord's interest in the Lease or the Premises prior to expiration or termination hereof shall be subject to this Lease and shall relieve the grantor of any further obligations or liability as Landlord, and Tenant shall look solely to Landlord's successor-in-interest for all future obligations of Landlord. Tenant hereby agrees to attorn to Landlord's successors in interest, whether such interest is acquired by sale, transfer, foreclosure, deed in lieu of foreclosure, or otherwise. The term "Landlord" as used in this Lease, so far as covenants and obligations 25 32 on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises. Without further agreement, the transferee of such title shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord hereunder during its ownership of the Premises. ARTICLE XVIII: DEFAULT AND TERMINATION 18.1 Events of Default. The occurrence of any of the following events (each an "Event of Default" or "Default") shall constitute a default by Tenant: a. Failure by Tenant to pay Base Rent, Additional Rent (including, without limitation any Monthly Tax Payments) or other sum of money payable hereunder when due and the continuance of such failure for ten (10) days after written notice thereof from Landlord to Tenant; provided, however, if Tenant shall fail in the performance of any such covenant or agreement of this Lease necessitating notice by Landlord and shall receive notice from Landlord hereunder two (2) or more times in any twelve (12) month period, notwithstanding such failures have each been cured by Tenant on each previous occasion, at Landlord's option, any further similar failure during such 12-month period may be deemed an Event of Default without the ability for cure; b. Failure by Tenant to perform or comply with any provision of this Lease [other than as set forth in Subsection 18.1(a)] if the failure is not cured within thirty (30) days after notice has been given to Tenant. If, however, the failure cannot reasonably be cured within thirty (30) days after notice has been given to Tenant, Tenant shall not be in default of this Lease if Tenant commences to cure the failure within the cure period and diligently and in good faith continues to cure the failure. c. To the extent permitted by law: (i) a general assignment by Tenant or any guarantor of the Lease for the benefit of creditors, or the filing by or against Tenant or any guarantor of any proceeding or arrangement under any law relating to any insolvency or bankruptcy, unless in the case of a proceeding filed against Tenant or any guarantor the same is dismissed within sixty (60) days, or the appointment of a trustee or receiver to take possession of all or substantially all of the assets of Tenant or any guarantor, unless possession is restored to Tenant or such guarantor within thirty (30) days, or any attachment, execution or other judicially authorized seizure of all or substantially all of Tenant's assets located upon the Premises or of Tenant's interest in this Lease, unless such seizure is discharged within thirty (30) days; (ii) Tenant's or any guarantor's convening of its creditors or any class thereof for the purpose of effecting a moratorium upon or; (iii) Tenant's or any guarantor's insolvency or admission of inability to pay its debts as they mature; and/or (iv) a violation by Tenant or any affiliate of Tenant under any other lease or agreement with Landlord relating to the Premises which is not cured within the time permitted thereunder. 26 33 d. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant or any guarantor or of the Premises or any of Tenant's property located thereon in any proceedings brought by Tenant or any guarantor, or any such receiver or trustee shall be appointed in any proceeding brought against Tenant or any guarantor and shall not be discharged within sixty (60) days after such appointment or Tenant or such guarantor shall consent to or acquiesce in such appointment; or e. The leasehold hereunder shall be taken on execution or other process of law in any action against Tenant. 18.2 Landlord's Remedies on Tenant Default. 18.2.1 Landlord shall have any one or more of the following remedies after the occurrence of a Default by Tenant: a. Terminate Lease. Terminate this Lease by giving written notice of termination to Tenant, in which event Tenant immediately shall surrender the Premises to Landlord. If Tenant fails to so surrender the Premises, then Landlord, without prejudice to any other remedy it has for possession of the Premises or arrearages in rent or other damages, may re-enter and take possession of the Premises and expel or remove Tenant and any other person or entity occupying the Premises or any part thereof, without being liable for any damages, whether caused by the negligence of Landlord or otherwise. No act by Landlord other than giving notice of termination to Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the Premises, or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of this Lease. On termination of the Lease, Landlord shall have the right to recover from Tenant the aggregate sum of the following: (i) The cost of recovering the Premises; plus (ii) The unpaid Rent (including Base Rent and Additional Rent) earned at the time of termination, including interest thereon at the per annum interest rate provided in accordance with Article IV, above, from the due date; plus (iii) The amount equal to: (1) the total Rent which Landlord would have received under this Lease for the remainder of the Term, discounted at the Prime Rate then in effect to the then present value, less (2) the then fair market value of the remaining unexpired portion of the Lease determined at the then Fair Market Rate for the Premises, discounted at the Prime Rate then in effect to the then present value, and taking into consideration the likelihood and probable timing of the reletting of the Premises; plus (iv) All other reasonable expenses incurred by Landlord in connection with Tenant's default and all other sums of money and damages due to Landlord. 27 34 For the purposes of this Section, the term "Prime Rate" shall mean the per annum rate of interest announced or published from time to time by The Frost National Bank (or its successors or assigns) as its Prime Commercial Lending rate; provided, however, that the Prime Rate shall at all times be limited to the maximum rate of interest from time to time permitted under applicable federal and Texas law. b. Re-take Possession. Landlord may terminate Tenant's right of possession (but not the Lease) and may repossess the Premises by forcible entry or detainer suit or otherwise, without demand or notice of any kind to Tenant and without terminating this Lease and without being liable for any damages, whether caused by the negligence of Landlord or otherwise; in such case, Landlord may relet the Premises, or any part of them, to third parties, but has no obligation to do so, except as may be required under Texas law. Except to the extent Texas law requires otherwise, such reletting by Landlord of the Premises may be on whatever terms and conditions Landlord, in its sole discretion, deems advisable. Reletting can be for a period shorter or longer than the remaining term of this Lease. Landlord's action under this Subsection is not considered an acceptance of Tenant's surrender of the Premises unless Landlord so notifies Tenant in writing. Tenant shall be immediately liable to Landlord for all reasonable costs Landlord incurs in reletting the Premises, including brokers' commissions, expenses of remodeling the Premises required by the reletting, and like costs. Tenant shall pay to Landlord the Rent due under this Lease on the dates the Rent is due, less the rent Landlord receives from any reletting. If Landlord relets the Premises without terminating this Lease, any rent received will be applied to the account of Tenant, not to exceed Tenant's total indebtedness to Landlord; no reletting by Landlord is considered to be for its own account unless Landlord has notified Tenant in writing that the Lease has been terminated. If Landlord relets the Premises, rent that Landlord receives from reletting will be applied to the payment of: (i) first, any indebtedness from Tenant to Landlord other than Rent due from Tenant; (ii) second, any Additional Rent; (iii) third, all costs, including maintenance, incurred by Landlord in reletting; and (iv) fourth, Base Rent due and unpaid under the Lease. After deducting the payments referred to in this Subsection, any sum remaining from the rent Landlord receives from reletting will be held by Landlord and applied in payment of future Rent as Rent becomes due under this Lease. If, on the date Rent is due under this Lease, the rent received from the reletting is less than the rent due on that date, Tenant will pay to Landlord, in addition to the remaining rent due, all costs, including maintenance, Landlord incurred in reletting which remain after applying the rent received from the reletting. Tenant shall have no right to or interest in the rent or other consideration received by Landlord from reletting to the extent it exceeds Tenant's total indebtedness to Landlord. Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this Section 18.2.1 from time to time; and that no delivery or recovery of any portion due Landlord hereunder shall be any defense in any action to recover any 28 35 amount not theretofore paid to Landlord, nor shall such reletting be construed as an election on the part of Landlord to terminate this Lease unless a written notice of such intention be given to Tenant by Landlord. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. d. Perform on behalf of Tenant. Landlord may re-enter the Premises without terminating this Lease and without being liable for any damages, whether caused by the negligence of Landlord or otherwise, and do whatever Tenant is obligated to do under the terms of this Lease. The expenses incurred by Landlord in affecting compliance with Tenant's obligations under this Lease immediately shall become due and payable to Landlord as Additional Rent. The above remedies are not exclusive; they are cumulative in addition to any remedies now or later allowed by law, in equity, or otherwise. 18.2.2 In all events, Tenant is liable for all damages of whatever kind or nature, direct or indirect, suffered by Landlord as a result of the occurrence of an Event of Default. If Tenant fails to pay Landlord in a prompt manner for the damages suffered, Landlord may pursue a monetary recovery from Tenant. Included among these damages are all expenses incurred by Landlord in repossessing the Premises (including, but not limited to, increased insurance premiums resulting from Tenant's vacancy), all expenses incurred by Landlord in reletting the Premises (including, but not limited to, those incurred for advertisements, brokerage fees, repairs, remodeling, and replacements), all concessions granted to a new tenant on a reletting, all losses incurred by Landlord as a result of Tenant's default, a reasonable allowance for Landlord's administrative costs attributable to Tenant's default, and all reasonable attorney's fees incurred by Landlord in enforcing any of Landlord's rights or remedies against Tenant. 18.2.3 Pursuit of any of the foregoing remedies does not constitute an irrevocable election of remedies nor preclude pursuit of any other remedy provided elsewhere in this Lease or by applicable law, and none is exclusive of another unless so provided in this Lease or by applicable law. Likewise, forbearance by Landlord to enforce one or more of the remedies available to it on an Event of Default does not constitute a waiver of that default or of the right to exercise that remedy later or of any rent, damages, or other amounts due to Landlord hereunder. 18.2.4 Whether or not Landlord elects to terminate this Lease or Tenant's right to possession of the Premises on account of any default by Tenant, Landlord shall have all rights and remedies at law or in equity, including, but not limited to, the right to re-enter the Premises and, to the maximum extent provided by law, Landlord shall have the right to terminate any and all subleases, licenses, concessions, or other consensual arrangements for possession entered into by Tenant and affecting the Premises or, in Landlord's sole discretion, may succeed to Tenant's interest in such subleases, licenses, concessions, or arrangements. In the event of Landlord's election to succeed to Tenant's 29 36 interest in any such subleases, licenses, concessions, or arrangements, Tenant shall have no further right to or interest in the rent or other consideration receivable thereunder as of the date of notice by Landlord of such election. 18.3 Effect of Tenant's Default. If Tenant is in Default of the Lease, then, in addition to the above, all costs of de-identification of the Premises shall be paid by Tenant whether or not Landlord terminates this Lease. 18.4 Right of Landlord to Re-Enter. In the event of any termination of this Lease, Landlord shall have the immediate right (but under no obligation) to enter upon and repossess the Premises, and any personal property of Tenant may be removed from the Premises and stored in any public warehouse at the risk and expense of Tenant. 18.5 Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord or a surrender of Premises unless such intent is specifically acknowledged in a writing signed by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord and, notwithstanding such delivery, Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been terminated properly. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises. 18.6 Default by Landlord. Landlord shall be in default if Landlord fails to perform any provision of this Lease required of it and the failure is not cured within thirty (30) days after notice has been given to Landlord. If, however, the failure cannot reasonably be cured within the cure period, Landlord shall not be in default of this Lease if Landlord commences to cure the failure within the cure period and diligently and in good faith continues to cure the failure. Notices given under this Article XVIII shall specify the alleged breach and the applicable Lease provisions. If Landlord shall at any time default beyond the applicable notice and cure period, Tenant shall, in addition to any other rights or remedies which Tenant may have as a result of such default, have the right to cure such default on Landlord's behalf. Any sums expended by Tenant in doing so, and all reasonably necessary incidental costs and expenses incurred in connection therewith, shall be payable by Landlord to Tenant within thirty (30) days following demand therefor by Tenant. Tenant shall not be entitled to an offset against rent. 18.7 Interest Charges. Any amount not paid by one part to the other when due to the other party will bear interest from the date due at the lesser of (i) the rate of eighteen percent (18%) per annum; or (ii) the maximum rate permitted by law. 30 37 ARTICLE XIX: SUBORDINATION, ATTORNMENT AND ESTOPPEL 19.1 Subordination and Non-Disturbance. Subject to the provisions of this Section, this Lease and the leasehold estate created hereby shall be subject, subordinate, and inferior to the lien and estate of any liens, trust deeds, and encumbrances including without limitation any lien held by Landlord's Mortgagee ("Mortgages"), and all renewals, extensions, or replacements thereof, now or hereafter imposed by Landlord upon the Premises. In confirmation of such subordination, Tenant shall, at Landlord's request, or upon the request of Landlord's Mortgagee, execute promptly any certificate or instrument evidencing such subordination that Landlord, or Landlord's Mortgagee, may request. Tenant hereby constitutes and appoints Landlord the attorney-in-fact for Tenant to execute any such certificate or instrument for and on behalf of Tenant. Provided, however, that this Lease shall not be subordinate to any Mortgage arising after the date of this Lease, or any renewal, extension, or replacement thereof, unless and until Landlord provides Tenant with an agreement ("Non-Disturbance Agreement"), in form and content reasonably acceptable to Tenant, Landlord, and Landlord's Lender, signed and acknowledged by each holder of any such interest setting forth that (i) so long as Tenant is not in Default hereunder, Tenant's rights and obligations hereunder shall remain in full force and Tenant's right to possession shall be upheld, and (ii) any party succeeding to Landlord's interest shall be bound by Tenant's payment of the Prepaid Rent and the provisions of this Lease regarding thereto, if any of the Prepaid Rent remains unapplied at such time. Tenant shall, promptly following a request by Landlord and after receipt of the Non- Disturbance Agreement, execute and acknowledge any subordination agreement or other documents required to establish of record the priority of any such encumbrance over this Lease, so long as such agreement does not otherwise increase Tenant's obligations or diminish Tenant's rights hereunder. The form of Non-Disturbance Agreement attached hereto as Exhibit "G", is deemed approved by Tenant as an acceptable form of Non-Disturbance Agreement; provided, the approval of such form of Non-Disturbance Agreement in the form attached, shall not limit or restrict the ability of Landlord to require the execution of a different form of Non-Disturbance Agreement so long a such different form complies with the conditions of this Section 19.1. 19.2 Attornment. In the event of foreclosure of any Mortgage, whether superior or subordinate to this Lease, then (i) this Lease shall continue in force; (ii) Tenant's quiet possession shall not be disturbed if Tenant is not in default hereunder; (iii) Tenant shall attorn to and recognize the mortgagee or purchaser at foreclosure sale ("Successor Landlord") as Tenant's landlord for the remaining term of this Lease; and (iv) the Successor Landlord shall not be bound by (a) any payment of rent for more than one month in advance, unless same was required by the terms of this Lease; (b) any amendment or modification of this Lease made without the Successor Landlord's consent after the Successor Landlord's name is given to Tenant, unless the amendment or modification is specifically authorized by the original lease and does not require Landlord's prior agreement of consent; (c) any personal liability for any act or omission of a prior Landlord; and (d) any termination of Lease by Tenant except as authorized under this Lease or by law. At the request of the Successor Landlord, Tenant shall execute a 31 38 new lease for the Premises, setting forth all of the provisions of this Lease except that the term of the new lease shall be for the balance of the term of this Lease. 19.3 Estoppel Certificate. Tenant shall execute and deliver to Landlord, within ten (10) days after receipt of Landlord's request, any estoppel certificate or other statement to be furnished to any prospective purchaser of or any lender against the Premises. Such estoppel certificate shall acknowledge and certify each of the following matters, to the extent each may be true: that the Lease is in effect and not subject to any rental offsets, claims, or defenses to its enforcement; the commencement and termination dates of the term; that Tenant is paying rent on a current basis; that any improvements required to be furnished under the Lease have been completed in all respects; that the Lease constitutes the entire agreement between Tenant and Landlord relating to the Premises; that Tenant has accepted the Premises and is in possession thereof; that the Lease has not been modified, altered, or amended except in specified respects by specified instruments; and that Tenant has no notice of any prior assignment, hypothecation, or pledge of rents or the Lease. ARTICLE XX: TENANT'S FINANCIAL STATEMENTS During the term of the Lease and for such period as the Tenant remains a registrant subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Tenant shall provide Landlord with all financial information required on Forms 10-Q, 10-K, 8-K, as well as any proxy materials, on a basis concurrent with its public reporting obligations. Failure of the Tenant to file its required reports with the Securities and Exchange Commission on a timely basis does not alter the Tenant's obligation to provide Landlord with timely financial information pursuant to the Lease. Should the Tenant's status as a registrant change during the term of the Lease such that it is no longer subject to public reporting requirements, then Tenant shall provide Landlord with quarterly financial statements within sixty (60) days of the end of each fiscal quarter and annual financial statements within ninety (90) days of the end of each fiscal year. ARTICLE XXI: NOTICES 21.1 Notice Requirements. All notices, requests, or demands herein provided to be given or made, or which may be given or made by either party to the other, shall be given or made only in writing and shall be deemed to have been duly given: (i) when delivered personally at the address set forth below, or to any agent of the party to whom notice is being given; or (ii) on the date delivered when sent via Overnight Mail, properly addressed and postage prepaid; or (iii) on the date sent via facsimile transmission; or (iv) seventy-two (72) hours after the time the same is deposited in the United States mail, properly addressed and first class postage prepaid, return receipt requested. The proper addresses to which notices, requests, or demands may be given or made by either party shall be the address set forth at the end of this Section or to such other address or to such 32 39 other person as any party shall designate. Such address may be changed by written notice given to the other party in accordance with this Section. If to Landlord: KOONTZ/McCOMBS 1, LTD. Attn: Bart C. Koontz, President 200 Concord Plaza Drive, Suite 525 San Antonio, Texas 78216 Telephone: (210) 829-9292 Telecopier: (210) 829-9273 With a copy to: Marlise A. Kercheville Davis, Adami & Cedillo, Inc. 7710 Jones Maltsberger, Suite 400 San Antonio, Texas 78216 Telephone: (210) 822-6666 Telecopier: (210) 822-1151 If to Tenant: Solo Serve Corporation Attn: Mr. Ross Bacon 1610 Cornerway Blvd. San Antonio, Texas 78219-2900 Telephone: (210) 662-6262 Telecopier: (210) 666-3339 With copy to: Peter R. Broderick Cox & Smith, Inc. 112 E. Pecan, Suite 1800 San Antonio, Texas 78205 Telephone: (210) 554-5231 Telecopier: (210) 226-8395 21.2 Payments Under Lease. Rent and all other payments due to Landlord under this Lease shall be paid in lawful money of the United States of America without offset or deduction to the name and at the address first given above or to such other persons or parties or at such other places as Landlord may from time to time designate in writing. ARTICLE XXII: ATTORNEY'S FEES AND VENUE 22.1 Recovery of Attorneys' Fees and Costs of Suit. Tenant or Landlord, as the case may be, shall reimburse the other party upon demand, for any costs or expenses 33 40 incurred in connection with any breach or default by the other party under this Lease, whether or not suit is commenced or judgment entered, including without limitation, enforcement proceedings of any type whether formal or informal, or filed in state, federal or bankruptcy court. Such costs shall include legal fees and costs incurred for the negotiation of a settlement, enforcement of rights, or otherwise. Furthermore, if any action for breach of or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs; such attorneys' fees and costs shall be paid by the losing party in such action. 22.2 Party to Litigation. Tenant shall indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands, and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action (i) instituted by Tenant, or by any third party against Tenant, unless resulting from the default by Landlord hereunder, or by or against any person holding any interest under or using the Premises by license of or agreement with Tenant; (ii) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (iii) otherwise arising out of or resulting from any action or transaction of Tenant or such other person during or prior to the Term, hereof, other than a proceeding by Nationwide under the Nationwide Note and Deed of Trust with Landlord's Mortgagee; or (iv) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding commencing by or against Tenant, under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs incurred by Landlord in any such claim or action. For purposes of this Section 22.2, the term "Landlord" shall be deemed to include Landlord, Landlord's Property Manager, and their officers, directors, trustees, beneficiaries, partners, agents, affiliates and/or employees. 22.3 Non-Jury Trial; Venue. In the interest of obtaining a speedier and less costly hearing of any dispute, each of Landlord and Tenant hereby expressly waives trial by jury in any action, proceeding or counterclaim brought by either party against the other and any rights to a trial by jury under any statute, rule of law or public policy in connection with any matter whatsoever arising out of or in any way related to this Lease and the Premises. Although such jury waiver is intended to be self-operative and irrevocable, Landlord and Tenant each further agree, if requested, to confirm such waivers in writing at the time of commencement of any such action, proceeding, or counterclaim. If Landlord commences any detainer suit, summary proceedings or other action seeking possession of the premises, Tenant agrees not to interpose by consolidation of actions, removal to chancery or otherwise, any counterclaim, claim for set- off, recoupment, reduction of Rent, or other claim seeking affirmative relief of any kind (except a mandatory or compulsory counterclaim which Tenant would forfeit if not so interposed). Any action or proceeding brought by either party against the other for any matter arising out of or in any way relating to the Lease or the Premises, shall be heard, in the County where the Premises are located. 34 41 ARTICLE XXIII: RELATIONSHIP OF PARTIES, WAIVER AND CONSENT 23.1 Relationship of Parties. This Lease shall not be deemed or construed by the parties, nor by any third party, as creating the relationship of (i) principal and agent, (ii) partnership, or (iii) joint venture between the parties. Neither the method of computation of rent nor any other provision of this Lease, nor any acts of the parties are other than in the relationship of Landlord and Tenant. 23.2 No Waiver. No waiver by Landlord of any breach of any one or more of the terms, covenants, conditions, or agreements of this Lease shall be deemed to imply or constitute a waiver of any succeeding or other breach. Failure of Landlord to insist upon the strict performance of any of the terms, conditions, covenants, and agreements of this Lease shall not constitute or be considered as a waiver or relinquishment of Landlord's rights to subsequently enforce any default, term, condition, covenants, or agreement, which shall all continue in full force and effect. The rights and remedies of Landlord under this Lease shall be cumulative and in addition to any and all other rights and remedies which Landlord has or may have. 23.3 No Obligation to Give Consent. Landlord shall have no liability for damages resulting from Landlord's failure to give any consent, approval, or instruction reserved to Landlord. Tenant's sole remedy in any such event shall be an action for injunctive relief. ARTICLE XXIV: AUTHORITY TO MAKE LEASE; COVENANT OF QUIET ENJOYMENT 24.1 Full Power and Authority to Enter Lease. The parties covenant and warrant that each has full power and authority to enter into this Lease. 24.2 Quiet Enjoyment. Landlord covenants and warrants that Tenant shall have and enjoy full, quiet, and peaceful possession of the Premises, its appurtenances and all rights and privileges incidental thereto during the term, subject to the provisions of this Lease and any title exceptions or defects in existence at the time of the conveyance of the Premises to Landlord by Tenant. ARTICLE XXV: HAZARDOUS MATERIAL 25.1 Environmental Compliance. Tenant shall not cause or permit any Hazardous Material to be brought upon, or used in or about, the Premises by Tenant, its agents, employees, contractors, or invitees, without the prior written consent of Landlord. If Tenant breaches the obligations stated in the preceding sentence, if the presence of Hazardous Material on the Premises caused or permitted by Tenant results in contamination of the Premises, or if contamination of the Premises by Hazardous Material otherwise occurs, during or prior to the Term hereof, except as set forth in Section 25.3, 35 42 below, and Landlord, its agents, employees or contractors are not responsible for the contamination, then Tenant shall indemnify, defend, and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses (including, without limitation, diminution in value of the Premises, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, damages arising from any adverse impact on marketing of space of the Premises, and sums paid in settlement of claims, attorneys' fees, consultation fees, and expert fees) which arise during or after the term of the Lease as a result of such contamination. This indemnification by Tenant shall survive the termination or expiration of this Lease. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation or site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Premises, unless Landlord is responsible of same under Section 25.3, below. Without limiting the foregoing, if the presence of any Hazardous Material on the Premises caused or permitted by Tenant results in any contamination of the Premises, Tenant shall promptly take all actions at its sole expense as are recommended by environmental engineers hired by Tenant and are necessary to return the Premises to a condition which is in compliance with all applicable Laws ; provided that Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises. 25.2 Tenant's Responsibility for Hazardous Materials. Landlord and Tenant acknowledge that Landlord may become legally liable for the costs of complying with laws relating to Hazardous Material which are not the responsibility of Landlord or the responsibility of Tenant including the following: (i) a change in Laws which relate to Hazardous Material which make Hazardous Material present on the Premises as of the Commencement Date, whether known or unknown to Landlord, a violation of such new Laws; (ii) Hazardous Material present or under the Premises as a result of any discharge, dumping, or spilling (whether accidental or otherwise) on the surface of the Premises by other tenants of the Premises, or their agents, employees, contractors, or invitees, or by others during or prior to the Term hereof. Accordingly, Landlord and Tenant agree that, except to the extent set forth in Section 25.3, hereof, the cost of complying with Laws relating to Hazardous Material on the Premises for which Landlord is legally liable as set forth in this Section 25.2 shall be the responsibility and shall be paid by Tenant. To the extent any such expense relating to Hazardous Material is subsequently recovered or reimbursed through insurance, or recovery from responsible third parties, or other action, Tenant shall be entitled to a reimbursement to the extent it has paid the maintenance expense to which such recovery or reimbursement relates. Tenant shall also be responsible for remediation, environmental clean- up and/or debris removal and related damages in connection with any fire or other casualty which may occur on the premises. 25.3 Landlord's Responsibility for Hazardous Material. Landlord agrees that it shall be responsible for Hazardous Material that migrates, flows, percolates, diffuses, or in any other way moves beneath the surface of the Premises from outside the Premises after 36 43 the Commencement Date, provided such Hazardous Material is not caused by Tenant, its agents, employees, contractors or invitees. The cost of complying with Laws relating to Hazardous Material on the Premises for which Landlord is legally liable under this Section 25.3, shall be the responsibility and shall be paid by Landlord. In the event Landlord or Tenant discovers any Hazardous Material located under the Demised Premises which Landlord is responsible for under this Section 25.3, Landlord shall promptly proceed to remove such Hazardous Material, at Landlord's sole cost and expense, necessary to return the subsurface of the Property to a condition which is in compliance with all applicable governmental regulations. Landlord hereby agrees to indemnify and hold Tenant harmless from and against and to reimburse Tenant with respect to (which obligation shall survive the termination or expiration of this Lease) any and all claims, demands, causes of action, loss, damage, liabilities, cost and expenses (including attorneys' fees and court costs) of any and every character, known or unknown, fixed or contingent, asserted against Tenant at any time and from time to time directly related to Landlord's failure to promptly remove any Hazardous Material for which Landlord is responsible under this Section 25.3. 25.4 Survival. Provisions of this Article XVII shall survive termination of the Lease. ARTICLE XXVI: GENERAL PROVISIONS 26.1 Gender; Number. The use of (i) the neuter gender includes the masculine and feminine and (ii) the singular number includes the plural, whenever the context requires. 26.2 Captions. Captions in this Lease are inserted for the convenience of reference only and do not define, describe, or limit the scope of the intent of this Lease or any of its terms. 26.3 Exhibits. All attached exhibits are a part of this Lease and are incorporated in full by this reference. Except as specifically provided herein, if any provision contained in any exhibit hereto is inconsistent or in conflict with any provisions of this Lease, the provisions of this Lease shall supersede the provisions of such exhibit and shall be paramount and controlling. 26.4 Entire Agreement. This Lease contains the entire agreement between the parties relating to the transactions contemplated hereby and all prior or contemporaneous agreements, understandings, representations and statements, oral and written, are merged into this Lease. 26.5 Drafting. This Lease shall not be construed more strictly against one party than the other because it may have been drafted by one of the parties or its counsel, each having contributed substantially and materially to the negotiation and drafting hereof. 37 44 26.6 Modification. No modification, waiver, amendment, discharge, or change of this Lease shall be valid unless it is in writing and signed by the party against which the enforcement of the modification, waiver, amendment, discharge, or change is or may be sought. 26.7 Joint and Several Liability. If any party consists of more than one person or entity, the liability of each such person or entity signing this Lease shall be joint and several. 26.8 Governing Law. This Lease shall be construed and enforced in accordance with the laws of the state in which the Premises are located. 26.9 Attorneys' Fees. With respect to Article XXIV and any other provision in this Lease providing for payment or indemnification of attorneys' fees, such fees shall be deemed to include reasonable fees incurred through any applicable appeal process. 26.10 Time of Essence. Time is of the essence of every provision of this Lease. 26.11 Severability. In the event any term, covenant, condition, or provision of this Lease is held to be invalid, void, or otherwise unenforceable by any court of competent jurisdiction, the fact that such term, covenant, condition, or provision is invalid, void, or otherwise unenforceable shall in no way affect the validity or enforceability of any other term, covenant, condition, or provision of this Lease. 26.12 Successors and Assigns. Except as otherwise provided herein, all terms of this Lease shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective legal representatives, successors, and assigns. 26.13 Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent, and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense, unless otherwise provided herein, or to any offset of the rent or other amounts owing hereunder against Landlord; provided, however, the foregoing shall in no way impair the right of Tenant to commence a separate action against Landlord for any violation by Landlord of the provisions hereof so long as notice is first given to Landlord and any holder of a mortgage or deed of trust covering the Building or all or any portion of the Project (of whose address Tenant has theretofore been notified) and an opportunity is granted to Landlord and such holder to correct such violation as provided above. 26.14 Counterparts. This Lease may be executed in any number of counterparts, each of which shall be deemed an original. The counterparts shall together constitute but one agreement. Any signature on a copy of this Lease or any document necessary or 38 45 convenient thereto sent by facsimile shall be binding upon transmission by facsimile and the facsimile copy may be utilized for the purposes of this Lease. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. LANDLORD: KOONTZ/McCOMBS 1, LTD., a Texas limited partnership, By: Koontz/McCombs, LLC, a Texas limited liability company, Its General Partner By: /s/ Bart C. Koontz ----------------------------- Bart C. Koontz, President TENANT: SOLO SERVE CORPORATION, a Delaware corporation, By: /s/ Ross E. Bacon -------------------------------------- Ross E. Bacon Executive Vice President 39 EX-10.50 4 EARNEST MONEY CONTACT 1 11. Contingency to Closing for Lease of Premises by Buyer. Closing of this transaction is also specifically contingent, subject to and conditioned upon Buyer and Seller agreeing on the terms and conditions of a lease for Solo Serve Corporation, the Seller, to lease the Property from Buyer, for an initial term of ten (10) years, with two (2) five (5) year renewal options. The lease is to be an absolute triple-net lease for the Property. Under the lease, Solo Serve Corporation shall be responsible for all expenses, maintenance, taxes, assessments, insurance, structural repairs and replacements, non-structural repairs and replacements, and in the lease, Solo Serve Corporation will agree to promptly repair and remediate same (to include, without limitation, settling of the foundation occurring in the front office portion of the building); provided, however, this repair obligation is not intended to apply to any casualty loss or condemnation loss to the extent any proceeds received as a result of such loss are not delivered to Seller to repair the Property. Additional terms of the lease, without limitation, shall include the following: 11.1 Rent. Rent payments are to be payable monthly in advance during the Primary Lease Term, based on a beginning annual base rental for Years 1-5 of the Primary Lease Term of Nine Hundred Seventy-Five Thousand and No/Hundredths Dollars ($975,000.00), One Million Seventy-Two Thousand Five Hundred and No/Hundredths Dollars ($1,072,500.00) for Years 6-10 of the Primary Lease Term, and the annual base rental for each renewal period, if executed, shall be at market rates. 11.2 Assignment and Subletting. Tenant shall not be entitled to assign or sublet all or any portion of the Premises. 11.3 Prepaid Rent. Upon execution of the lease, the Tenant will be required to provide prepaid rent under the lease in the amount of Five Hundred Thousand and No/Hundredths Dollars ($500,000.00) (the "Prepaid Rent"). Beginning with the Fourth Lease Year, as such term is defined in the lease, One Hundred Thousand Dollars ($100,000.00) of the Prepaid Rent will be applied to the Base Rent for the Fourth Lease Year, One Hundred Thousand Dollars ($100,000.00) to the Fifth Lease Year, and One Hundred Thousand Dollars ($100,000.00) to Rent for the Sixth Lease Year. Beginning with the Seventh Lease Year, the Prepaid Rent shall thereafter remain at Two Hundred Thousand Dollars ($200,000.00), and will be applied to Base Rent as set forth in the Lease. 11.4 Other Terms. Such other reasonable terms as may be negotiated and agreed upon between Buyer and Seller in good faith. The terms set forth in this Section 11 are not intended to be a definitive lease, and a lease shall not be deemed to exist between Buyer and Seller, nor shall the condition set forth in this Section 11 be deemed satisfied, until a definitive written lease agreement has been agreed upon by both Buyer and Seller. During the Buyer's Examination Period, Seller and Buyer agree to negotiate in good faith to agree upon a definitive lease agreement incorporating the terms set forth above. In the event Buyer and Seller do not agree on the terms of a definitive lease within the Buyer's Examination Period (after good 10 2 faith negotiations), this Contract shall terminate and neither party shall have any further rights or obligations one unto the other hereunder, except for Buyer's indemnity obligations under Section 7.3 hereof. In the event Buyer and Seller do agree on a definitive lease agreement within said period of time, the parties shall mutually acknowledge said agreement in a writing between the parties, the agreed upon form of the lease shall be deemed to be a part of this Contract, and Seller and Buyer shall each be obligated to each execute and deliver a copy of said lease at the Closing. 12. Closing. The purchase and sale of the Property herein described shall be closed in the offices of the Title Company on the first business day following twenty (20) days after the Buyer's Examination Period. Upon Closing, Seller shall deliver to Buyer: 12.1 Warranty Deed. A Special Warranty Deed conveying good and indefeasible title in fee simple to the Land and Improvements, free and clear of any and all liens, encumbrances, conditions, easements, assessments, restrictions, and other conditions except for and subject to the Permitted Exceptions. 12.2 Title Policy. An Owner's Title Policy of Insurance issued in the face amount of the Purchase Price insuring good and indefeasible title to the Property. 12.3 Bill of Sale and Assignment. A Special Warranty Bill of Sale and Assignment in form reasonably acceptable to Buyer and Seller conveying the Tangible Property and Intangible Property, subject to the Permitted Exceptions. The form of this Agreement shall be agreed upon by Buyer and Seller during the Buyer's Examination Period; provided, however, that Buyer shall be obligated to assume therein all of Seller's obligations under all the Guaranties, Warranties and Service Agreements constituting part of the Intangible Property, but only to the extent same is delivered to Buyer as part of the Inspection Items. 12.4 Non-Foreign Affidavit. An Affidavit of Seller certifying that Seller is not a "foreign person" as defined in the Federal Foreign Investment and Real Property Tax Act of 1980, and the 1984 Tax Reform Act, as amended. 12.5 Warranties. To the extent same are assignable by Seller, the originals of all warranties from third parties regarding the Property in the possession of Seller. 12.6 Evidence of Authority. Copy of Seller's resolutions, certified as true and complete as of the Closing date, authorizing Seller's selling the Property pursuant to this Agreement, and evidencing the authority of the person signing this Agreement and any documents to be executed by Seller at Closing. 11 3 12.7 Other Documents. Such other documents and instruments as are reasonably required by the Title Company in connection with the issuance of its title insurance policy to Buyer. 12.8 Assumption of Notes. Any and all documents and instruments as are reasonably required by the Lender in connection with Buyer's assumption of the Nationwide Note and the Wausau Note. 12.9 Lease. The lease executed by Seller, as Tenant, upon the terms and provisions set forth in Section 11 above. 12.10 Estoppel Agreement. An estoppel agreement executed by Seller and Nationwide, in connection with the Nationwide Note, and by Seller and Employer's Life Insurance Company of Wausau, in connection with the Wausau Note, evidencing that there are no defaults or events of default by Seller under either the Nationwide Note or Wausau Note [It being understood that Seller will make reasonable and good faith efforts to obtain the signature of Nationwide (with respect to the Nationwide Note) and Employer's Life Insurance Company of Wausau (with respect to the Wausau Note), but that Seller does not covenant or warrant that it can obtain an estoppel agreement executed by Nationwide or Employer's Life Insurance Company of Wausau; provided, however, if, after exercising reasonable and good faith efforts, Seller fails to deliver an estoppel agreement fully executed by Nationwide and/or an estoppel agreement fully executed by Employer's Life Insurance Company of Wausau, as provided in this Section 12.10, then Buyer, as its sole and exclusive remedy, shall have the right to terminate the Contract and receive a full refund of the Earnest Money (less $100.00 paid to Seller); and, upon such return of the Earnest Money, both parties shall be relieved and released of and from any further liability hereunder, except for Buyer's obligations under Section 7.3 hereof.] 13. Buyer's Obligations at Closing. At the Closing, Buyer shall deliver to Seller the following: 13.1 Purchase Price. The Purchase Price, less the assumed indebtedness with Nationwide Insurance and Employer's Life Insurance Company of Wausau, by wire transfer of immediately available funds. 13.2 Lease. The Lease, executed by Buyer, as Landlord, and Seller, as Tenant, upon the terms and provisions set forth in Section 11 above. 13.3 Evidence of Authority. Copy of Buyer's resolutions, certified as true and complete as of the Closing date, authorizing Buyer's acquisition of the Property pursuant to this Earnest Money Contract, and evidencing the authority of the person signing this Agreement and any documents to be executed by Buyer at Closing. 12 4 13.4 Other Documents. Such other documents and instruments as are reasonably required by the Title Company in connection with the issuance of its title insurance policy to Buyer. 13.5 Assumption of Notes. Such documents and instruments as are reasonably required by Lender in connection with the assumption by Buyer of the Nationwide Note and the Wausau Note. 14. Proration. Rent shall be prorated for the month in which the Closing occurs. As Seller will be responsible for all utility expenses and other charges related to the Property pursuant to the terms of the lease, no proration of these items will be made. Real estate taxes will be prorated as of the date of Closing. 15. Default. In the event Buyer defaults in its obligations hereunder, Seller may terminate this Contract and retain all Earnest Money, as liquidated damages and this shall be Seller's sole remedy for the Buyer's breach of this Agreement. Seller and Buyer agree that it is difficult to determine, with any degree of certainty, the loss which Seller would incur in the event of Buyer's failure to close the purchase of the Property, and the parties have agreed the amount of the Earnest Money represents a reasonable estimate of such loss and is intended as a liquidated damages provision. In the event Seller defaults in its obligations hereunder, Buyer shall be entitled, as its sole and exclusive remedy in such event, to either (i) terminate this Agreement and receive a refund of the full amount of its Earnest Money, or (ii) enforce specific performance of this Contract. 16. Future operations. From the date of this Agreement until the Closing or earlier termination of this Agreement, Seller will: (i) keep, operate, and maintain the Property in accordance with past operating procedures, and (ii) promptly advise Buyer of any litigation, arbitration or administrative hearing concerning the Property arising or threatened to which Seller receives notice or of any circumstances which Seller learns of which would render any of Seller's representations set forth in Section 9 hereof false; (iii) maintain (or cause the maintenance of) all liability and property insurance currently in force with respect to the Property; (iv) perform all of Seller's obligations under the loan documents for the Nationwide Note and the Wausau Note; (v) not transfer or encumber or cause any lien to be placed against all or a portion of the Property; and 13 5 (vi) not enter into or acquiesce in the filing of any easement, license, plat (or re-plat) or zoning change affecting the Property. 17. Real Estate Commission. If, as and when this transaction closes, Seller will at Closing pay a commission of four percent (4.0%) of the Purchase Price, payable two percent (2.0%) to Grubb & Ellis, and two percent (2.0%) to Ironwood Property Corporation (the "Brokers"). Seller hereby indemnifies and holds Buyer harmless from any and all real estate commissions, claims for such commissions or similar fees on this transaction arising in any manner out of any commitment or promise or agreement made by Seller. Buyer hereby indemnifies and holds Seller harmless from any and all real estate commissions, claims for such commissions or similar fees on this transaction arising in any manner out of any commitment or promise or agreement made by Buyer, other than the commission provided herein. In accordance with the terms of the Real Estate License Act of Texas, Buyer is hereby advised by Broker that Buyer should have the abstract covering the Property examined by an attorney of Buyer's selection, or be furnished with or obtain a policy of title insurance. 18. Broker/Principal Disclosure. Bart C. Koontz, licensed real estate broker, is a principal of Ironwood Property Corporation and is also a principal of Koontz/McCombs, LLC, the Buyer herein. 19. Survival. All representations and warranties of Seller under this Purchase Agreement shall survive the Closing and continue in full force and effect for a period of two (2) years after the Closing. 20. Closing Costs. Notwithstanding anything to the contrary contained herein, the Closing Costs shall be paid as follows: By Seller: (a) Preparation of a Special Warranty Deed; (b) Title insurance examination and premium; (c) The cost of the Survey; (d) Brokerage fee as outlined in Section 17 herein; (e) One-half of the escrow fee, if any; and (f) One-half of the transfer and any other fees imposed by Lender, up to a maximum total amount payable by Buyer and Seller of Seventy-Five Thousand Dollars ($75,000.00). By Buyer: (a) Preparation of transfer documents relating to the Nationwide Note; (b) Recording fees; (c) One-half of the escrow fee, if any; (d) The survey deletion fee for Title Insurance purposes; and 14 6 (e) One-half of the transfer and any other fees imposed by Lender, up to a maximum total amount payable by Buyer and Seller of Seventy-Five Thousand Dollars ($75,000.00). In the event that Lender requires a payment of more than $75,000.00 as a condition of granting its approval of Buyer's assumption of the Notes, neither party shall be obligated to pay any such additional amount, and in the event Buyer and Seller cannot agree upon the payment thereof, either party may terminate this Contract and the Earnest Money will be refunded to Buyer (less $100.00), in which event neither party shall have any further obligation one unto the other hereunder, except for Buyer's indemnity obligations under Section 7.3 hereof. 21. Casualty. The risk of loss or damage to the Property by fire or other casualty shall, until Closing, be borne by Seller. Seller shall promptly give Buyer written notice of any material casualty and the extent thereof, and for purposes of this Section 21, "material" shall be any casualty resulting in damage to the Property of $25,000 or more. In the event of a material casualty, either Buyer or Seller may, by written notice to the other within twenty (20) days after receipt of notice of the occurrence, elect to cancel this Agreement. In the event either party shall so elect, the Earnest Money shall be returned to Buyer (less $100.00 paid to Seller) and, upon such return of the Earnest Money, both parties shall be relieved and released of and from any further liability hereunder, except for Buyer's obligations under Section 7.3 hereof. In the event of a material casualty, if this Agreement is not so cancelled by either Buyer or Seller, this Agreement shall not be affected, but Seller shall assign to Buyer all of its right, title and interest in any insurance proceeds and the Purchase Price shall be reduced by the amount of any deductible. In the event of an immaterial casualty, this Contract shall not be affected, and the parties shall proceed to Closing in accordance with the terms hereof and Seller shall be obligated to repair such damage as soon as reasonably practicable. In the event such damage cannot be repaired prior to Closing, the Closing shall not be delayed, but the reasonable sum necessary (as reasonably agreed to by and between Buyer and Seller prior to Closing) to repair such immaterial casualty shall be credited to Buyer and against Seller as a "Closing Adjustment" at the Closing; and, in the event of the satisfactory repair of such damage by Seller pursuant to the lease or as otherwise agreed by Seller and Buyer, then Buyer shall reimburse Seller for such sum credited to Buyer at Closing.. 22. Condemnation. If all or any portion of the Property is condemned or taken by eminent domain by any authority (a "Condemnation"), this Agreement may be terminated by either Buyer or Seller by giving written notice to the other party prior to the Closing Date, in which event the Earnest Money shall be returned to Buyer (less $100.00 paid to Seller) and, upon such return of the Earnest Money, both parties shall be relieved and released of and from any further liability hereunder, except for Buyer's obligations under Section 7.3 hereof. 23. Entire Agreement. This written agreement constitutes the entire and complete agreement between the parties hereto. It is expressly understood that there are 15 7 no verbal understandings or agreements which may change the terms, covenants and conditions herein set forth, and that no modification of this Agreement and no waiver of any of the terms and conditions shall be effective unless made in writing and duly executed by the parties hereto. 24. Binding Effect. All covenants, agreements, warranties and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 25. Controlling Law. This Agreement has been made and entered into under the laws of the State of Texas, and said laws shall control the interpretation thereof. 26. Seller's Acceptance. In the event that Seller does not accept Buyer's offer by executing a copy of this Agreement and delivering same to the Title Company on or before 5:00 p.m., CDT, on January 14, 1998, then in that event this offer shall be deemed to have been withdrawn, and this Earnest Money Contract shall become null and void. 27. Confidentiality. Buyer agrees not to disclose any confidential information (that is, any information not otherwise available to the public) as may be disclosed by Seller to Buyer during the term of this Agreement. Any and all reports, studies and other information delivered by Seller to Buyer during the term of this Agreement shall be returned to Seller, in the event this Agreement is terminated by either party prior to Closing. The Brokers, by execution of this Earnest Money Contract, agree that they will not, at any time prior to or after the Closing hereunder, without the prior written consent of Buyer, disclose to any third party the terms and provisions of this Contract, other than pursuant to proper court order. 28. Time. Time is of the essence in all matters pertaining to the performance of this Agreement. However, if the final date of any period set forth in this Agreement falls on a Saturday, Sunday, or legal holiday under the laws of the United States or the State of Texas, then, in such event, the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday. 29. Assignment. Buyer shall not have the right to assign this Contract, except to an Affiliated Entity. "Affiliated Entity," for purposes hereof, is an entity owned fifty percent (50.0%) or more by Bart Koontz and/or B.J. "Red" McCombs. 30. Notices. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be sent by either facsimile, deemed delivered when sent with confirmation of receipt, or mailed by certified or registered mail, postage prepaid, or express mail, deemed delivered when deposited in a U.S. mail depository, or by hand delivery, addressed as follows: 16 8 IF TO SELLER: Solo Serve Corporation Attn: Mr. Ross Bacon 1610 Cornerway Blvd. San Antonio, Texas 78219-2900 Telephone: (210) 662-6262, ext. 302 Telecopier: (210) 666-3339 WITH A COPY TO: Peter R. Broderick Cox & Smith, Inc. 112 E. Pecan, Suite 1800 San Antonio, Texas 78205 Telephone: (210) 554-5231 Telecopier: (210) 226-8395 IF TO BUYER: Koontz/McCombs, LLC Attn: Bart C. Koontz, President 200 Concord Plaza Drive, Suite 525 San Antonio, Texas 78216 Telephone: (210) 826-2600 Telecopier: (210) 826-5445 WITH A COPY TO: Marlise A. Kercheville Davis, Adami & Cedillo, Inc. 7710 Jones Maltsberger, Suite 400 San Antonio, Texas 78216 Telephone: (210) 822-6666 Telecopier: (210) 822-1151 31. Counterparts. This Agreement may be executed in as many counterparts as may be required and it shall be sufficient that the signature of each party appear on one or more such counterparts. All counterparts shall collectively constitute a single agreement. 32. Tax Abatement. Buyer agrees to cooperate with Seller, at no expense to Buyer, to assist Seller in obtaining the consent of applicable taxing authorities to the continuation of the current tax abatement agreement in favor of the Seller in relation to the Property, notwithstanding the sale of the Property to Buyer. Buyer's obligations under this Section 32 shall survive Closing. 33. Exclusivity. During the term of this Agreement, Seller covenants and agrees that Seller will not negotiate or enter into any discussions with any other potential buyers for the purchase of the Property. EXECUTED by Buyer this 14th day of January, 1998, in multiple counterparts, each of which shall have the force and effect of an original. 17 9 EXECUTED by Seller this 14th day of January, 1998, in multiple counterparts, each of which shall have the force and effect of an original. SIGNATURES ON FOLLOWING PAGE: 18 10 SELLER: SOLO SERVE CORPORATION, a Delaware corporation, By: /s/ Ross E. Bacon --------------------------------------- Name: Ross E. Bacon --------------------------- Its: Executive Vice President ---------------------------- BUYER: KOONTZ/McCOMBS, LLC, a Texas limited liability company, By: /s/ Bart C. Koontz -------------------------------------- Bart C. Koontz, President The Brokers do hereby agree to the confidentiality provisions of Section 27, above. GRUBB & ELLIS By: /s/ -------------------------------------- Its: Senior Vice President ----------------------------- IRONWOOD PROPERTY CORPORATION By: /s/ -------------------------------------- Its: Vice President ----------------------------- 19 11 Receipt of this Earnest Money Contract is acknowledged the 14th day of January, 1998. ALAMO TITLE COMPANY By: /s/ DAVID A. MCALLISTER -------------------------------------- Its: Vice President ----------------------------- Receipt of Earnest Money in the amount of $50,000.00 is hereby acknowledged this 14th day of January, 1998; and the Title Company does hereby agree that if the Buyer terminates the Contract as provided in this Earnest Money Contract, to promptly pay the Earnest Money as set forth herein without the necessity of securing Seller's consent. CHICAGO TITLE COMPANY By: /s/ DAVID A. MCALLISTER -------------------------------------- Its: Vice President ----------------------------- NOTICE TO TITLE COMPANY. Upon receipt, please deliver a dated and executed copy of this Earnest Money Contract to each of the following parties: Marlise A. Kercheville Peter R. Broderick Davis, Adami & Cedillo, Inc. Cox & Smith, Inc. 7710 Jones Maltsberger, Suite 400 112 E. Pecan, Suite 1800 San Antonio, Texas 78216 San Antonio, Texas 78205 20 EX-10.51 5 ESCROW & SECURITY AGREEMENT 1 EXHIBIT 10.51 ESCROW AND SECURITY AGREEMENT THIS ESCROW AND SECURITY AGREEMENT (this "Agreement") dated this 6th day of April, 1998, by, between and among NATIONWIDE LIFE INSURANCE COMPANY, an Ohio corporation ("Nationwide"), EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU, a Wisconsin corporation ("Employers") (Nationwide and Employers collectively, "Lender"), KOONTZ/MCCOMBS 1, LTD., a Texas limited partnership ("Borrower"), HOLLIDAY FENOGLIO FOWLER, L.P., a Delaware limited partnership ("Escrow Agent") and SOLO SERVE CORPORATION, a Delaware corporation ("Solo Serve"); W I T N E S S E T H : WHEREAS, Lender has made a loan to Solo Serve in the amount of $5,940,000 (the "Loan"), and in connection with the Loan, Solo Serve has executed and delivered to Lender one certain Mortgage Note A ("Note A") dated November 20, 1992, payable to the order of Nationwide in the original principal sum of $4,940,000, with interest and principal payable as therein provided, and one certain Mortgage Note B ("Note B") dated November 20, 1992, payable to the order of Employers in the original principal sum of $1,000,000, with interest and principal payable as therein provided (Note A and Note B being collectively the "Note"), the payment of which Note is secured by Deed of Trust, Mortgage and Security Agreement (the "Deed of Trust") dated of even date with the Note from Maker to M. Lawrence Hicks, Jr., Trustee, recorded in Volume 5504, Page 720, of the Real Property Records of Bexar County, Texas, covering certain real and personal property described therein (the "Property"); WHEREAS, Solo Serve has sold, transferred and conveyed the Property to Borrower and Borrower has assumed the Loan pursuant to an Assumption Agreement dated of even date herewith between Borrower and Lender; WHEREAS, Borrower and Solo Serve have entered into a lease (the "Lease") covering the Property and in connection therewith $500,000 of prepaid rent (the "Prepaid Rent") shall be deposited with Escrow Agent to be placed in an escrow account (the "Escrow Account"); WHEREAS, Escrow Agent has agreed to accept the $500,000 and any interest thereon (collectively, the "Escrow Funds") and to hold them as the agent of Lender and Borrower for the purpose of perfecting Lender's security interest therein, and to establish and administer the Escrow Account in accordance with the terms and conditions set forth herein; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender, Borrower and Escrow Agent agree as follows: 2 1. Appointment of Escrow Agent. Borrower, Solo Serve and Lender hereby designate Escrow Agent to act as escrow agent for all purposes set forth herein including, but not limited to, acting as the bailee and agent of Lender and Borrower for the purpose of perfecting Lender's security interest in the Escrow Funds, and Escrow Agent hereby agrees to such designation and assumes and accepts the obligations of escrow agent as set forth herein. Escrow Agent agrees to hold the Escrow Funds in its safekeeping in separate and segregated accounts, and to deliver the Escrow Funds only in accordance with the instructions provided herein. 2. Delivery of Escrow Funds. Contemporaneously with the execution hereof, Borrower has delivered to the Escrow Agent the Escrow Funds. The Escrow Account shall be opened in the name of the Escrow Agent. Escrow Agent shall notify Lender in writing of the style and number of the Escrow Account. Escrow Agent shall deposit the Escrow Funds with an FDIC insured financial institution, provided that at no time shall any portion of the principal thereof be exposed to any risk of loss. Neither Escrow Agent nor Lender shall be responsible for any losses resulting from the investment said deposit of the Escrow Funds or for obtaining any specific level or percentage of earnings on such investment. Solo Serve, Borrower and Lender agree that the Escrow Funds shall, until further notice, be deposited in a federally insured interest-bearing account at Nationsbank, Dallas, Texas (the "Bank"). 3. Interest on Escrow Funds. Any interest paid on Escrow Funds deposited with Escrow Agent pursuant to this Agreement shall be added to and become a part of the Escrow Funds. In the event of an Event of Default (as hereinafter defined) all accrued interest of funds deposited with Escrow Agent pursuant to this Agreement shall be disbursed to Lender to be applied in the same manner as outlined in subparagraph 12(b) below. All earnings from the investment of the Escrow Funds on deposit in the Escrow Account shall be reported by Escrow Agent to applicable authorities, if at all, using the federal tax identification number of Borrower. The parties hereto acknowledge that the foregoing provision shall not in any way abrogate, vitiate or diminish the effectiveness of the security interests granted to Lender in paragraph 6 below. 4. Acknowledgment by Escrow Agent. By its execution hereof, Escrow Agent acknowledges receipt of the Escrow Funds from Borrower for deposit into the Escrow Account, and hereby agrees to hold the same pursuant to the terms hereof. Escrow Agent hereby agrees to hold and disburse the Escrow Funds as directed by Lender, Solo Serve and Borrower in accordance with the terms and conditions set forth herein. Escrow Agent further agrees to use commercially reasonably efforts to obtain from the Bank and any other depository of the Escrow Funds and provide to Lender, Solo Serve and Borrower a written waiver provided by Solo Serve of any and all rights it may have in and to the Escrow Funds and/or the Escrow Account including, without limitation, any security interest, bank or other possessory lien, or right of offset. 5. Disbursement Procedures. The Escrow Funds may be disbursed to Borrower according to the terms of Section 4.2c (i)- (iv) of the Lease or in the event of a default under the Lease by Solo Serve in which Borrower is entitled to damages, the Escrow Funds (or portion thereof) to which Borrower is so entitled under the Lease shall be considered partial satisfaction of such damages and shall remain in the Escrow Account, and if Lender consents thereto upon -2- 3 occurrence of such a default (which consent shall not be unreasonably withheld or delayed), the Escrow Funds (or said portion thereof, as is applicable) may be used by Borrower to cover debt service for the Loan or for tenant improvement expenses in connection with a substitute tenant. The Escrow Funds to which Borrower is entitled under the Lease will be disbursed to Borrower in accordance with the preceding sentence upon compliance with the provisions of this Agreement and the following procedures: (a) There exists no Event of Default and no event or occurrence which, with the passage of time or the giving of notice, or both, would constitute an Event of Default, hereunder or under the Loan Documents; (b) Borrower shall certify to Lender that there are no uncured defaults under the Note, the Deed of Trust or any of the other documents securing the Loan at the time the disbursement of a portion or all of the Escrow Account is requested; (c) Borrower shall deliver to Lender and the Escrow Agent a written request for the disbursement of a portion or all of the Escrow Funds; and (d) Escrow Agent has received written authorization from Lender for the proposed disbursement of a portion or all of the Escrow Account. (e) In the event Borrower wishes to receive a disbursement of any portion of the Escrow Funds to which Borrower is entitled to under the Lease in connection with tenant improvements for a substitute tenant, Borrower shall furnish evidence satisfactory to Lender in its reasonable discretion that occupancy leases approved by Lender have been executed and are in full force and effect and that the tenant improvements required by those leases have been completed and the respective tenants are in occupancy and open for business, which evidence shall include copies of such executed occupancy leases approved by Lender, executed current tenant estoppel certificates on Lender's form, approved by Lender, in its reasonable discretion, lien waivers, invoices, unconditional certificates of occupancy and a current inspection report of the Property prepared by Lender's inspecting architect/engineer. If, at any time during this Agreement, Solo Serve would be entitled to the payment of all or any portion of the Escrow Funds pursuant to the terms of the Lease because of a termination thereof resulting from (a) the condemnation of all or any portion of the Property, or (b) any casualty loss at the Property, the Escrow Agent shall disburse such portion to Solo Serve upon notification of the occurrence of such event by Solo Serve, Borrower and Lender, which notification shall not be unreasonably withheld or delayed by such parties. Furthermore, in the event the Lease is terminated by Solo Serve pursuant to any rights or remedies it may have at law or equity as a result of Borrower's default thereunder, the then balance of the Escrow Funds shall be paid to Solo Serve upon written notification by Lender and Solo Serve of such termination to Escrow Agent, which notification shall not be unreasonably withheld or delayed by such parties. Notwithstanding any of the foregoing to the contrary, it is expressly agreed that Solo Serve's interest in and to the Escrow Funds shall, at any time, only extend to that portion thereof equaling -3- 4 the difference obtained by subtracting any portion of the Escrow Funds previously applied pursuant to the terms of the Lease from the original Prepaid Rent deposited into the Escrow Account. In no event shall Solo Serve have any right, title or interest in and to any portion of the interest or other earnings on the Escrow Funds. 6. Grant of Security Interest. As security for the payment of the Note and all indebtedness now or hereafter incurred or arising pursuant to the provisions of, or secured by, the Deed of Trust, or any other deed of trust and security agreement executed by Borrower to secure the Loan, which indebtedness includes all indebtedness incurred or arising pursuant to the provisions of this Agreement (the indebtedness referred to in this paragraph herein called the "secured indebtedness" or the "indebtedness secured hereby"), Borrower hereby pledges, assigns and transfers to Lender and hereby grants to Lender a security interest in all of Borrower's right, title and interest in and to the Escrow Funds and any and all interest of Borrower therein and rights of Borrower thereto, whether Borrower's ownership or other rights therein are presently held or hereafter acquired and howsoever Borrower's interests therein may arise or appear, which security interest shall be subject to the rights of Solo Serve in and to the Escrow Funds pursuant to the Lease. Escrow Agent and Borrower hereby agree that Escrow Agent will hold the Escrow Funds as the agent of Lender and Borrower for the purpose of perfecting Lender's security interest therein. Subject to Solo Serve's rights in and to the Prepaid Rent, Escrow Agent hereby recognizes Lender's first and prior right to the Escrow Account and the grant of such security interest to Lender in the Escrow Funds, and agrees that Escrow Agent shall have no security interest, bank or other possessory lien, right of offset or other claim against the Escrow Funds. In addition to Lender's other rights at law or in equity, Lender shall have all rights of a secured party under the Texas Business and Commerce Code, as amended (the "Code") whether or not the security interest granted herein is covered by the Code. It is understood and agreed that consistent with the terms of the Lease and that certain Security Agreement by and between Solo Serve, as debtor and Borrower, as secured party (the "Security Agreement"), Solo Serve has granted to Borrower a security interest in the Prepaid Rent. Lender consents to the Security Agreement and the security interest created therein. 7. Borrower's Taxpayer Identification Number. Borrower's federal taxpayer identification number is 74- 2872440. 8. Covenants of Borrower. So long as the indebtedness secured hereby or any part thereof remains unpaid, Borrower covenants and agrees with Lender as follows: (a) Borrower shall furnish Lender such instruments and shall take such action as may be reasonably required by Lender to assure transferability of the Escrow Funds when and as often as may be reasonably requested by Lender consistent with the provisions of this Agreement and the Deed of Trust; (b) Borrower will not pledge, assign, transfer or otherwise dispose of all or any interest of Borrower in the Escrow Funds or right of Borrower thereto, or permit any of the foregoing, or attempt to make any withdrawal from the Escrow Account except as specifically permitted hereunder; -4- 5 (c) Except in connection with the Security Agreement described in Section 6 hereof, Borrower will not, without the prior written consent of Lender, create, place or permit to be created or placed, or through any act or failure to act, acquiesce in the placing of, or allow to remain, any voluntary or involuntary lien, security interest, encumbrance or charge, or other title retention document, against or covering the Escrow Funds, or any part thereof, or any interest of Borrower therein or right of Borrower thereto regardless of whether the same are expressly or otherwise subordinate to the security interest created in this Agreement, and should any of the foregoing become attached hereafter in any manner to any part of the Escrow Funds without the prior written consent of Lender, Borrower will cause the same to be promptly discharged and released; (d) Borrower shall promptly execute and deliver to Lender any financing statement or financing statement change or continuation statement required by Lender to establish or maintain the validity, perfection or priority of the security interest granted herein. Lender shall be authorized to file, without the signature of Borrower where permitted by law, one or more financing or continuation statements, and/or amendments thereto, relating to the interest of Borrower in the Escrow Funds or right of Borrower thereto (a copy of which shall be provided by Lender to Borrower). Borrower further agrees that a carbon, photographic or other reproduction of this Agreement or any financing statement describing any Escrow Funds is sufficient as a financing statement and may be filed in any jurisdiction Lender may deem appropriate; and (e) In the event that Borrower shall file a petition with any bankruptcy court or be the subject of any petition filed under 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), Borrower acknowledges and agrees that its interest in the Escrow Funds is the property of Lender and shall not constitute property of the bankruptcy estate within the meaning of Section 541 of the Bankruptcy Code. In the event that, notwithstanding the foregoing, the bankruptcy court shall determine that Borrower has any continuing right, title or interest in or to the Escrow Funds and that all or any portion of the Escrow Funds are property of the bankruptcy estate, Borrower hereby acknowledges and agrees that all such Escrow Funds to which Borrower is entitled shall constitute Lender's cash collateral within the meaning of Section 363 of the Bankruptcy Code. Borrower further acknowledges that in such event, Lender does not consent to Borrower's use of such cash collateral, and that Borrower shall have no right to use or apply any such cash collateral unless and until Borrower shall have received a court order authorizing use of the same, and Lender shall have been provided with adequate protection as contemplated by Section 361 of the Bankruptcy Code. 9. Right of Lender to Perform. Borrower agrees that, if Borrower fails to perform any act or to take any action which hereunder Borrower is required to perform or take, or to pay any money which hereunder Borrower is required to pay, or takes any action prohibited hereby, Lender, in Borrower's name or in its own name, may but shall not be obligated to perform or cause to be performed such act or take such action or pay such money or remedy any action so -5- 6 taken, and any expenses so incurred by Lender, and any money paid by Lender in connection therewith, shall be a demand obligation owing by Borrower to Lender and Lender, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment. Any amounts due and owing by Borrower to Lender pursuant to this Agreement shall bear interest from the date such amount becomes due until paid at the rate of interest payable on matured but unpaid principal of or interest on the Note and such amounts and interest thereon shall be a part of the secured indebtedness and shall be secured by this Agreement and the Deed of Trust and by any other instrument securing the secured indebtedness. 10. Termination of Escrow. (a) If any Escrow Funds remain in the Escrow Account after the Note has been paid in full and all other obligations of Borrower under the Note and Deed of Trust have been satisfied, then Lender shall have no further rights hereunder and the Escrow Funds shall be held by Escrow Agent for disbursement in accordance with the terms of the Lease. (b) If Solo Serve or Borrower has terminated the Lease due to their respective rights under the Lease in the event of a casualty loss at the Property, or if Solo Serve terminates the Lease because of a taking of the Property or pursuant to any rights it may have at law as a result of Borrower's default under the Lease, and provided Solo Serve and/or Borrower have complied with the provisions of that certain Estoppel Certificate and Non-Disturbance and Attornment Agreement of even date herewith, executed by Borrower, Lender, and Solo Serve, the Escrow Funds shall be disbursed by Escrow Agent in accordance with the terms of the Lease. (c) The Escrow Account shall terminate upon the last to occur of (i) the date the Note has been paid in full and all other obligations of Borrower under the Note and Deed of Trust have been satisfied of (ii) the date on which the last of the Escrow Funds is applied in accordance with the terms of the Lease. 11. Mortgage Banker. Solo Serve, Borrower and Lender recognize that Escrow Agent, as mortgage banker in the transaction, has represented the interest of Borrower and Lender in the negotiation of the Commitment and the closing of the loan. Borrower understands that, during the escrow period, Escrow Agent will have a continuing relationship to the transaction as Lender's servicing agent for the loan. Solo Serve, Borrower and Lender agree to appoint Escrow Agent in the capacity set forth in this Agreement notwithstanding Escrow Agent may have represented or continues to represent Borrower and Lender. 12. Events of Defaults and Remedies. (a) The term "Event of Default" as used in this Agreement shall mean (i) any default under and as defined in the Deed of Trust or in any other deed of trust, assignment of leases and rents and security agreement executed by Borrower to secure the Loan, and (ii) any default by Borrower in its obligations under this Agreement; -6- 7 (b) Upon the occurrence of an Event of Default, Lender may at its option, and without notice to Borrower, require Escrow Agent to deliver any and all portions of the Escrow Funds which Borrower becomes entitled to under the Lease to Lender. Failure of Lender to so require the delivery of and to apply such funds upon the occurrence of an Event of Default shall not be deemed a waiver of the right to do so in the event of a subsequent Event of Default. Upon the occurrence of an Event of Default, Borrower hereby authorizes Lender, and Lender shall have full right and authority, (i) to ask, demand, collect, receive, receipt for, sue for, compound and give acquittance for any portion of the Escrow Funds to which Borrower is entitled under the Lease, (ii) to execute any and all withdrawal receipts or other orders for the payment such portion of the Escrow Funds from the Escrow Account, and (iii) in the discretion of Lender, to file any claim or take any other action or proceeding, either in Borrower's name or in its own name, which Lender may deem necessary or appropriate to protect and preserve the rights of Lender hereunder. Escrow Agent shall be entitled to rely on Lender's statement in writing that an Event of Default has occurred and shall, upon Lender's request after the receipt of such a statement, turn any or all of the Escrow Funds so requested over to Lender without any right to investigate the actual occurrence or non-occurrence of an Event of Default; (c) Upon the occurrence of an Event of Default, Lender may exercise its right of enforcement under the Code with respect to the portion of the Escrow Funds to which Borrower is then entitled under the Lease, whether or not the security interest granted herein is covered by the Code, and in conjunction with, in addition to or in substitution for those rights and remedies and the other rights and remedies provided for herein (including specifically, without limitation, the rights and remedies provided for in the immediately preceding subparagraph: (i) written notice mailed to Borrower as provided herein five (5) days prior to the date of public sale of the portion of the Escrow Funds to which Borrower is entitled under the Lease or prior to the date after which private sale of said portion of the Escrow Funds will be made shall constitute reasonable notice; (ii) it shall not be necessary that Lender take possession of said portion of the Escrow Funds or any part thereof prior to the time that any sale pursuant to the provisions of this paragraph is conducted and it shall not be necessary that said portion of the Escrow Funds or any part thereof be present at the location of such sale; (iii) prior to application of proceeds of disposition of said portion of the Escrow Funds to the secured indebtedness, such proceeds shall be applied to the reasonable expenses of retaking, holding, preparing for sale, selling, and the like and the reasonable attorneys' fees and legal expenses incurred by Lender; (iv) the sale by Lender of less than the whole of said portion of the Escrow Funds shall not exhaust the rights of Lender hereunder, and Lender is specifically -7- 8 empowered to make successive sale or sales hereunder until the whole of said portion of the Escrow Funds shall be sold; and, if the proceeds of such sale of less than the whole of said portion of the Escrow Funds shall be less than the aggregate of the indebtedness secured hereby, this Agreement and the security interest created hereby shall remain in full force and effect as to the unsold portion of said portion of the Escrow Funds just as though no sale had been made; provided, however, that Borrower shall never have any right to require the sale of less than the whole of said portion of the Escrow Funds but Lender shall have the right, at its sole election, to sell less than the whole of said portion of the Escrow Funds; (v) in the event any sale hereunder is not completed or is defective in the opinion of Lender, such sale shall not exhaust the rights of Lender hereunder and Lender shall have the right to cause a subsequent sale or sales to be made hereunder; (vi) any and all statements of fact or other recitals made in any bill of sale or assignment or other instrument evidencing any foreclosure sale hereunder as to nonpayment of the indebtedness or as to the occurrence of an Event of Default, or as to Lender having declared all of such indebtedness to be due and payable, or as to notice of time, place and terms of sale and the properties to be sold having been duly given, or as to any other act or thing having been duly done by Lender, shall be taken as prima facie evidence of the truth of the facts so stated and recited; and (vii) Lender may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale held by Lender, including the sending of notices and the conduct of sale, but in the name and on behalf of Lender; (d) Upon the occurrence of an Event of Default, Lender may reduce its claim to judgment or foreclose or otherwise enforce, in whole or in part, the security interest created hereby by any available judicial procedure; (e) Upon the occurrence of an Event of Default, Lender may at any time cause any or all of the Escrow Funds to which Borrower is then entitled to under the Lease to be transferred into its name or into the name or names of any nominee or nominees of Lender; (f) In addition to all other remedies herein provided for, Borrower agrees that, upon the occurrence of an Event of Default, Lender shall as a matter of right be entitled to the appointment of a receiver or receivers for the portion of the Escrow Funds to which Borrower is entitled under the Lease, whether such receivership be incident to a proposed sale of the portion of the Escrow Funds to which Borrower is then entitled under the Lease or otherwise, and without regard to the value of said portion of the Escrow Funds or the solvency of any person or persons liable for the payment of the indebtedness secured hereby, and Borrower does hereby consent to the appointment of such receiver or -8- 9 receivers, waives any and all defenses to such appointment and agrees not to oppose any application therefor by Lender, but nothing herein is to be construed to deprive Lender of any other right, remedy or privilege it may now have under the law to have a receiver appointed. Any money advanced by Lender in connection with any such receivership shall be a demand obligation owing by Borrower to Lender and shall bear interest from the date of making such advancement by Lender until paid at the rate of interest payable on matured but unpaid principal of or interest on the Note and such money plus interest shall be a part of the secured indebtedness and shall be secured by this Agreement and the Deed of Trust and by any other instrument securing the secured indebtedness; (g) All remedies herein expressly provided for are cumulative of any and all other remedies existing at law or in equity and are cumulative of any and all other remedies provided for in any other instrument securing the payment of the secured indebtedness, or any part thereof, or otherwise benefiting Lender. Upon the occurrence of an Event of Default, Lender shall, in addition to the remedies herein provided, be entitled to exercise any and all rights and remedies reserved to Lender in the Note, the Deed of Trust and each and every other document evidencing or securing, or otherwise executed and delivered in connection with, the Loan and shall also be entitled to avail itself of all such other remedies as may now or hereafter exist at law or in equity for the collection of the secured indebtedness and the enforcement of the covenants herein, and the resort to any remedy provided for hereunder or under any such other instrument or provided for by law shall not prevent the concurrent or subsequent employment of any other appropriate remedy or remedies; (h) Lender may resort to any security given by this Agreement or to any other security now existing or hereafter given to secure the payment of the secured indebtedness, in whole or in part, and in such portions and in such order as may seem best to Lender in its sole and uncontrolled discretion, and any such action shall not in anyway be considered as a waiver of any of the rights, benefits or security interests evidenced by this Agreement; and (i) If following an Event of Default, Lender succeeds to the interest of Borrower in and to the Property, by way of foreclosure of the lien of the Deed of Trust, conveyance in lieu thereof or otherwise, it is expressly agreed that Lender shall also succeed to all rights of Borrower in and to any portion of the Escrow Funds which have not been previously applied in accordance with the terms of the Lease and, upon Lender succeeding to the interest of Borrower in and to the Property, Escrow Agent is authorized to thereafter make all disbursements to which Borrower would otherwise be entitled hereunder directly to Lender. 13. Expenses. Borrower shall pay all charges and reasonable expenses of Escrow Agent and any substitute in its capacity as escrow agent pursuant to this Agreement, including but not limited to reasonable attorneys' fees, expenses and other out-of-pocket costs as may be incurred by Escrow Agent and any substitute in connection with the administration of this Agreement, and all charges and expenses of Lender incurred in connection with the administration of this Agreement including, without limitation, reasonable attorneys' fees. Borrower -9- 10 acknowledges that there is a $500 fee to establish the Escrow Account, and a fee of $100 per disbursement, plus any charges that might be incurred in the event an inspection is required. 14. Limitation of Liability of Escrow Agent. Escrow Agent shall act under this Agreement only as an escrow agent pursuant to the terms of this Agreement and instructions given pursuant hereto, and otherwise as a depository only, and shall not be responsible or liable in any manner whatsoever for the sufficiency of escrowed funds or for the sufficiency, correctness, genuineness or validity of any instrument or signature thereon deposited with or delivered to Escrow Agent hereunder, with respect to the form or execution of any such instrument thereof or the identity, authority or rights of any person executing, depositing or delivering the same. Escrow Agent may act in reliance on any instrument reasonably believed to be genuine and may assume that any person reasonably purporting to give any written notice or advice or instruction in connection with the provisions hereof has been duly authorized to do so. Escrow Agent shall not be responsible to see to the correct application of any amounts released from the Escrow Funds. Escrow Agent may from time to time consult with legal counsel of its own choosing in the event of any disagreement, controversy, question or doubt as to the construction of any of the provisions hereof or its duties hereunder, and Escrow Agent shall incur no liability and shall be fully protected in acting in good faith in accordance with the written opinion and instructions of such counsel. In the event of a dispute over the Escrow Funds, Escrow Agent shall have the right, at its sole discretion, to interplead and pay over the Escrow Funds to a court of competent jurisdiction in Bexar County, Texas and thereafter Escrow Agent shall have no obligation to see to the application of the Escrow Funds and shall have no liability with respect to such Escrow Funds or this Agreement arising after the time of such payment. Escrow Agent shall not be liable for any action taken or omitted hereunder other than that constituting gross negligence or willful misconduct. THE FOREGOING SHALL APPLY TO ESCROW AGENT WITH RESPECT TO ACTION CONSTITUTING NEGLIGENCE OF ESCROW AGENT but shall not apply to Escrow Agent with respect to action constituting gross negligence or willful misconduct of Escrow Agent. 15. Indemnification of Escrow Agent. Borrower will indemnify and hold Escrow Agent harmless from all suits, claims, actions, judgments, losses, liabilities, fees, costs, expenses, damages or other charges which may be imposed upon or incurred by Escrow Agent in connection with the performance of its duties hereunder, except with respect to any of the foregoing incurred as the result of Escrow Agent's gross negligence or willful misconduct. THE FOREGOING INDEMNITIES SHALL APPLY TO ESCROW AGENT WITH RESPECT TO SUITS, CLAIMS, ACTIONS, JUDGMENTS, LOSSES, LIABILITIES, FEES, COSTS, EXPENSES, DAMAGES AND OTHER CHARGES WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF ESCROW AGENT. However, such indemnity shall not apply to Escrow Agent to the extent the subject of the indemnification is caused by or arises out of the gross negligence or willful misconduct of Escrow Agent. 16. Notices. Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, or (d) prepaid telecopy, telegram or telex, addressed as follows: -10- 11 To Borrower: Koontz/McCombs 1, Ltd. 200 Concord Plaza Drive, Suite 525 San Antonio, Texas 78216 To Lender: Nationwide Life Insurance Company One Nationwide Plaza Columbus, Ohio 43215-2220 Attn: Real Estate Investments 34-T Employers Life Insurance Company of Wausau c/o Nationwide Life Insurance Company One Nationwide Plaza Columbus, Ohio 43215-2220 Attn: Real Estate Investments 34-T To Escrow Agent: Holliday Fenoglio, L.P. 3003 West Alabama Street Houston, Texas 77098-2032 To Solo Serve: Solo Serve Corporation 1610 Cornerway Blvd. San Antonio, Texas 78219-2900 Attn: Chief Financial Officer or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telecopy, telegram or telex, upon receipt. 17. Replacement of Escrow Agent. The duties of Escrow Agent hereunder may be terminated in either of the following manners: (a) Upon written notice given by Lender, Solo Serve and Borrower of cancellation of designation of Escrow Agent to act and serve in said capacity, in which event, cancellation shall take effect no earlier than thirty (30) days after notice to Escrow Agent of such cancellation unless such cancellation is for cause, in which event cancellation shall take effect immediately upon delivery of such notice; or (b) Escrow Agent may resign as escrow agent at any time upon giving notice to Lender, Solo Serve and Borrower of its desire to so resign; provided, however, that resignation of Escrow Agent shall take effect no earlier than sixty (60) days after the giving of notice of resignation. Upon termination of the duties of Escrow Agent in either manner set forth in subparagraphs (a) or (b) above, Escrow Agent shall deliver the balance of the Escrow Funds, together with all interest -11- 12 accrued on the Escrow Funds, to the newly appointed escrow agent designated by Lender and shall not have the right to withhold the Escrow Funds or the interest accrued thereon from said newly appointed escrow agent. Lender, Borrower and Solo Serve hereby agree that if the duties of Escrow Agent are terminated in either manner set forth in subparagraphs (a) or (b) above, then Lender, subject to the approval of Borrower and Solo Serve (such approval not to be unreasonably withheld or delayed), may appoint another nationally recognized title insurance underwriter or a national banking association to serve as the escrow agent under this Agreement and such nationally recognized title insurance underwriter or national banking association shall succeed to all the rights, titles, interests and duties of Escrow Agent hereunder; provided, however, if Lender has not appointed such a replacement escrow agent within fifteen (15) days after the termination of Escrow Agent, then the Bank shall become the escrow agent under this Agreement and shall succeed to all the rights, titles, interests and duties of Escrow Agent hereunder. 18. Applicable Law. This Agreement and the rights and duties of the parties hereunder shall be governed for all purposes by the law of the State of Texas. 19. Headings. The headings used herein are for convenience only and are not to be used in interpreting this Agreement. 20. Multiple Original Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original. The signatures to this Agreement may be executed on separate pages, and when attached to this Agreement shall constitute one complete document. 21. Amendments. Any agreement hereafter made shall be ineffective to change, modify, waive, release, discharge, terminate or effect the abandonment of this Agreement, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the change, modification, release, discharge, termination or the effecting of the abandonment is sought. 22. Assignment. None of this Agreement, the Escrow Funds or any interest of Borrower therein or right of Borrower therein, or the Escrow Account may be assigned by Borrower without the prior written consent of Lender and Solo Serve and any attempt to do so without the prior written consent of Lender and Solo Serve shall be void. In the event Lender consents, in its sole and absolute discretion, to a sale of the Property, or in the event of a sale of the Property after the loan has been paid in full, the provisions of this Agreement shall be binding on any such approved subsequent owner of the Property. This Agreement shall inure to the benefit of and bind the successors and permitted assigns of the parties hereto. 23. Waiver. To the full extent Borrower may do so, Borrower agrees that Borrower will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay, extension or redemption, and Borrower, for Borrower, Borrower's successors and assigns, and for any and all persons ever claiming any interest in the Escrow Funds (other than Solo Serve), to the extent permitted by law, hereby waives and releases all rights of redemption, valuation, appraisement, stay of execution, -12- 13 notice of intention to mature or declare due the whole of the secured indebtedness, notice of election to mature or declare due the whole of the secured indebtedness and all rights to a marshaling of the assets of Borrower, including any portion of the Escrow Funds to which Borrower is entitled to under the Lease, or to a sale in inverse order of alienation in the event of foreclosure of the security interest hereby created. Borrower shall not have or assert any right under any statute or rule of law pertaining to the marshaling of assets, sale in inverse order of alienation, the administration of estates of decedents, or other matters whatever to defeat, reduce or affect the right of Lender under the terms of this Agreement to payment under the Escrow Account, or to a sale of any portion of the Escrow Funds to which Borrower is entitled under the Lease for the payment of the secured indebtedness without any prior or different resort for payment, or the right of Lender under the terms of this Agreement to the payment of such indebtedness out of the proceeds of sale of such portion of the Escrow Funds in preference to every other claimant whatsoever (other than Solo Serve). If any law referred to in this paragraph and now in force, of which Borrower or Borrower's successors and assigns and such other persons claiming any interest in the Escrow Funds (other than Solo Serve) might take advantage despite this paragraph, shall hereafter be repealed or cease to be in force, such law shall not thereafter be deemed to preclude the application of this paragraph. -13- 14 IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year first above written. KOONTZ/MCCOMBS 1, LTD., a Texas limited partnership By Koontz/McCombs, LLC, a Texas limited liability company, General Partner By:/s/ Bart Koontz ----------------------------------- Name: Bart Koontz ----------------------------- Title: President ---------------------------- BORROWER NATIONWIDE LIFE INSURANCE COMPANY, an Ohio corporation By: /s/ Robert H. McNaughton ------------------------------------------- Name: Robert H. McNaughton ------------------------------------- Title: Vice President ------------------------------------- EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU, a Wisconsin corporation By: Robert H. McNaughton ------------------------------------------- Name: Robert H. McNaughton ------------------------------------- Title: Vice President ------------------------------------- LENDER HOLLIDAY FENOGLIO FOWLER, L.P., a Delaware limited partnership By: AMRESCO Mortgage Capital, Inc., a Delaware corporation, general partner By: /s/ Rebecca Browning -------------------------------- Name: Rebecca Browning ---------------------------- Title: Director - Loan Servicing --------------------------- ESCROW AGENT -14- 15 SOLO SERVE CORPORATION, a Delaware corporation By: /s/ Ross E. Bacon ----------------------------------------- Name: Ross E. Bacon ------------------------------------ Title: Executive Vice President ---------------------------------- SOLO SERVE -15- 16 SCHEDULE A Property EX-10.52 6 ASSUMPTION AGREEMENT 1 EXHIBIT 10.52 ASSUMPTION AGREEMENT THE STATE OF TEXAS ) ) KNOW ALL MEN BY THESE PRESENTS THAT: COUNTY OF BEXAR ) THIS ASSUMPTION AGREEMENT (this "Agreement") dated as of the 6th day of April, 1998, by and between NATIONWIDE LIFE INSURANCE COMPANY, an Ohio corporation ("Nationwide"), and EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU, a Wisconsin corporation ("Employers") (Nationwide and Employers being collectively "Lender"), SOLO SERVE CORPORATION, a Delaware corporation ("Maker"), KOONTZ/MCCOMBS 1, LTD., a Texas limited partnership ("Borrower"), KOONTZ/MCCOMBS, LLC, a Texas limited liability company (the "General Partner") and BART C. KOONTZ ("Koontz") (the General Partner and Koontz being collectively "Indemnitors"); W I T N E S S E T H T H A T: WHEREAS, Lender has made a loan to Maker in the amount of $5,940,000 (the "Loan"), and in connection with the Loan, Maker has executed and delivered to Lender one certain Mortgage Note A dated November 20, 1992, payable to the order of Nationwide in the original principal sum of $4,940,000, with interest and principal payable as therein provided, which Mortgage Note A has been modified by that certain Loan Modification Agreement (the "Modification") dated July 18, 1995, executed by Maker and Lender, recorded in Volume 6568, Page 1548 in the Official Public Record of Real Property of Bexar County, Texas (Mortgage Note A as modified by the Modification, "Note A") and one certain Mortgage Note B dated November 20, 1992, payable to the order of Employers in the original principal sum of $1,000,000, with interest and principal payable as therein provided, which Mortgage Note B has been modified by the Modification (Mortgage Note B as modified by the Modification, "Note B") (Note A and Note B being collectively the "Note"), the payment of which Note is secured by Deed of Trust, Mortgage and Security Agreement dated of even date with the Note from Maker to M. Lawrence Hicks, Jr., Trustee, recorded in Volume 5504, Page 720, of the Real Property Records of Bexar County, Texas, covering certain real property described therein (the "Property"), including without limitation, the land described in Exhibit A attached hereto and made a part hereof, which Deed of Trust, Mortgage and Security Agreement has been modified by the Modification (the Deed of Trust, Mortgage and Security Agreement as modified by the Modification, the "Deed of Trust"), reference being here made to the Deed of Trust and the record thereof for all purposes; WHEREAS, in connection with the Loan, Maker has also executed (i) an Assignment of Leases, Rents and Profits dated of even date with the Note from Maker to Lender, recorded in Volume 5504, Page 765, of the Real Property Records of Bexar County, Texas, providing a source of future payment of the Loan, which Assignment of Leases and Rents has been modified by the Modification (the Assignment of Leases, Rents and Profits as modified by the Modification, the "Assignment of Leases and Rents"), reference being here made to the Assignment of Leases and Rents and the record thereof for all purposes, and (ii) that certain Indemnity Agreement (the "Indemnity Agreement") dated of even date with the Note executed by Maker in favor of Lender (the Note, the Deed of Trust, the Assignment of Leases and Rents, the Indemnity Agreement and all other documents executed by Maker or any other parties in connection with or securing or evidencing the Loan are herein collectively called the "Loan Documents"); 2 WHEREAS, the Deed of Trust provides that the indebtedness secured thereby may, at the option of the holder of same, be accelerated if Maker or any assignee of Maker sells or conveys any or all of the Property without the consent of Lender; WHEREAS, Lender has been requested to consent to the conveyance of the Property to Borrower and Lender is willing so to consent upon compliance with the terms and provisions of this Agreement; and WHEREAS, Lender is the owner and holder of the Note and Borrower is the owner of the legal and equitable title to the Property; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Conveyance of Property. Maker has concurrently herewith conveyed title to the Property to Borrower. Borrower hereby acknowledges and agrees that title to the Property and its interest therein, is encumbered by and subject to the liens, security interests, assignments and other terms, covenants, restrictions and provisions of the Loan Documents. 2. Assumption by Borrower and Indemnitors. (a) Borrower hereby acknowledges and agrees that it hereby (i) assumes and promises to keep and perform all covenants and obligations on Maker's part to be performed under the Loan Documents from and after the conveyance and transfer of the Property to Borrower and attributable to any act, omission, occurrence, event or circumstance occurring after the conveyance and transfer of the Property to Borrower to the same extent as if Borrower were the Maker thereto and (ii) assumes and promises to pay the outstanding principal balance of the Note, with interest thereon, and all other sums required to be paid to Lender in accordance with the provisions of the Note and other Loan Documents, and to perform, comply with and abide by each and every one of the covenants, agreements and conditions contained and set forth in the Loan Documents. (b) Indemnitors hereby acknowledge and agree that they hereby assume and promise to keep and perform all covenants and obligations on Maker's part to be performed under the Indemnity Agreement from and after the conveyance and transfer of the Property to Borrower and attributable to any act, omission, occurrence, event or circumstance occurring after the conveyance and transfer of the Property to Borrower to the same extent as if Borrower and Indemnitors were the Maker thereto. (c) For purposes of this Agreement, the transfer of the Property shall be deemed to have occurred simultaneously with the recordation in the Real Property Records of Bexar County, Texas, of the deed by which title to the Property is conveyed by Maker to Borrower. 3. Conditions Precedent to Lender's Consent. Lender's consent and approval as set forth in Paragraph 4 below is conditioned upon the satisfaction of the following conditions precedent: (a) Maker, Borrower and Indemnitors shall have executed and delivered this Agreement to Lender. (b) Maker or Borrower shall have paid a total transfer fee of 1% of the outstanding principal balance of Note A and Note B at the time of such transfer to Lender (which amount includes $3,000.00 previously paid to Lender) in connection with the transfer of the Property and the assumption of the loan evidenced by the Note by Borrower, and shall have reimbursed Lender for any and all costs and expenses and third-party costs incurred by Lender for the processing of said - 2 - 3 transfer, including, without limitation, counsel fees, recording and transfer fees, and title insurance costs and premiums. Maker and Borrower agree that should the Loan Documents contain any provision defining or limiting a transfer fee or assumption fee, this paragraph shall control and supersede such provision. (c) Lender shall have received and approved such partnership documents or other organizational documents of Borrower and the General Partner as are requested by Lender. (d) Borrower shall have, at its sole cost and expense, obtained and delivered to Lender a mortgagee's title policy to be issued simultaneously with Borrower's owner's policy insuring the lien of the Deed of Trust in an amount equal to the loan balance assumed. (e) Borrower shall have executed and delivered to Lender a Certification of Non-Foreign Status in a form acceptable to Lender. (f) Borrower shall have executed and filed financing statements and/or financing statement amendments in form and substance satisfactory to Lender in all places necessary in connection with the perfection of Lender's security interest in the fixtures and other property described in the Deed of Trust. (g) Maker shall have executed and contemporaneously filed of record, in the Real Property Records of Bexar County, Texas, a deed in the form approved by Lender, pursuant to which title to the Property shall be conveyed to Borrower. (h) There shall be no secondary or subordinate financing of the Property in connection with the conveyance and transfer of the Property by Maker to Borrower and no other changes to the status of title to the Property not approved by Lender. (i) Borrower shall have executed and delivered an Escrow and Security Agreement to Lender, in form and substance satisfactory to Lender. (j) Borrower and Maker shall have executed and delivered to Lender a lease covering the Property, in form and substance satisfactory to Lender. (k) Borrower shall have executed and delivered a Notice and Agreement to Lender, in form and substance satisfactory to Lender. (l) Borrower shall continue to escrow for real estate taxes, assessments and insurance premiums pursuant to the Deed of Trust. (m) Borrower shall deliver to Lender in form and substance satisfactory to Lender and Borrower's counsel, an opinion of counsel to Borrower and Indemnitors, stating that, inter alia, (i) Borrower is duly formed, legally existing and in good standing under the laws of the State of its formation and authorized to do business in Texas, (ii) the General Partner is duly formed, legally existing and in good standing under the laws of the State of its formation and authorized to do business in Texas, (iii) the execution of this Agreement and the other documents in connection with the assumption of the Loan have been duly authorized by Borrower and the General Partner, (iv) Borrower has all requisite authority to - 3 - 4 own, lease and operate the Property and assume the obligations of Maker under the Loan Documents, (v) Indemnitors have all requisite authority to assume the obligations of Maker under the Indemnity Agreement, and (vi) this Agreement and the other documents executed by Borrower and Indemnitors in connection with the assumption of the Loan have been duly executed and delivered by Borrower and Indemnitors and are legal, valid, and binding obligations of Borrower and/or Indemnitor, as the case may be, and enforceable against Borrower or Indemnitor, as the case may be, in accordance with their terms. (n) Maker or Borrower shall pay, or cause to be paid, all costs and expenses incident to the preparation hereof and the consummation of the transactions specified herein, including without limitation title insurance policy premiums or endorsement charges, fees and expenses of legal counsel to Lender and recording fees. 4. Consent to Transfer of Property and Release of Maker. Subject to the conditions set forth in Paragraph 3 above and pursuant to Paragraph 33 of the Deed of Trust: (a) Lender hereby consents to the sale and transfer of the Property to Borrower, and hereby accepts Borrower as the owner of the Property, without prejudice to its rights with respect to any future conveyance of the Property (or any interest therein). (b) Lender shall amend its records to indicate that Borrower is the owner of the Property, and Lender shall indicate on the Note that the Note is subject to the terms of this Agreement. (c) From and after the conveyance of the Property, Lender hereby releases, remises, acquits and forever discharges Maker, together with its employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the "Maker's Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter accruing under the Loan Documents, and/or for or because of any matter or things done, omitted or suffered to be done by any of the Maker's Released Parties, and in any way directly or indirectly arising out of or in any way connected to the Note, the Deed of Trust, the Assignment of Leases and Rents or any other Loan Document, or any of the transactions associated therewith, or the Property, provided, however, that the foregoing release shall not cover any obligation or liability of Maker under the Loan Documents prior to the conveyance of the Property or any of the representations, covenants and obligations of Maker contained in this Agreement. 5. Representations, Warranties and Covenants to Lender. (a) Maker, Borrower and Indemnitors hereby represent, warrant, certify and covenant to Lender (EACH SUCH REPRESENTATION, WARRANTY AND CERTIFICATION BEING MADE BY MAKER AS TO ITSELF, BY BORROWER AS TO ITSELF AND BY INDEMNITORS AS TO THEMSELVES) respectively that: (i) Such party has not made an assignment for benefit of creditors; (ii) No application or petition has been filed for the appointment of a custodian, trustee, receiver or agent to take possession of any property of such party; - 4 - 5 (iii) Such party is generally paying its debts as such debts become due; (iv) Such party is not "insolvent" as that term is defined in Section 101(31) of the "Bankruptcy Code" (Title 11 of the United States Code; 11 U.S.C. Sections 101, et seq.); (v) Such party has not filed a petition with the bankruptcy court under the Bankruptcy Code, or commenced any proceeding relating to Borrower under any bankruptcy or reorganization statute or under any arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; (vi) No petition or application of the type described in subparagraphs (ii) and (v) above, and no proceeding of the type described in subparagraph (v) above, has been filed or commenced against such party; (vii) Execution and delivery of this Agreement by such party and to the extent applicable, compliance by such party with the provisions of the Loan Documents will not (A) violate or result in any breach of any of the terms, conditions or provisions of or constitute a default under any deed of trust, loan agreement, indenture or other contract or agreement to which such party is a party or by which such party or any of its properties may be bound (nor would such execution and delivery constitute such a default with the passage of time or the giving of notice or both) and do not violate or contravene any law, order, decree, rule or regulation to which such party is subject, (B) result in the creation of any lien, charge or encumbrance on the property or assets of such party (other than the lien on the Property created by the Loan Documents), or (C) violate the terms of such party's organizational documents, to the extent applicable or any order of any court or administrative agency entered in any proceeding to which such party was or is a party or to which such party may be subject or be bound; (viii) This Agreement constitutes the legal, valid and binding obligations of each such party, enforceable in accordance with its terms; (ix) The execution and delivery of, and performance under this Agreement are within such party's power and authority without the joinder or consent of any other party and have been duly authorized by all requisite action; (x) Each person executing this Agreement as a representative of such party, and, to the extent applicable, its general partner, has been duly authorized and has full power to execute and deliver this Agreement on behalf of such party, and to bind such party to the terms and conditions hereof; (xi) To its actual knowledge, such party is not in violation of any Federal or State laws, including, but not limited to, Federal securities laws, blue sky laws, and other laws, or the rules or regulations of the Securities and Exchange Commission with respect to the Property; (xii) Such party is not engaged and has not been engaged at any time since Maker's acquisition of the Property in a "pattern of racketeering activity" within the meaning of 18 U.S.C. 1961, as amended, or engaged in any other pattern of actions, the potential results of which might include forfeiture of Maker's interest in the Property; - 5 - 6 (xviii) There are no law suits or legal proceedings pending or to the actual knowledge of such party's knowledge threatened in any court or before any governmental agency involving such party or the Property, nor are there any judgments outstanding against such party. (b) Maker and Borrower hereby represent, warrant and certify to Lender that, as of the date hereof, Maker or Borrower, as the case may be and with respect to itself, has no knowledge of any offsets, defenses or counterclaims to the payment of the indebtedness evidenced by the Note, and Borrower hereby agrees that if Borrower hereafter becomes aware of such defense to the payment of such indebtedness based on facts or circumstances existing as of the date hereof, the same will not be raised against Lender. (c) The representations, warranties and certifications set forth herein are given to induce Lender to grant the consent and approvals set forth in Paragraph 4 above, with the knowledge that Lender will rely upon the truth of the statements made herein. (d) Maker, Borrower and Indemnitors each agree to indemnify and hold Lender harmless against any loss, claim, damage, liability or expense (including without limitation attorneys' fees) incurred as a result of any representation or warranty made by it, but not of any other of such parties, herein proving to be untrue in any respect. (e) Borrower hereby represents, warrants and certifies to Lender that: (i) Borrower is duly organized and legally existing under the laws of the State of Texas and is authorized to own and operate the Property and/or otherwise transact business in the State of Texas; and (ii) Borrower understands and hereby acknowledges all of the terms and provisions of the Loan Documents. (f) General Partner hereby represents, warrants and certifies to Lender that General Partner is duly organized and legally existing under the laws of the State of Texas. (g) Maker hereby represents, warrants and certifies to Lender that to Maker's knowledge there exists no uncured default under the Note, the Deed of Trust, the Assignment of Leases and Rents or any of the other Loan Documents. (h) Borrower and Indemnitors reaffirm to Lender each of the covenants and agreements of Maker set forth in the Loan Documents with the same force and effect as if each were separately stated herein. (i) It is specifically understood and agreed that each of the representations, warranties, certifications and covenants made in this Section 5 are made by such party as each applies to itself (and not for any other party to this Agreement), and not to any other party that may be making the same representations, warranty, certification and/or covenant. (j) Nothing contained herein shall be construed as an acknowledgment, confirmation or reaffirmation by Borrower, the Indemnitors or the General Partner of any of the representations and - 6 - 7 warranties made by Maker in the Loan Documents; it being understood that the representations and warranties set forth in this Agreement and/or such other loan documents specifically executed by Borrower, Indemnitors or General Partner, as the case may be, are intended to be inclusive of all representations and warranties made by Borrower, Indemnitors or General Partner, with respect to the Loan Documents assumed herein. This subsection 5(j) shall not be deemed to limit Borrower's and Indemnitors' assumption of the covenants and agreements under the Loan Documents as specifically provided in this Agreement. 6. Further Assurances. Borrower, upon request from Lender, agrees to execute such other and further documents as may be reasonably necessary or appropriate to consummate the transactions contemplated herein or to perfect the liens and security interests intended to secure the payment of the loan evidenced by the Note. 7. INDEMNIFICATIONS. BORROWER EXPRESSLY CONFIRMS AND AGREES THAT THE INDEMNITY AGREEMENTS CONTAINED IN PARAGRAPHS 3 AND 26 OF THE DEED OF TRUST AND IN PARAGRAPH 4 OF THE ASSIGNMENT OF LEASES AND RENTS APPLY TO EACH INDEMNIFIED PARTY THEREUNDER WITH RESPECT TO CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, COURT COSTS AND ATTORNEYS' FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY. HOWEVER, SUCH INDEMNITIES SHALL NOT APPLY TO ANY INDEMNIFIED PARTY TO THE EXTENT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. 8. RELEASES IN LOAN DOCUMENTS. BORROWER EXPRESSLY CONFIRMS AND AGREES THAT THE RELEASE CONTAINED IN SECTION 1.E OF THE ASSIGNMENT OF LEASES AND RENTS APPLIES TO LENDER WITH RESPECT TO ANY MATTER COVERED THEREBY WHICH IN WHOLE OR IN PART IS CAUSED BY OR ARISES OUT OF THE NEGLIGENCE OF LENDER. HOWEVER, SUCH RELEASE SHALL NOT APPLY TO LENDER TO THE EXTENT A MATTER COVERED THEREBY IS CAUSED BY OR ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LENDER. 9. Remedies. If Borrower or Indemnitors shall fail to keep or perform any of the covenants or agreements contained herein or if any statement, representation or warranty contained herein is false, misleading or erroneous in any material respect as each applies to itself, Borrower shall be deemed to be in default under the Deed of Trust and Lender shall be entitled at its option to exercise any and all of the rights and remedies granted pursuant to the Deed of Trust, the Assignment of Leases and Rents or any other Loan Document or which Lender may otherwise be entitled, whether at law or in equity. Nothing contained in this Section 9 or otherwise in this Agreement shall be construed to create any obligation or agreement of Borrower or Indemnitors, as the case may be, to perform any duties or obligations of the other party under the Loan Documents which are not specifically assumed herein. 10. Lien Status. Maker and Borrower hereby acknowledge and agree that the liens and security interests created and evidenced by the Deed of Trust and the assignment created and evidenced by the Assignment of Leases and Rents are valid and subsisting and further acknowledge and agree that there are no offsets, claims or defenses to the Note, the Deed of Trust, the Assignment of Leases and Rents or any other Loan Documents. - 7 - 8 11. Other Provisions Unchanged. Notwithstanding anything to the contrary contained in the Deed of Trust (i)it is understood that Borrower and/or any tenant of Borrower permitted under the Loan Documents shall have the right to make alterations, additions, and improvements to the interior or exterior of the "Building" comprising part of the Property and the parking areas adjacent to such Building equal to or less than Five Thousand and No/100 Dollars ($5,000.00) without the prior consent of Lender and (ii) it is understood that Sanwa Business Credit Corporation and MetLife Capital Corporation currently have a lien on certain non-movable trade fixtures, equipment and personal property owned and/or utilized by Maker, Borrower's tenant, in connection with the Property, which non-movable trade fixtures, equipment and personal property do not comprise part of the Property (as defined in the Deed of Trust) under the Loan Documents. Except for the foregoing sentence, the terms and provisions of the Loan Documents shall remain unchanged and shall remain in full force and effect. The Loan Documents are hereby ratified and confirmed in all respects. All liens, security interests, mortgage and assignments granted or created by or existing under the Deed of Trust, the Assignment of Leases and Rents and the other Loan Documents remain unchanged and continue, unabated, in full force and effect, to secure Borrower's obligation to repay the Note. 12. Merger. This Agreement supersedes and merges all prior and contemporaneous promises, representations and agreements. No modification of any of the Loan Documents, or any waiver of rights under any of the foregoing, shall be effective unless made by supplemental agreement, in writing, executed by Lender and Borrower. Lender, Maker, and Borrower further agree that this Agreement may not in any way be explained or supplemented by a prior, existing or future course of dealings between the parties or by any prior, existing, or future performance between the parties pursuant to this Agreement or otherwise. 13. Notices. Any notice or communication required or permitted hereunder or under the Loan Documents shall be given in writing, sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, or (d) prepaid telegram, telex or telecopy, addressed as follows: To Borrower: Koontz/McCombs 1, Ltd. 200 Concord Plaza Drive San Antonio, Texas 78216 To Nationwide: Nationwide Life Insurance Company One Nationwide Plaza Columbus, Ohio 43215-2220 Attn: Real Estate Investments 34-T To Employers: Employers Life Insurance Company of Wausau c/o Nationwide Life Insurance Company One Nationwide Plaza Columbus, Ohio 43215-2220 Attn: Real Estate Investments 34-T To Maker: Solo Serve Corporation 1610 Cornerway Blvd. San Antonio, Texas 78219-2900 - 8 - 9 To Indemnitors: Koontz/McCombs, LLC 200 Concord Plaza Drive San Antonio, Texas 78216 Bart C. Koontz 200 Concord Plaza Drive San Antonio, Texas 78216 or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telegram, telex or telecopy, upon receipt; provided that, service of a notice required by Tex. Property Code Section 51.002 shall be considered complete when the requirements of that statute are met. 14. Release of Lender. Maker, Borrower and Indemnitors each hereby release, remise, acquit and forever discharge Lender, together with their employees, agents, representatives, consultants, attorneys, fiduciaries, servants, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, whether heretofore or hereafter accruing, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date hereof, and in any way directly or indirectly arising out of or in any way connected to this Agreement, the Note, the Deed of Trust, the Assignment of Leases and Rents or any other Loan Document, or any of the transactions associated therewith, or the Property, including specifically but not limited to claims of usury. 15. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. 16. Severability of Provisions. If any covenant, condition, or provision herein contained is held to be invalid by final judgment of any court of competent jurisdiction, the invalidity of such covenant, condition, or provision shall not in any way affect any other covenant, condition or provision herein contained. 17. Time of the Essence. It is expressly agreed by the parties hereto that time is of the essence with respect to this Agreement. 18. Representation by Counsel. The parties acknowledge and confirm that each of their respective attorneys have participated jointly in the review and revision of this Agreement and that it has not been written solely by counsel for one party. The parties hereto therefore stipulate and agree that the rule of construction to the effect that any ambiguities are to or may be resolved against the drafting party shall not be employed in the interpretation of this Agreement to favor either party against the other. 19. Governing Law. This Agreement and the rights and duties of the parties hereunder shall be governed for all purposes by the law of the State of Texas and the law of the United States applicable to transactions within said State. - 9 - 10 20. Successors and Assigns. The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto, their heirs, personal representatives, successors and assigns. 21. Paragraph Headings. The paragraph headings set forth in this Agreement are for the convenience of the parties only, and shall in no way enlarge or limit the scope or meaning of the various and several paragraphs in this Agreement. IN WITNESS WHEREOF, this Agreement is executed on the dates of acknowledgment below but is effective as of the date first above written. BORROWER: KOONTZ/McCOMBS 1, LTD., a Texas limited partnership By Koontz/McCombs, LLC, a Texas limited liability company, General Partner By: /s/ Bart Koontz ------------------------------------ Name: Bart Koontz ------------------------------- Title: President ------------------------------ MAKER: SOLO SERVE CORPORATION, a Delaware corporation By: /s/ Ross E. Bacon --------------------------------------- Name: Ross E. Bacon ---------------------------------- Title: Executive Vice President --------------------------------- INDEMNITORS: KOONTZ/McCOMBS, LLC, a Texas limited liability company By: /s/ Bart C. Koontz --------------------------------------- Name: Bart C. Koontz ---------------------------------- Title: President --------------------------------- /s/ Bart C. Koontz ------------------------------------------ BART C. KOONTZ - 10 - 11 LENDER: NATIONWIDE LIFE INSURANCE COMPANY, an Ohio corporation By: /s/ Robert H. McNaughton ---------------------------------------- Name: Robert H. McNaughton ----------------------------------- Title: Vice President ---------------------------------- EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU, a Wisconsin corporation By: /s/ Robert H. McNaughton ---------------------------------------- Name: Robert H. McNaughton ----------------------------------- Title: Vice President ---------------------------------- EX-23.1 7 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-99670) pertaining to the 1995 Stock Incentive Plan of Solo Serve Corporation of our reports dated April 10, 1998, with respect to the financial statements and schedule of Solo Serve Corporation included in the Annual Report (Form 10-K) for the year ended January 31, 1998. ERNST & YOUNG LLP San Antonio, Texas April 10, 1998 EX-23.2 8 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in each of the Registration Statements of Solo Serve Corporation on Forms S-8 (Nos. 33-99666 and 33-99670) filed on November 20, 1995, of our report dated May 14, 1997 appearing on Page F-2A 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-2 of this Form 10-K. PRICE WATERHOUSE LLP San Antonio, Texas April 29, 1998 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 01-31-98 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT. YEAR JAN-31-1998 JAN-31-1998 1,042,357 0 0 0 12,030,628 14,485,899 11,897,807 0 26,383,706 14,765,894 13,840,959 0 13,889 28,562 (2,265,598) 26,383,706 82,045,778 82,045,778 57,302,606 57,302,606 29,098,701 0 1,933,853 (6,289,382) 0 (6,289,382) 0 (266,343) 0 (6,555,725) (2.30) (2.30)
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