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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 27, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No 0-631
ROSE'S STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-0382475
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
218 S. Garnett Street
Henderson, NC 27536
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 430-2600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Stock Warrants (to purchase Common Stock)
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. ( X )
(continued on following page)
PAGE
(continued from previous page)
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and report required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
As of February 19, 1996, of the 10,000,000 shares of common stock delivered
to First Union National Bank of North Carolina as Escrow Agent pursuant to the
Modified and Restated First Amended Joint Plan of Reorganization, the Company
has 8,158,316 shares of common stock outstanding. The remaining 865,936 shares
held in escrow will be distributed by FUNB in satisfaction of disputed Class 3
claims as and when such claims are resolved. If all pending claims are resolved
adversely to the Company, approximately 8,852,901 shares of common stock will
be outstanding. If all pending claims are resolved in accordance with the
Company's records, approximately 8,601,172 shares of common stock will be
outstanding. The foregoing estimates do not include any additional shares that
may be issued with respect to late-filed claims which the Bankruptcy Court may
allow which have not been filed as of the date hereof or the effect of negotiat-
ed settlements made for amounts in excess of amounts shown in the Company's
records. To the extent that escrowed shares of common stock are not used to
satisfy claims, they will revert to the Company and will be retired or held
in the treasury of the Company.
As of March 21, 1996, the aggregate market value of common stock held by non-
affiliates (assuming all pending claims are resolved adversely to the Company)
of the Registrant was approximately $18,046,671.
PAGE
PART I
ITEM 1: BUSINESS
(a) General Development of Business
Rose's* was organized in 1915 as a family partnership consisting of Paul H.
Rose and his wife, Emma M. Rose, who together opened a "5-10-25 cents" store in
Henderson, North Carolina. By 1927, when there were 28 stores, the business
was incorporated in the state of Delaware under the name of "Rose's 5, 10 & 25
cents Stores, Inc.". In 1962, the name was changed to "Rose's Stores, Inc.".
Over the years, Rose's has opened stores of a larger size. As a result, Regis-
trant's business has evolved from a chain of 5, 10 & 25 cents stores to a chain
of general merchandise discount stores.
On September 5, 1993, Rose's filed a voluntary petition for Relief under
Chapter 11, Title 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Eastern District of North
Carolina (the "Bankruptcy Court"). The Company's Modified and Restated First
Amended Joint Plan of Reorganization (the "Plan") was approved by Order of the
Bankruptcy Court on April 24, 1995. On April 28, 1995, the Plan became effec-
tive. Details of the bankruptcy proceedings are discussed in Note 1 of the
Financial Statements.
On March 1, 1996, the Company and Fred's, Inc. ("Fred's") entered into a
letter of intent (the "Letter of Intent"), providing for the acquisition by mer-
ger of the Company by Fred's (the "Merger"). Fred's is a publicly traded re-
tailer that operates approximately 200 stores in the southeastern United States.
The Letter of Intent provides that each share of the Company's common stock, no
par value ("Common Stock"), issued and outstanding (including stock held in
escrow according to the Plan) immediately prior to the effective time of the
Merger (other than the shares held in the treasury of the Company, which will
be canceled) will be converted into the "Conversion Number" of shares of Fred's
class A voting common stock ("Fred's Common Stock"). The "Conversion Number"
will be determined by dividing $2.15 by the "Fred's Average Price". The "Fred's
Average Price" is an amount equal to the average price of a share of Fred's
Common Stock for the 10 days immediately preceding the day before the printing
of the joint proxy statement to be distributed to stockholders of Fred's and the
Company in connection with the Merger; provided, however, that if the amount so
computed would (a) exceed $8.00, then the Fred's Average Price will be $8.00, or
(b) be less than $6.00, then the Fred's Average Price will be $6.00. The Letter
of Intent provides that the Merger is subject to the execution of a definitive
agreement and to the occurrence or (to the extent permitted by the definitive
merger agreement or applicable law) waiver of a number of conditions, including
the approval of the stockholders of the Company and Fred's.
(b) Industry Segments Registrant's business does not include industry
segments as defined under the Act.
(c) Narrative Description of Business
At the end of its last fiscal year, Registrant was operating 105 retail
stores in a region extending from Delaware to Georgia and westward to the
Mississippi Valley. All store buildings are leased. The stores range in size
from 24,000 square feet to 72,000 square feet. During the year, Rose's opened
no new stores and closed 8 stores.
Registrant operates one class of stores, known as "ROSES". The stores carry
a wide range of general merchandise and popularly priced consumer goods such as
clothing, shoes, household furnishings, small appliances, toiletries, cosmetics,
sporting goods, automobile accessories, food, yard and garden products,
electronics and occasional furniture. Registrant operates all of the departments
in its stores with the exception of the shoe departments.
* Reference in this Annual Report on Form 10-K to "Rose's", the "Registrant",
or "the Company" shall mean Rose's Stores, Inc.
PAGE
Sales are primarily for cash, although credit cards such as MASTERCARD, VISA
and DISCOVER are honored. During the past fiscal year, credit card sales
amounted to approximately 14% of gross sales in its 105 stores. Sales are
directly affected by general economic conditions in the southeastern states,
consumer spending, and disposable income.
Merchandising Inventories are purchased in two principal ways. Buyers
purchase and distribute merchandise to the various stores, and to a lesser ex-
tent the store managers purchase merchandise for their individual stores from
listings and sources approved by buyers. Rose's purchases from a large number of
suppliers and sells to a large number of customers and does not believe that the
loss of any one customer or supplier would have a materially adverse effect on
the Company. Rose's does not engage in any material research activities and has
no plans for new product lines.
Distribution Approximately 15% of merchandise is shipped directly to stores
from suppliers, and 85% is shipped to stores from Rose's distribution and
consolidating facilities located in Henderson, North Carolina. The majority of
trailers used in shipping are owned by Rose's; the majority of tractors are
leased.
Seasonal Aspects of Operations Rose's business is highly seasonal and
directly influenced by general economic conditions in its operating area. The
fourth quarter, which includes Christmas, is the period of highest sales volume.
During the past fiscal year, a total of approximately 30% of the year's gross
sales were made in the fourth quarter, beginning October 29, 1995.
Competition Rose's business is intensely competitive. Rose's Stores compete
directly with chains and independent stores such as Wal-Mart, Kmart, Target,
Ames, and Hills. Wal-Mart and Kmart and more recently Target and Hills have
been opening stores in the areas in which Rose's stores are located. Of the 105
stores, 28 Company stores faced new competitors' openings in 1995, compared to
10 stores in 1994 and five stores in 1993. In 1996, the Company expects to have
16 stores facing new competition. Increasing competition also results from
grocery and drug chains expanding merchandise lines to carry goods and products
normally identified with general merchandise and variety stores. In addition,
other distribution channels, such as telemarketing and catalogs also compete
with stores of the Registrant.
Associates* Rose's employed, on a full-time or part-time basis,
approximately 8,000 persons at fiscal year-end. Rose's considers its relations
with its associates to be good.
* Persons employed by Rose's Stores, Inc.
PAGE
ITEM 2: PROPERTIES
The following table shows the geographical distribution of the 105 Rose's
stores in operation on January 27, 1996:
State Number of Stores
North Carolina 47
Virginia 27
Georgia 8
South Carolina 6
Maryland 4
Mississippi 4
Kentucky 3
Delaware 3
Tennessee 2
West Virginia 1
TOTAL 105
During the fiscal year which ended January 27, 1996, Rose's opened no new
stores and closed 8 stores. The Registrant occupies approximately 5,437,000
square feet of store space (including office, stockroom, and other non-selling
areas). Rose's leases all store space from others under long-term leases which
are normally for initial terms of 15 to 20 years with one or more five-year
renewal options. (See Leased Assets and Lease Commitments, Note 15, to the
Financial Statements for additional information about the Registrant's
commitments under terms of long-term leases.)
Following is a table of the number of stores opened, closed and remodeled
in the last 5 years:
1995 1994 1993 1992 1991
Number of stores at the
beginning of year 113 172 217 232 256
Stores opened - - - - 3
Stores closed (8) (59) (45) (15) (27)
Number of stores at the
end of year 105 113 172 217 232
Remodeled stores 15 - 21 7 -
Most of the store fixtures are owned by the Registrant. The remaining
fixtures are manufacturers' racks that are supplied by vendors. Most of the
electronic equipment located in the stores, including point of sale equipment,
is leased by Registrant.
The Registrant owns its Executive and Buying Offices, its 860,300 square
foot central warehouse, an additional warehouse containing 134,400 square feet,
a 31,000 square foot graphic productions building and a 30,000 square foot data
center all of which are located in Vance County, North Carolina. Registrant also
leases facilities in Henderson, North Carolina for offices (approximately 30,000
square feet). Registrant also owns a 78,000 square foot warehouse in Henderson,
North Carolina, which is leased to a third party.
PAGE
On April 28, 1995, the Company closed on a $125,000,000 (subsequently amended
to $110,000,000) three-year revolving credit facility (the "Facility")(See Debt,
Note 7, to the Financial Statements). The Facility is secured by a perfected
first priority lien and security interest in all of the assets of the Company.
A second lien on the properties owned by the Company in Henderson, NC, was
granted to trade suppliers which extend credit to the Company. The second lien
expires April 30, 1996 (extended to May 30, 1997).
ITEM 3: LEGAL PROCEEDINGS
The Registrant's business ordinarily results in a number of negligence and
tort actions, most of which arise from injuries on store premises, injuries from
a product, or false arrest and detainer arising from apprehending suspected
shoplifters. General damages are covered by insurance, subject to specified
self-retention amounts, and are adjusted and managed by a third party claims
management service which also manages defense of the claims.
On September 5, 1993 (the "Petition Date"), the Company filed a voluntary
petition for Relief under Chapter 11, Title 11 of the United States Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Eastern
District of North Carolina (the "Bankruptcy Court"). Pursuant to Section 362
of the Bankruptcy Code, the commencement of the Chapter 11 case created an
automatic stay as to claims which arose prior to the Petition Date. On April
26, 1994, the Bankruptcy Court approved an Alternative Dispute Resolution
Procedure (the "ADR Procedure") to liquidate pre-petition liability for certain
personal injury, property damage and commercial claims (the "Damages Claims").
The ADR Procedure is described on page 26 of the October 5, 1994 First Amended
Disclosure Statement Relating to First Amended Joint Plan of Reorganization (the
"Disclosure Statement"). Once liquidated under the provisions of the ADR
Procedure, or as otherwise provided, Damages Claims will be satisfied and
discharged under the terms of the Joint Plan of Reorganization (described
below).
The Registrant's liability for general damages and punitive damages for
claims which arose after the Petition Date is not considered material. No post-
petition legal proceedings presently pending by or against the Registrant with
respect to Post-Petition Date claims are described because the Registrant
believes that the outcome of such litigation should not have a material adverse
effect on the financial position of the Registrant.
Chapter 11 Reorganization
The following discussion provides general background information regarding
the Chapter 11 case, but is not intended as an exhaustive summary. For
additional information regarding the effect of the case on the Company, refer-
ence should be made to the Bankruptcy Code and to the October 5, 1994 Disclosure
Statement.
On September 5, 1993 (the "Petition Date"), the Company filed a voluntary
petition for Relief under Chapter 11, Title 11 of the United States Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Eastern District of North Carolina (the "Bankruptcy Court").
Although the Company was authorized to operate its business as a debtor-
in-possession, it could not engage in transactions outside the ordinary course
of business without first complying with the notice and hearing provisions of
the Bankruptcy Code and obtaining Bankruptcy Court approval when necessary.
An Official Unsecured Creditors' Committee and an Official Equity Committee
were formed and acted during the case. These committees had the right to review
and object to certain business transactions and participated in the formulation
of the plan of reorganization and were joint sponsors of the plan. The Company
has been required to pay certain expenses of these committees, including legal
and accounting fees, to the extent allowed by the Bankruptcy Court.
Pursuant to certain consent orders entered by the Bankruptcy Court during
the course of the proceeding, the Company closed 102 of its stores and used a
portion of the proceeds from the sale of inventories and fixtures therefrom to
reduce liabilities to the Pre-Petition Secured Lenders to $26.4 million. In
addition, the Company closed an additional 7 stores in 1995 pursuant to consent
orders of the Bankruptcy Court.
In the Chapter 11 case, substantially all liabilities as of the Petition
Date were subject to settlement under a plan of reorganization voted upon by
certain impaired creditors of the Company. On October 4, 1994, the Company
filed with the Bankruptcy Court its First Amended Joint Plan of Reorganization
(together with all amendments thereto approved by the Bankruptcy Court, the
"Joint Plan of Reorganization"). This Joint Plan of Reorganization was submitted
to the Court on behalf of the Company, the Pre-Petition Secured Noteholders,
Bank of Tokyo, Ltd., the Official Committee of Unsecured Creditors, and the
Official Committee of Equity Security Holders. Capitalized terms used herein
and not defined are defined in the Joint Plan of Reorganization.
The Company's First Amended Disclosure Statement Relating to First Amended
Joint Plan of Reorganization, dated October 5, 1994, was approved by the
Bankruptcy Court on October 5, 1994. The Joint Plan of Reorganization was
confirmed by order of the Bankruptcy Court dated December 14, 1994.
By orders dated February 3, 1995 and February 13, 1995, the Bankruptcy Court
approved technical modifications to the Joint Plan of Reorganization. On April
24, 1995, the Bankruptcy Court approved a Modified and Restated First Amended
Joint Plan of Reorganization (the "Modified Plan"), which (i) reflected payment,
under the exit financing facility obtained by the Company, of certain pre-
petition lenders of the Company in cash instead of secured notes, (ii) deleted
all references in the plan to certain "Alternative Treatment" provisions under
which the Company would have been required to liquidate inasmuch as all
requirements for emergence from Chapter 11 occurred as required under the Plan
and Modified Plan, and (iii) made other confirming and technical modifications
to the Plan. The Plan and Modified Plan will be referred to hereinafter
collectively as the "Plan".
The Effective Date of the Plan occurred on April 28, 1995. Pursuant to the
Plan, the Company (i) made cash payments of $26.4 million to its Pre-Petition
Secured Lenders and amounts owing under the debtor-in-possession financing
facility and various administrative and tax claims due at the Effective Date;
and (ii) distributed to the Escrow Agent ten million shares of the common stock
of reorganized Rose's (including 150,000 shares reserved for issuance to offic-
ers of the Company as a management incentive and retention program approved by
order of the Bankruptcy Court dated February 14, 1995) for distribution to un-
secured creditors to settle claims of $115 million to $130 million. Additional-
ly, shareholders of record as of the Effective Date became entitled to receive
their prorata share of 4,285,714 warrants. Each warrant entitles the holder to
purchase one share of common stock of the reorganized Rose's at a price
determined and periodically adjusted in accordance with applicable provisions
of the Plan. The warrants expire on April 28, 2002. In addition, RSI Trading,
Inc., a wholly owned subsidiary of the Company, was merged into the Company
under the Plan.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
INVESTOR INFORMATION
Rose's new common stock was delivered to First Union National Bank of North
Carolina as Escrow Agent on April 28, 1995, pursuant to the Modified and Restat-
ed First Amended Joint Plan of Reorganization (the Plan) for distribution on
allowed claims of unsecured creditors and to officers of the Company pursuant to
a consummation bonus plan approved by order of the Bankruptcy Court on February
14, 1995. Rose's stock is listed on the Nasdaq National Market System ("NASDAQ";
symbol "RSTO"). Rose's had 3,209 shareholders of record of the new common stock
on March 4, 1996. High and low prices on the Company's common stock from the
Effective Date through January 27, 1996, as reported on NASDAQ are shown in the
table below:
Thirty-Nine Weeks
Ended January 27, 1996
High Low
2nd Quarter 3 3/8 1 57/64
3rd Quarter 3 1/4 1 5/8
4th Quarter 2 5/16 1 1/2
On the Effective Date, all shares of the Company's pre-emergence Voting
Common Stock and Non-voting Class B Stock were canceled under the Plan. The
shareholders of record of such stock as of such date became entitled to receive
their prorata share of 4,285,714 warrants to purchase the new stock of the
Company. One warrant was issued for every 4.377 shares of pre-emergence Voting
Common Stock or Non-voting Class B Stock and allows the holder to purchase one
share of the new common stock. See Stockholders' Equity, Note 11, to the
Financial Statements for additional information. The stock warrants are listed
on the Nasdaq National Market System ("NASDAQ"; symbol "RSTOW"). High and low
prices on the stock warrants from the first day listed (October 31, 1995)
through January 27, 1996, as reported on NASDAQ, are shown in the table below:
High Low
2nd Quarter NA NA
3rd Quarter 5/16 3/16
4th Quarter 1/4 1/16
PAGE
The pre-emergence stock was listed on NASDAQ; the Voting Common Stock had the
symbol "RSTOQ" and the Non-voting Class B Stock had the symbol "RSTBQ". Rose's
had 1,143 shareholders of record for the pre-emergence Voting Common Stock and
1,497 for Non-voting Class B Stock at April 28, 1995. High and low prices of
Rose's pre-emergence stock (adjusted to reflect the 2-for-1 stock split effected
in 1986) are shown in the table below:
(Dollars in thousands except per share amounts)
Market Price Range and Dividends
1995 1994
High Low High Low
1st Quarter 7/16 1/32 11/16 3/14
2nd Quarter - - 1/2 1/8
3rd Quarter - - 7/16 1/8
4th Quarter - - 7/16 1/8
Dividends Total
High Low Per Share Dividends
1995 (through
April 28, 1995) 7/16 1/32 - -
1994 11/16 1/8 - -
1993 7 1/4 13/32 - -
1992 7 3 1/2 - -
1991 7 1/8 2 1/8 - -
1990 7 1/4 2 1/4 .210 3,991
1989 9 5/8 5 .210 4,138
1988 12 7 1/8 .210 4,194
1987 22 1/2 7 7/8 .210 4,316
1986 23 1/8 10 3/4 .200 4,115
1985 13 1/2 8 3/4 .190 3,900
There were no dividends paid for the new or pre-emergence common stock in 1995
and 1994. The previous Board of Directors suspended the payment of dividends
on the pre-emergence stock on January 24, 1991. In addition, the Predecessor
Company was precluded from paying dividends while the Chapter 11 case was
pending and the Registrant is restricted from paying dividends under the terms
of its exit financing facility.
PAGE
ITEM 6: SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
(Not covered by Independent Auditors' Report)
Thirty-Nine | Thirteen
Weeks Ended | Weeks Ended
January 27, | April 29, Fiscal Years
1996 | 1995 1994 1993 1992 1991
Net sales $ 524,397 | 154,290 731,926 1,203,223 1,362,243 1,380,630
Leased department income 3,784 | 1,114 5,288 8,707 9,816 10,198
Earnings (loss) before |
reorganization expense, |
fresh-start revaluation, |
income taxes, and |
extraordinary item 5,484 | 542 6,617 (27,069) (59,509) (18,525)
Reorganization expense(b) - | (3,847) (57,899) (39,138) - -
Fresh-Start revaluation(c) - | (17,432) - - - -
Earnings (loss) before |
cumulative effect of |
accounting change and |
extraordinary item 4,401 | (20,737) (51,282) (66,207) (58,560) (23,304)
Cumulative effect of |
accounting change(d) - | - - - (5,031) -
Extraordinary item-gain |
on debt discharge(e) - | 90,924 - - - -
Net earnings (loss)(f) 4,401 | 70,187 (51,282) (66,207) (63,591) (23,304)
Per Share Results |
Earnings (loss) before |
cumulative effect of |
accounting change and |
extraordinary item .50 | (1.11) (2.73) (3.53) (3.14) (1.25)
Net earnings (loss) .50 | 3.74 (2.73) (3.53) (3.41) (1.25)
Cash dividends - | - - - - -
Total assets 171,244 | 204,561 183,186 308,105 337,040 416,318
Excess of net assets over |
reorganization value 25,371 | 32,201 - - - -
Reserve for income tax(g) 12,673 | - - - - -
Long-term obligations 2,108 | (h) (h) (h) 83,433 74,896
(a) In accordance with Fresh-Start Reporting, the Company adjusted its assets
and liabilities to reflect their estimated fair market value at the Effective
Date, and made certain reclassifications between gross margin and expenses and
changed the method of accruing certain expenses between periods (See Note 2 to
the Financial Statements). Accordingly, the selected financial data above for
the thirty-nine weeks ended January 27, 1996 is not comparable in material re=
spects to such data for prior periods. Furthermore, the Company's results of
operations for the period prior to reorganization are not necessarily indicative
of results of operations that may be achieved in the future.
(b) Included in the reorganization expense for 1994 is a provision of $43,000
for the costs of closing 59 stores in May 1994 and realigning corporate and ad-
ministrative costs. Included in the reorganization expense for 1993 is a provi-
sion of $39,500 for the costs of closing 43 stores in January 1994. Included in
the thirteen weeks ended April 29, 1995, 1994 and 1993 reorganization costs, in
addition to the costs of closing the stores, are the DIP facility fee amortiza-
tion and expenses, professional fees and other reorganization costs. Offsetting
the 1993 expense is a reversal of prior reserves for closings due to the antici-
pated rejections of closed store leases.
(c) The Fresh-Start revaluation of $17,432 reflects the net expense to record
assets at their fair values and liabilities at their present values in accord-
ance with the provisions of SOP 90-7 and to reduce noncurrent assets below their
fair values for the excess of the fair values of assets over the reorganization
value.
(d) In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postre-
tirement Benefits Other Than Pensions," requiring the Company to accrue health
insurance benefits over the period in which associates become eligible for such
benefits. The cumulative effect of adopting SFAS 106 was a one-time charge of
$5,031.
(e) The extraordinary item-gain on debt discharge represents the extinguishment
of liabilities subject to settlement under reorganization proceedings in accord-
ance with the Plan.
(f) In 1991, the Company changed its method of accounting for LIFO inventories
from the use of the inflation index provided by the Bureau of Labor Statistics
to an internally generated price index to measure inflation in the retail prices
of its merchandise inventories. This change decreased 1991 cost of sales by
$21,428 (or $1.15 per share). Net loss would have been $44,732 in 1991 if the
change in accounting method had not been made. Also, included in net loss for
1991 is a provision for future store closings and remerchandising for the anti-
cipated costs of closing approximately 15 stores during fiscal year 1992.
(g) During 1995, the Company filed for and received a federal refund of $16,898
resulting from the carry back of losses described in Section 172(f) of the
Internal Revenue Code. Section 172(f) is an area of tax law without substantial
legal precedent or guidance. Accordingly, assurances cannot be made as to
whether the IRS would challenge the Company's ability to carry back such a sub-
stantial portion of losses under this provision. Consequently, an income tax
reserve of $12,673 has been recorded in the amount of the refund net of the col-
lection expenses which will be reimbursed if the Company's position does not
withstand any such challenge and the refund is reversed.
(h) Not comparable for the thirteen weeks ended April 29, 1995, and the fiscal
years 1994 and 1993, the majority of the amounts comprising this item have been
reclassed to liabilities subject to settlement under reorganization proceedings.
PAGE
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS FROM OPERATIONS
(Dollars in thousands except per share amounts)
Results of Operations
The following table sets forth for the periods indicated the percentage
which each item listed relates to net sales:
(a) Fiscal Years
1995 % to Net % to Net % to Net
Proforma Sales 1994 Sales 1993 Sales
Revenue:
Gross sales $700,325(b) 103.2% 756,356 103.3% 1,245,697 103.5%
Leased department sales 21,638(b) 3.2 24,430 3.3 42,474 3.5
Net sales 678,687(b) 100.0 731,926 100.0 1,203,223 100.0
Leased department income 4,898(b) 0.7 5,288 0.7 8,707 0.7
Total revenue 683,585 100.7 737,214 100.7 1,211,930 100.7
Costs and Expenses:
Cost of sales 519,727 76.6 555,087 75.8 932,238 77.5
Selling, general and
administrative 153,900 22.7 160,346 21.9 281,723 23.4
Depreciation and
amortization (3,349) (0.5) 9,257 1.3 12,984 1.0
Interest 6,927 1.0 5,907 0.8 12,054 1.0
Total costs and expenses 677,205 99.8 730,597 99.8 1,238,999 102.9
Earnings (loss) before
reorganization expense,
and income taxes (benefits) 6,380 0.9 6,617 0.9 (27,069) (2.2)
Reorganization expense (a) - - (57,899) (7.9) (39,138) (3.3)
Earnings (loss) before income
tax benefits 6,380 0.9 (51,282) (7.0) (66,207) (5.5)
Income tax expense 1,272 0.2 - - - -
Net earnings (loss) $ 5,108 0.7% (51,282) (7.0)% (66,207) (5.5)%
(a) On September 5, 1993, the Company filed a voluntary petition in the United
States Bankruptcy Court for the Eastern District of North Carolina seeking to
reorganize under Chapter 11 of the Bankruptcy Code. The Company emerged from
Chapter 11 on April 28, 1995. Beginning in May 1995, the income statements re-
flect the application of Fresh-Start Reporting as described in Fresh-Start Re-
porting, Note 2 to the Financial Statements, and are therefore not comparable to
prior years. The 1995 year-to-date results are presented on a pro forma basis
to reflect the results as if the Company had adopted Fresh-Start Reporting at
the beginning of the year. The adjustments are related to interest expense,
reorganization costs, depreciation and amortization, advertising accrual, LIFO
shrinkage and income taxes.
(b) The Successor's proforma amounts represent the combination of the Success-
or's historical amounts with the Predecessor's historical amounts. See State-
ments of Operations included in the historical financial statements.
PAGE
Chapter 11 Proceedings
On September 5, 1993, the Company filed a voluntary Petition for Relief under
Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the
United States Bankruptcy Court for the Eastern District of North Carolina (the
"Bankruptcy Court") Case No. 93-01365-5-ATS.
Technical modifications to the Company's First Amended Joint Plan of
Reorganization (which was confirmed by the Bankruptcy Court on December 14,
1995) were approved by orders of the Bankruptcy Court dated February 3, 1995 and
February 13, 1995 and a Modified and Restated First Amended Joint Plan of
Reorganization (the "Plan") was approved by order of the Bankruptcy Court on
April 24, 1995. On May 1, 1995, the Company announced that it had satisfied all
conditions required under its plan of reorganization and had emerged from Chap-
ter 11 of the United States Bankruptcy Code on April 28, 1995 (the "Effective
Date").
For a further discussion of the Chapter 11 proceedings, see Item 3: Legal
Proceedings and Note 1 to the Financial Statements.
In accordance with SOP 90-7, the Company adopted fresh-start reporting.
Under fresh-start reporting, a new reporting entity is created, and the Company
was required to adjust its assets and liabilities to reflect their estimated
fair market value at the Effective Date, which reduced depreciation and amorti-
zation related to property and equipment; and created a deferred credit, excess
of net assets over reorganization value, which is being amortized over 10 years.
At the same time, the Company made certain reclassifications between gross
margin and expenses and changed the method of accruing certain expenses between
periods. In addition, as a result of the Company's emergence, reorganization
expense and income taxes recognized by the Company prior to April 28, 1995, are
not comparable to amounts, if any, recognized subsequent to the Effective Date.
For further information, see Note 2 to the Financial Statements.
To facilitate a better comparison of the Company's operating results for the
periods presented, the following discussion is based on the results of opera-
tions which are presented on a pro forma basis (as described below) for 1995.
The combined historical statements of operations for the thirteen weeks ended
April 29, 1995 (Predecessor) and thirty-nine weeks ended January 27, 1996 (Suc-
cessor), are not included in the discussion due to the lack of comparability
caused by the adoption of fresh-start reporting at the end of the first quarter.
Certain items in the Successor's pro forma statements of operations are not
affected by fresh-start adjustments and are comparable to the historical com-
bined results of the Predecessor and the Successor.
The pro forma statements of operations combine the results of operations of
the Predecessor and Successor for 1995 and give effect to the transactions
occurring in conjunction with the Plan as if the Effective Date had occurred,
and such transactions had been consummated, on January 29, 1995. The statements
of operations have been adjusted to reflect: the reduction in depreciation and
amortization expense due to the write-off of property and equipment and property
under capital leases; reclassification of DIP interest from reorganization costs
to interest expense; the elimination of all other reorganization costs;
amortization of excess net assets over reorganization value; the effects of
changing to the accrual method for advertising; the reversal of LIFO credits;
accrual of additional shrinkage; and the recording of an appropriate income tax
expense.
Revenue
The Company reported sales in 1995 of $700,325, a decrease of $56,031 or
7.4% from 1994. A significant portion of the decrease is attributable to the
closing of 7 stores in May 1995 and 1 store in October 1995. Sales in same
stores for 1995 decreased 1.5% compared to 1994. Same store sales were
negatively affected by poor weather at the beginning of the year, a change in
layaway promotions and by a poor Christmas selling season for retailers in
general.
In 1994, the Company reported sales of $756,356, a decrease of $489,341 or
39.3% from fiscal 1993. The closings of 43 stores in January 1994 and 59 stores
in May 1994 were the reasons for the sales decrease. Same store sales for 1994
increased 1.2% from 1993.
In 1993, the Company reported sales of $1,245,697, a decrease of $158,605
or 11.3% from fiscal 1992. 1993 same store sales, on a comparable week-to-week
basis, decreased 7.7% from 1992. Prior to its bankruptcy filing, poor sales were
caused by out-of-stocks resulting from reduced purchases necessitated by the
Company's limited borrowing availability. Also, just prior to and immediately
after filing the petition under Chapter 11, many suppliers interrupted their
shipments of merchandise causing out-of-stock positions on most seasonal
merchandise. It took several months to restore inventory levels to acceptable
levels.
Sales have been adversely affected over the last three years as a result of
new competition. Wal-Mart and Kmart and more recently Target and Hills have
been opening stores in the areas in which Rose's stores are located. Of the 105
stores open in 1995, 28 faced new competitors, compared to 10 in 1994 and five
in 1993. In 1996, the Company expects to have 16 stores facing new competition.
Inflation has had little effect on the Company's operations in the last
three years.
Costs and Expenses
In 1995, the proforma cost of sales as a percent of sales increased .8% from
the 1994 percent to sales. This was due primarily to (i) higher shrinkage
resulting in an increase of the cost of sales rate by .8%, (ii) increased
markdowns resulting in an increase in the rate by .5%, and (iii) no LIFO credit
was recorded in 1995 resulting in an increase in the cost of sales rate by .7%.
These increases in the cost of sales were offset somewhat by the reclassifica-
tion of advertising co-op income and cash discounts to cost of sales resulting
in a decrease of 1.1% in the 1995 cost of sales.
In 1994, the cost of sales as a percent of sales decreased 1.7% from the 1993
percent to sales. This was due to (i) higher markup decreasing the cost of sales
rate by .7%, (ii) lower shrinkage resulting in a decrease of the rate by 1.1%,
and (iii) LIFO credit decreasing the rate by .6%. These improvements were offset
by higher markdowns and increases in freight costs.
In 1993, the cost of sales as a percent of sales decreased 3.5% from the
1992 percent to sales. This was due to (i) decreased markdowns resulting in a
decrease in the cost of sales rate of 1.6%, (ii) higher markup decreasing the
rate by 1.5%, and (iii) lower shrinkage resulting in a decrease of the rate by
1.1%. These improvements were offset somewhat by increases in the freight costs.
The Company took proactive measures in 1993 to reduce the shrinkage to a normal
rate. Some of these measures included strengthening the Company's loss
prevention department, implementing systems that automatically calculate
markdowns, establishing a shrink incentive program for the stores, and
implementing stronger store front-end controls.
Selling, general and administrative (SG&A) expenses as a percent of sales
were 22.7% in 1995 (proforma), 21.9% in 1994, and 23.4% in 1993. The 1995
proforma increase as a percentage of sales was due in part to the
reclassification of advertising co-op and cash discounts from SG&A to gross
margin and to the decline in 1995 sales. Included in 1995 SG&A, is a gain of
$4,701 which represents the effect of canceling a postretirement healthcare
benefit, a charge of $1,170 for severance costs related to recent downsizings
of approximately 175 positions in the home office, distribution and store
operations support staff, and a gain of $586 on the sale of a store lease. The
decrease in 1994 is due in part to the realignment of corporate and
administrative costs as well as a reduction in store expenses. The increase in
1993 is largely attributable to the decline in 1993 sales.
The Company made the decision in the first quarter of 1994 to close 59 stores
and realign corporate and administrative costs accordingly. A charge of $43,000
relating to these closings is included in the 1994 reorganization expenses of
$57,899. The reserve remaining at the end of 1994 was adequate to cover the
costs of closing an additional seven stores in May 1995.
As part of its business plan, the Company decided to close 43 stores in
January of 1994 and recognized an expense of $39,500 in 1993 associated with
these closings. Additionally, the Company recognized a $13,026 benefit
associated with the anticipated rejection of leases on stores already closed.
A net reorganization expense of $39,138 before taxes, relating to these closed
stores and other bankruptcy costs, was recorded during 1993. In addition, the
Company included in the 1993 reorganization costs, a write-off of $4,528 related
to unamortized costs of pre-petition debt.
Interest expense for 1995 pro forma was $6,927 and includes interest on the
DIP facility of $970. Interest for 1994 and 1993 including the interest on the
DIP facility was $9,352 and $13,292, respectively. Interest expense decreased
25.9% in 1995 (pro forma), 29.6% in 1994 (including DIP interest), and 4.2% in
1993 (including DIP interest), primarily due to payments made to pre-petition
secured lenders. Generally, under the Bankruptcy Code, interest on pre-petition
claims ceases accruing upon the filing of a petition unless the claims are
collateralized by an interest in property with value exceeding the amount of
debt. The Bankruptcy Court ordered the Company to make monthly adequate
protection payments to its Pre-petition Secured lenders which were booked as
interest.
Other
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Statement 109 requires a change from the deferred method of accounting
for income taxes of APB Opinion 11 to the asset and liability method of
accounting for income taxes. Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carry-
ing amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates expect-
ed to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Under Statement 109 the effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Effective the first quarter of 1993, the Company adopted Statement 109.
The only effect of adopting Statement 109 was the establishment of a $5,760
current deferred tax liability and a $5,760 non-current deferred tax asset.
Under the guidelines provided by APB 11, the Company would have no current or
non-current deferred tax liability/asset.
The Internal Revenue Service has examined the Company's federal income tax
returns for the years 1988 through 1991. Claims arising from those examinations
have been settled subject to final review. The Company believes adequate
provision has been made for these claims. All state income and franchise tax
returns for taxable years ending prior to fiscal 1993 are not subject to
adjustment, primarily because of the application of certain facets of bankruptcy
law.
During 1995, the Company filed for and received a federal refund of $16,898
resulting from the carry back of losses as described in Section 172(f) of the
Internal Revenue Code. Section 172(f) is an area of tax law without substantial
legal precedent or guidance. Accordingly, assurances cannot be made as to
whether the IRS would challenge the Company's ability to carry back such a
substantial portion of losses under this provision. Consequently, an income tax
reserve of $12,673 has been recorded in the amount of the refund net of the
collection expenses which will be reimbursed if the Company's position does not
withstand any such challenge and the refund is reversed.
Liquidity and Capital Resources
On April 28, 1995 (the "Effective Date"), the Company closed on its exit
financing loan, thereby satisfying the last condition of the Plan and emerged
from bankruptcy. The exit financing is a $125,000 (subsequently amended to
$110,000, see below) three-year revolving credit facility (the "Facility") with
a letter of credit sublimit in the aggregate principal amount of $40,000 with
the First National Bank of Boston and The CIT Group/Business Credit, Inc., (the
"Banks") as facility agents. The Facility is secured by a perfected first
priority lien and security interest in all of the assets of the Company. The
interest rate on the Facility is either (a) the Banks' base rate plus 1.5%
payable monthly or (b) a LIBOR rate plus 3.75% payable at the expiration of the
LIBOR loan, depending on which option the Company chooses. Although there are
no compensating balances required, the Company is required to pay a fee of .5%
per annum on the average unused portion of the Facility. Borrowing availability
is based upon certain eligible inventory times a borrowing base percentage that
varies by month. Under the Facility, trade suppliers which extend credit to the
Company are supported by a $5,000 letter of credit and subordinated lien of
$15,000 in the real estate properties of the Company which expire April 30, 1996
(extended to May 30, 1997).
The Facility includes certain financial covenants and financial maintenance
tests, including those relating to earnings before interest, taxes, depreciation
and amortization (EBITDA), debt service coverage, capital expenditures
limitations, minimum stockholders' equity, and minimum/maximum inventory levels,
which are measured quarterly. The Facility also includes restrictions on the
incurrence of additional liens and indebtedness; a requirement that the Facility
be paid down to certain levels for 30 consecutive days between December 1st and
February 15th each year; and a prohibition on paying dividends.
On January 31, 1996, the Company and the Banks agreed to an amendment to the
Facility that reduced the Facility size to $110,000. The covenants for the end
of fiscal 1995 and the remaining life of the Facility were amended and certain
covenants were added, including those related to days on hand inventory, maximum
borrowings exposure, and an interest coverage ratio. Also, the measurement
period for most covenants was changed from quarterly to monthly. In addition,
the LIBOR option was eliminated and the Banks agreed to extend the trade letter
of credit and subordinated lien until May 30, 1997. The Company was in
compliance with these covenants as of January 27, 1996. The Company's management
believes that the Company's current financing arrangement is adequate to meet
its liquidity needs.
The Company's current ratio for 1995 is 1.83 compared to 2.73 in 1994, and
3.32 in 1993, which included $4,000 of reclamation claims. In 1995, cash and
cash equivalents decreased $757, (combined Successor and Predecessor) compared
to a decrease of $10,605 in 1994 and a decrease of $7,146 in 1993. The Company's
working capital was $75,166 in 1995, $92,009 in 1994, and $173,640 in 1993. The
decrease in 1995 of $16,843 was due in part to the increased inventories as a
result of the write-off of $25,831 in LIFO reserves as part of Fresh-Start
Reporting, and an increase in investment in inventory, increased borrowings on
the line of credit, reclassification of pre-petition liabilities from liabili-
ties subject to settlement under reorganization proceedings and increased bank
drafts outstanding. The decrease in 1994 of $81,631 was due in part to a de-
crease in inventory related to closed stores and lower cash and cash equiva-
lents.
The fixed charge coverage ratio was 1.11 in 1995 (proforma), (0.65) in 1994,
and 0.00 in 1993. The fixed charge coverage ratio is defined as the sum of net
income before taxes, LIFO provision, interest, depreciation, and minimum rent
divided by the sum of interest and minimum rent. The ratio, excluding items that
are typically non-recurring such as reorganization costs, reserves for store
closings and remerchandising, was 1.11 in 1995 (proforma), 1.39 in 1994, and
0.74 in 1993.
In 1995 (combined Successor and Predecessor), $6,613 of cash was used by
operating activities, while $57,560 was provided in 1994 and $8,373 was provided
in 1993. The decrease in cash from operating activities in 1995 (combined
Successor and Predecessor) is due primarily to increased investments in
inventory. The increase in cash from operating activities in 1994 is due to a
decrease in inventory related to closed stores and reductions of inventory
prepayments. Declining sales, as well as an increased investment in inventory
and inventory prepayments contributed to the decline in cash from operating
activities in 1993.
Investing activities used cash of $5,381 in 1995 (combined Successor and
Predecessor), $1,281 in 1994, and $9,100 in 1993. The Company invested cash in
property and equipment totaling $5,431 in 1995 (combined Successor and
Predecessor), $2,015 in 1994, and $9,109 in 1993. The 1995 expenditures were
primarily for store improvements, and new computer software. The Company closed
8 stores in 1995, closed 59 stores in 1994, and closed 45 stores in 1993. The
Company plans to invest $6,000 in 1996 primarily for store remodels and new
computer software. The Company does not plan to open or close any stores in
1996.
Financing activities provided cash of $11,237 in 1995 (combined Successor
and Predecessor), used cash of $66,884 in 1994, and $6,419 in 1993. The Company
had net activity on its line of credit of $33,673 (combined Successor and
Predecessor). The Predecessor made $26,423 of payments on long-term debt in
1995, $65,437 in 1994, and $1,127 in 1993. The Company's debt agreements include
a restriction on the payment of cash dividends and the repurchase of stock.
On March 1, 1996, the Company and Fred's, Inc. ("Fred's") entered into a
letter of intent (the "Letter of Intent"), providing for the acquisition by
merger of the Company by Fred's (the "Merger"). Fred's is a publicly traded
retailer that operates approximately 200 stores in the southeastern United
States. The Letter of Intent provides that each share of the Company's common
stock, no par value ("Common Stock"), issued and outstanding (including stock
held in escrow according to the Plan) immediately prior to the effective time of
the Merger (other than the shares held in the treasury of the Company, which
will be canceled) will be converted into the "Conversion Number" of shares of
Fred's class A voting common stock ("Fred's Common Stock"). The "Conversion
Number" will be determined by dividing $2.15 by the "Fred's Average Price".
The "Fred's Average Price" is an amount equal to the average price of a share
of Fred's Common Stock for the 10 days immediately preceding the day before
the printing of the joint proxy statement to be distributed to stockholders
of Fred's and the Company in connection with the Merger; provided, however, that
if the amount so computed would (a) exceed $8.00, then the Fred's Average Price
will be $8.00, or (b) be less than $6.00, then the Fred's Average Price will
be $6.00. The Letter of Intent provides that the Merger is subject to the exe-
cution of a definitive agreement and to the occurrence or (to the extent permit-
ted by the definitive merger agreement or applicable law) waiver of a number of
conditions, including the approval of the stockholders of the Company and
Fred's. If the merger is approved, the Company's current plans for 1996 would be
subject to change.
ITEM 8: FINANCIAL STATEMENTS
See Financial Statements contained elsewhere herein.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PAGE
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is furnished with respect to each of the members of the Board
of Directors of the Registrant as of February 26, 1996:
First Year
Principal Occupation During Last Five Years, Elected A
Name and Age Directorships in Public Registrants Director
R. Edward Anderson (46) Chairman of the Board, President and 1994
Chief Executive Officer, Appointed
August 22, 1994; Executive Vice
President, Chief Financial Officer,
October 19, 1992 to August 21, 1994;
Senior Vice President, Chief Financial
Officer January 12, 1990 to October
18, 1992.
Walter F. Loeb (71) President of Loeb Associates, Inc., 1995
February 1990 to present; Publisher of
the Loeb Retail Letter. He is a
director of Federal Realty Investment
Trust, InterTan, Inc., Wet Seal, Inc;
Mothers Work, Inc., and Gymboree
Corporation.
Joseph L. Mullen (49) Managing partner of Li Moran Inter- 1995
national (as managing partner, he served
as a Senior Officer of Leeward Creative
Crafts and Potamkin International), January
1994 to present; Vice President Hardlines for
Hill's Department Stores, Inc., for the
relevant period prior to January 1994.
While Mr. Mullen was employed at Hill's
Department Stores, Hill's filed for pro-
tection under Chapter 11 in February, 1991,
and emerged from Chapter 11 in 1992.
Joseph Nusim (60) President and Chief Executive Officer of 1995
Channel Home Centers Realty, a real estate
company, November 1994 to present; Chairman,
President, and Chief Executive Officer
of Channel Home Centers, 1990 to
November 1994. He is a director of
Herman's Sporting Goods, Scotty's Inc.,
and the International Mass Retailing
Association.
J. David Rosenberg, Esq. Partner of Keating, Muething & Klekamp 1995
(46) law firm.
PAGE
Harold Smith (72) President of Funding & Merchandising 1995
Resources Corp., 1990 to present;
President and Chief Operating Officer
of Woolco, prior to 1990. Formerly
President and Chief Executive Officer
of Goldblatts.
Elliot J. Stone (75) Management consultant to various retail 1995
stores, 1990 to present; Chairman,
President, and Chief Executive Officer
of Jordan Marsh Company and Vice
Chairman of the Board of Federated
Department Stores, prior to 1990. He
is a director of Catherines Stores,
Inc. and Holsen Burnes Group.
N. Hunter Wyche, Jr., Esq. Founding Partner of Wyche & Story law firm, 1995
(45) for the relevant period.
The following information is furnished with respect to each of the execu-
tive officers of the Registrant as of February 26, 1996
Name, Age, Position Business Experience During Past Five Years
R. Edward Anderson (46) Appointed August 22, 1994; Executive Vice
Chairman of the Board, President, Chief Financial Officer,
President and Chief October 19, 1992 to August 21, 1994;
Executive Officer Senior Vice President, Chief Financial
Officer, January 12, 1990 to October 18, 1992.
Howard Parge (49) Appointed February 9, 1995; Vice President,
Senior Vice President, Operations, March 1992 to February 1995;
Operations Target Stores, District Manager, 1989
through 1991.
Jeanette R. Peters (40) Appointed Treasurer September 7, 1995;
Senior Vice President, Appointed Senior Vice President, Chief
Chief Financial Officer Financial Officer November 2, 1994; Vice
and Treasurer President and Controller April 24, 1991
through November 1994.
George T. Blackburn, II Appointed Vice President, Real Estate
(45) November 2, 1994; Elected Secretary
Vice President, Real February 17, 1993; Appointed Vice President,
Estate, General Counsel General Counsel April 19, 1991; formerly
and Secretary Partner of Perry, Kittrell, Blackburn &
Blackburn law firm for the relevant period
preceding April 19, 1991.
Dave Howard (45) Appointed August 11, 1995; Vice President
Senior Vice President, Information Systems April 13, 1994 through
Distribution and August, 1995. Director IS Development from
Information Services April 1991 to April 1994.
Officers of the Registrant are elected each year at the Annual Meeting of
the Board of Directors to serve for the ensuing year and until their successors
are elected and qualified.
Section 16(a) Reporting
The Registrant believes that all executive officers and directors of the
Registrant and all other persons known by the Registrant to be subject to Sec-
tion 16 of the Securities Exchange Act of 1934, filed all reports required to be
filed during fiscal year 1995 under Section 16(a) of that Act on a timely basis.
The Registrant's belief is based solely on its review of Forms 3, 4 and 5 and
amendments thereto furnished to the Registrant during, and with respect to, its
most recent fiscal year by persons known to be subject to Section 16.
ITEM 11: EXECUTIVE COMPENSATION
Cash And Other Compensation
The following table sets forth all the cash compensation paid or to be paid
by the Registrant, as well as certain other compensation paid or accrued, during
the fiscal years indicated, to the Chairman of the Board, the Chief Executive
Officer, and the four other highest paid executive officers of the Registrant
for fiscal year 1995 in all capacities in which they served:
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other (4) All Other
Name and Annual Restricted Options/ LTIP Compen-
Principal Salary Bonus Compen- Stock SARs Payouts sation
Position Year ($) ($) sation (1) Awards ($) (#) ($) ($)(2)
R. Edward 1995 407,692 - 4,518 127,122 137,500 - 6,198
Anderson 1994 322,936 - 6,265 - - - 5,760
President and 1993 265,923 - 7,383 - 12,750 29,806 6,900
Chief Executive
Officer
Kathy Hurley 1995 206,346 - 1,039 19,594 50,000 - 5,528
Senior Vice 1994 166,349 - 1,349 - - - -
President 1993 150,000 - 624 - - - 873
Merchandising(3)
Howard Parge 1995 175,323 - 5,592 17,531 50,000 - 4,784
Senior Vice 1994 144,900 - 4,291 - - - -
President 1993 143,958 - 2,238 - 4,000 - 1,039
Operations
Jeanette 1995 156,346 - 2,097 28,597 50,000 - 5,528
Peters 1994 109,015 - 2,288 - - - -
Senior Vice 1993 95,800 - 1,077 - - - -
President,
Chief Financial
Officer and Treasurer
PAGE
David W. 1995 126,964 25,000 562 2,063 25,000 - 2,020
Howard 1994 103,077 - 705 - - - -
Senior Vice 1993 90,444 10,064 - - - - -
President
Distribution and
Information Services
_____________
(1) "Other Annual Compensation" consists of tax gross-ups on medical ex-
pense reimbursements.
(2) "All Other Compensation" consists of automobile allowance.
(3) Ms. Hurley resigned from the Registrant effective February 16, 1996.
(4) Outstanding Restricted Stock Awards at year-end consists of:
Date Year Value at
Name Granted Payable Shares(#) 1/27/96($)
R. Edward Anderson 7/5/95 1996 61,635 102,083
Kathy Hurley 7/5/95 1996 9,500 15,734
Howard Parge 7/5/95 1996 8,500 14,078
Jeanette Peters 7/5/95 1996 13,865 22,964
David W. Howard 7/5/95 1996 1,000 1,656
Stock Options Granted During Fiscal Year
No stock options of the Predecessor were granted during fiscal year 1995.
All options were canceled on April 28, 1995.
The Company's New Equity Compensation Plan was adopted on February 14, 1995
and was designed for the benefit of the executives and key employees of the
Company by allowing the grant of a variety of different types of equity-based
compensation to eligible participants. The plan provides for the granting of
a maximum of 700,000 shares of the Successor's stock. Under the New Equity
Compensation Plan, 387,500 nonqualified stock options were granted to officers
of the Company on July 27, 1995, which were issued in addition to the total
number of shares of New Rose's Common Stock issued on the Effective Date. Such
options were granted in the form of incentive stock options pursuant to Section
422 of the Internal Revenue Code of 1986, as amended (or, to the extent required
otherwise by law, nonqualified stock options). One-half of the options contain
an exercise price of $2.875 and have a term of five years. The remaining one-
half of the options contain an exercise price of $5.750 and have a term of seven
years. All of the options shall vest one-third on the first anniversary of the
Effective Date, one-third on the second anniversary of the Effective Date and
one-third on the third anniversary of the Effective Date.
As the Company's President and Chief Executive Officer, R. Edward Anderson
received 35% of the options (corresponding to 137,500 shares of New Rose's Com-
mon Stock). The remaining options were allocated among the Company's Senior
Vice Presidents and Vice Presidents in amounts based on targeted awards, as
determined by the Company's Compensation Committee in its discretion based in
part on the recommendation of the Company's President and Chief Executive Offic-
er. Thus, Jeanette R. Peters (Senior Vice President), Howard R. Parge (Senior
Vice President), and Dave Howard (Senior Vice President) received a portion of
the remaining options as shown in the table below.
PAGE
Stock Options Exercised During Fiscal Year and Year End Values of Unexercised
Options
No stock options of the Predecessor were exercised in the thirteen weeks
ended April 29, 1995.
The following table sets forth information about unexercised stock options
and stock appreciation rights of the Successor by the named executive officers
of the Registrant during the thirty-nine weeks ended January 27, 1996. No stock
options or stock appreciation rights were exercised by the named executive
officers during the thirty-nine weeks ended January 27, 1996.
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Shares Number of Unexercised Value of Unexercised
Acquired Options/SARs at In-the-Money Options
on Value FY-End(#) at FY-End($)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable(1)
R. Edward Anderson - - - /137,500 -
Dave Howard - - - / 25,000 -
Kathy Hurley(2) - - - / 50,000 -
Howard Parge - - - / 50,000 -
Jeanette Peters - - - / 50,000 -
____________
(1) All options were out of the money at fiscal year end.
(2) Ms. Hurley resigned from the Registrant effective February 16, 1996.
Employment Contracts, Termination Of Employment And Change-In-Control
Arrangements
The Registrant has an employment contract with R. Edward Anderson which
provides for his active employment for an initial term ending May 28, 1998, with
automatic one-year renewal terms thereafter unless prior notice of termination
is given pursuant to the contract. Annual base salary under the contract was
increased from $395,000 to $425,000, effective August, 1995. All sums required
to be paid under the contract are shown in the summary compensation table above
for the applicable period. The contract includes a severance allowance under
which Mr. Anderson would be eligible to receive up to 24 months base salary,
continued health insurance coverage for 24 months, payment equal to 24 months
additional credits under any pension plan then in existence (if any), and full
vesting of all stock options and stock subject to vesting. The severance
allowance would be payable for termination without cause or constructive
termination by (i) reduction of salary, (ii) material change in job
responsibilities, (iii) assignment of duties inconsistent with position, (iv)
relocation of the principal executive offices outside a designated area, (v)
notice of intention not to renew the employment contract, or (vi) breach of a
material provision of the contract. In the event of a change of control, as
defined in the contract, Mr. Anderson would be eligible to receive (a) 36 months
base salary; (b) an amount equal to three times the greater of average cash
bonus or 50% of base salary; (c) continued health insurance coverage for 36
months; (d) payment equal to 36 months additional credits under any pension plan
then in existence (if any); (e) full vesting of all stock options and stock sub-
ject to vesting; and (f) a gross-up payment so that the net amount retained by
Mr. Anderson after deduction of any excise tax imposed by Section 4999 of the
Code on the foregoing amounts (the "Company Payments") and any federal, state
and local income, payroll tax and excise tax upon the gross-up payment, but be-
fore deduction for any federal, state or local income or payroll tax on the Com-
pany Payments, shall be equal to the Company Payments.
The Letter of Intent provides that R. Edward Anderson, President and Chief
Executive Officer of the Company, will enter into an agreement with Fred's and
the Company, to become effective at the effective date of the Merger, providing
for a modification and limitation of the severance compensation payable to Mr.
Anderson under his existing employment agreement with the Company as a result of
the Merger and termination of his employment. The Letter of Intent also contem-
plates that Mr. Anderson will enter into a consulting agreement with Fred's,
effective at the effective time of the Merger.
The Registrant maintains a severance plan (the "Severance Plan") providing
for the payment of certain benefits upon the cessation of employment of officers
and other employees designated in the plan. The Severance Plan, which became
effective on December 14, 1995, replaces a severance program which was authoriz-
ed by the Bankruptcy Court on April 1, 1994. Under the Severance Plan, each
officer as defined in the plan would be eligible to receive up to 12 months base
salary, up to one-half of such amount being paid in installments which would
cease upon re-employment. Each such officer would also be entitled to receive
$10,000 of outplacement expenses and continued coverage in medical and disabili-
ty benefits programs for 3 months. The severance allowance would be payable for
actual termination of employment without cause or constructive termination by
(i) elimination of job position, (ii) material reduction in salary, or (iii)
material change of job responsibilities. In the event of actual or constructive
termination following a change of control, as defined in the Severance Plan, the
described base salary payment would be made in one lump sum.
Compensation of Directors
Directors who are officers of the Registrant receive no additional
compensation for service on the Board of Directors or committees. Directors
who are not officers are paid $24,000 per year as retainer, plus $1,500 per day
for each meeting of the Directors attended and for each committee meeting held
on a day other than the date of a meeting of the Board of Directors, and
reimbursement for their actual travel expenses. Directors who are not officers
are paid $500 a day for each committee meeting held on the same day as a meeting
of the Board of Directors and $500 for each telephone conference meeting.
Committee members are reimbursed for their actual travel expenses.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Registrant during the thirty-nine weeks
ended January 27, 1996 was composed of Messrs. Loeb (Chairman), Mullen, Stone,
and Wyche. From January 29, 1995 until April 28, 1995, the Compensation
Committee was composed of Messrs. Busbee (Chairman), Allbright, Maynard and
Montgomery. None of the members of the Compensation Committee were officers or
employees of the Registrant during the last fiscal year or in prior fiscal
years. None of the Executive officers of the Registrant served as a member of
the board of directors or as a member of the compensation committee of another
entity during the last fiscal year. Consequently, there are no interlocking re-
lationships between the Registrant and other entities that might affect the
determination of the compensation of the Directors and executive officers of the
Registrant.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All existing stock of the Predecessor was canceled as of the effective date
of the Joint Plan of Reorganization. See Item 3 for a discussion of the issuance
of the common stock of reorganized Rose's.
There were no stockholders known to the Registrant to be the beneficial
owners, as of March 14, 1996, of more than five percent (5%) of the New Common
Stock of the Registrant.
The table below gives the indicated information of equity securities of the
Registrant beneficially owned by each director, nominee, the chief executive
officer and the four other most highly compensated executive officers, and, as
a group, by such person and other executive officers:
Common Percent Percent
Name Stock of Class Warrants of Class
R. Edward Anderson 61,635 * 5,649 *
Walter Loeb - * - *
Joseph L. Mullen - * - *
Joseph Nusim - * - *
J. David Rosenberg - * 6,854 *
Harold Smith - * - *
Elliot Stone - * - *
Hunter Wyche - * - *
Dave Howard 1,000 * - *
Kathy Hurley(a) 9,500 * - *
Howard Parge 8,500 * - *
Jeanette Peters 13,865 * - *
All of the above and other
executive officers as a
group (14) persons 103,000 1.2% 12,503 *
______________________
Footnotes:
* Less than 1% of shares that will be outstanding if all outstanding claims
are settled adversely to the Company.
(a) Ms. Hurley resigned from the Registrant effective February 16, 1996.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions or business relationships with executive
officers of reorganized Rose's during the thirty-nine weeks ended January 27,
1996, that would require disclosure. Prior to Mr. Wyche becoming a director of
the Successor Company, the firm of Wyche and Story, of which Mr. Wyche is a
partner, was paid $98,000 during the 1995 fiscal year for legal fees as local
counsel to the official committee of unsecured creditors in the Registrant's
Chapter 11 Reorganization pursuant to orders entered by the Bankruptcy Court.
Mr. Mullen entered into a consulting agreement with the Company in February,
1996, to serve as interim general merchandise manager for an indefinite term at
a per diem rate of $1,250 plus expenses. Accordingly, he will not receive a per
diem as a director. Following is the description of related transactions with
directors or executive officers of the Predecessor during fiscal year 1995. The
directors whose related transactions are described below were directors until
April 28, 1995. The amounts shown include all amounts paid at anytime during
fiscal year 1995.
Pursuant to existing leases, during the past fiscal year the Registrant paid
The Rosemyr Corporation ("Rosemyr") $189,685 as rent for its store building in
Morganton Shopping Center, Morganton, N.C.; $315,730 for its store building in
Newmarket Plaza Shopping Center, Newport News, Va. (Rosemyr owns a 31.5%
interest); $4,684 in rent for office space in Henderson, N.C.; and $9,863 for
parking facilities in Henderson, N.C; paid Emrose Corporation ("Emrose") under
pre-existing leases $33,726 in rent for office space in Henderson, N.C. and
$1,667 for lease of storage facilities; and paid H.H.C. Co., Inc. ("H.H.C.")
$6,713 in rent during the past fiscal year for a store building in High Point,
N.C., which was closed during 1994. Messrs. John T. Church and George Harvin,
who were directors of the Predecessor, were executive officers and/or held
beneficial ownership interests in Rosemyr, Emrose, and H.H.C. Co., Inc.
In the opinion of Management, all of the foregoing leases and other
transactions are competitive, and the rents paid approximate the rate of rent
paid by the Registrant to independent landlords under leases for comparable
property negotiated at comparable times, and represent the fair market value for
comparable transactions.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Statements of Operations for the thirty-nine
weeks ended January 27, 1996, thirteen weeks
ended April 29, 1995, and the years ended
January 28, 1995 and January 29, 1994
Balance Sheets - January 27, 1996 and
January 28, 1995
Statements of Stockholders' Equity for the
thirty-nine weeks ended January 27, 1996,
thirteen weeks ended April 29, 1995, and
the years ended January 28, 1995 and
January 29, 1994
Statements of Cash Flows for the thirty-nine
weeks ended January 27, 1996, thirteen weeks
ended April 29, 1995, and the years ended
January 28, 1995 and January 29, 1994
Notes to the Financial Statements
PAGE
2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable
or not required, or because the required information is
included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit
No. Page
10.1 Employment Agreement with R. Edward Incorporated
Anderson, Chairman of the Board, by reference
President and Chief Executive Officer,
dated May 29, 1995 (Incorporated by
reference to Exhibit 10.1 to Registrant's
Form 10-Q for the quarter ended
July 29, 1995).
10.2 New Retirement Benefits Savings Plan, Incorporated
effective July 1, 1995. (Incorporated by by reference
reference to Exhibit 10.2 to Registrant's
Form 10-Q for the quarter ended July 29, 1995).
10.3 Order of the United States Bankruptcy Court, Incorporated
Eastern District of North Carolina, Raleigh by reference
Division dated February 13, 1995, approving
the amendment changing the record date for
distributions of the New Rose's Warrants
and New Rose's Common Stock Secondary
Distribution to the Effective Date of the
Plan (Incorporated by reference to
Registrant's Form 8-K dated February 13, 1995).
10.4 Order dated April 24, 1995, approving the Incorporated
Modified and Restated First Amended Joint by reference
Plan of Reorganization dated April 19, 1995
(Incorporated by reference to Exhibit (c)(2)
to Registrant's Current Report on Form 8-K
dated April 24, 1995).
10.5 The Registrant's Revolving Credit and related Incorporated
agreements (Incorporated by reference to by reference
Exhibit (c)(1) through (c)(10) to Registrant's
Current Report on Form 8-K dated April 28, 1995):
(a) Revolving Credit Agreement dated as of
April 28, 1995, among the Registrant as
Borrower, the lending institutions listed
on Schedule 1 to the Agreement and The
First National Bank of Boston and The
CIT Group/Business Credit, Inc., as
Facility Agents and The First National
Bank of Boston as Administrative Agent
(the "Credit Agreement").
(b) Security Agreement dated as of April 28,
1995, between the Registrant and The
First National Bank of Boston as Collat-
eral Agent for the lending institutions
who are parties to the Credit Agreement.
(c) $62,500,000 Revolving Credit Note dated
April 28, 1995, issued to The First
National Bank of Boston pursuant to the
Credit Agreement.
(d) $62,500,000 Revolving Credit Note dated
April 28, 1995, issued to The CIT Group/
Business Credit, Inc., pursuant to the
Credit Agreement.
(e) Deed of Trust, Assignment of Rents and
Security Agreement dated as of April 27,
1995 by and among Registrant, First
National Bank of Boston, The CIT Group/
Business Credit, Inc., pursuant to the
Credit Agreement.
(f) Master Release Agreement dated as of
April 28, 1995 by and between General
Electric Capital Corporation and Registrant.
(g) Post-Effective Date GE Assumption Agree-
ment dated as of April 28, 1995 by and
between General Electric Capital Corpora-
tion and Registrant.
(h) GE Deferred Obligations Agreement dated
as of April 28, 1995 by and between
General Electric Capital Corporation and
Registrant.
(i) Warrant Agreement dated as of April 28,
1995, between the Registrant and First
Union National Bank of North Carolina as
Warrant Agent.
(j) Escrow Agreement dated as of April 28,
1995, between the Registrant and First
Union National Bank of North Carolina as
Escrow Agent.
10.6 Letter of Credit and Mortgage Trust Agreement Incorporated
dated May 8, 1995 (Incorporated by reference by reference
to Exhibit (c)(1) to Registrant's Current Report
on Form 8-K dated April 28, 1995).
PAGE
10.7 Second Deed of Trust dated May 8, 1995 Incorporated
(Incorporated by reference to Exhibit (c)(2) by reference
to Registrant's Current Report on Form 8-K
dated April 28, 1995).
10.8 Standby Letter of Credit dated May 8, 1995 Incorporated
(Incorporated by reference to Exhibit (c)(3) by reference
to Registrant's Current Report on Form 8-K
dated April 28, 1995).
10.9 Severance Pay Plan dated as of December 14,
1995.
27. Financial Data Schedule
99.1 Waiver and Amendment No. 1 dated as of Incorporated
July 31, 1995 (Incorporated by reference to by reference
Exhibit 99.1 to Registrant's Current Report
on Form 8-K dated July 31, 1995).
99.2 Waiver and Amendment No. 2 dated as of Incorporated
September 8, 1995 (Incorporated by refer- by reference
ence to Exhibit 99.2 to Registrant's
Current Report on Form 8-K dated July 31, 1995).
99.3 Waiver and Amendment No. 3 dated as of Incorporated
September 29, 1995 (Incorporated by reference by reference
to Exhibit 99.3 to Registrant's Current Report
on Form 8-K dated July 31, 1995).
99.4 Waiver and Amendment No. 4 dated as of January
31, 1996.
(b) REPORTS ON FORM 8-K
The Registrant filed the following reports on Form 8-K during the last
quarter of the period covered by this report:
Report on Form 8-K dated October 28, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended October 28, 1995,
together with projected financial information
for similar periods as contained in the
Company's plan for the year ended January 27,
1996. The financial results were included as
an exhibit in Item 7.
Report on Form 8-K dated December 2, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended December 2, 1995,
together with projected financial information
for similar periods as contained in the Company's
revised plan for the year ended January 27, 1996.
The financial results were included as an exhibit
in Item 7.
Report on Form 8-K dated December 30, 1995, Incorporated
reporting under Item 5 the monthly and year- by reference
to-date financial results and other financial
data for the period ended December 30, 1995,
together with projected financial information
for similar periods as contained in the Company's
revised plan for the year ended January 27, 1996.
The financial results were included as an exhibit
in Item 7.
Report on Form 8-K dated March 1, 1996, Incorporated
reporting under Item 5 the agreement in by reference
principle regarding the acquisition by merger
of Rose's by Fred's.
PAGE
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Rose's Stores, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ROSE'S STORES, INC.
By: /s/ R. Edward Anderson
R. Edward Anderson, President and
Chief Executive Officer
By: /s/ Jeanette R. Peters
Jeanette R. Peters, Senior Vice
President, Chief Financial Officer
and Treasurer
Date: April 10, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Regis-
trant and on the dates indicated:
/s/ R. Edward Anderson /s/ J. David Rosenberg
R. Edward Anderson, Director J. David Rosenberg, Director
/s/ Walter F. Loeb /s/ Harold Smith
Walter F. Loeb, Director Harold Smith, Director
/s/ Joseph L. Mullen /s/ Elliot J. Stone
Joseph L. Mullen, Director Elliot J. Stone, Director
/s/ Joseph Nusim /s/ N. Hunter Wyche, Jr.
Joseph Nusim, Director N. Hunter Wyche, Jr., Director
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
January 27, 1996
The financial statements on the following pages have been prepared by
management in conformity with generally accepted accounting principles.
Management is responsible for the reliability and fairness of the financial
statements and other financial information included herein.
To meet its responsibilities with respect to financial information,
management maintains and enforces internal accounting policies, procedures and
controls which are designed to provide reasonable assurance that assets are
safeguarded and that transactions are properly recorded and executed in
accordance with management's authorization. Management believes that the
Company's accounting controls provide reasonable, but not absolute, assurance
that errors or irregularities which could be material to the financial state-
ments are prevented or would be detected within a timely period by Company
personnel in the normal course of performing their assigned functions. The con-
cept of reasonable assurance is based on the recognition that the cost of con-
trols should not exceed the expected benefits. Management maintains an internal
audit function and an internal control function which are responsible for eval-
uating the adequacy and application of financial and operating controls and for
testing compliance with Company policies and procedures.
The responsibility of our independent auditors, KPMG Peat Marwick LLP, is
limited to an expression of their opinion on the fairness of the financial
statements presented. Their opinion is based on procedures, described in the
second paragraph of their report, which include evaluation and testing of
controls and procedures sufficient to provide reasonable assurance that the
financial statements neither are materially misleading nor contain material
errors.
The Audit Committee of the Board of Directors meets periodically with
management, internal auditors and independent auditors to discuss auditing and
financial matters and to assure that each is carrying out its responsibilities.
The independent auditors have full and free access to the Audit Committee and
meet with it, with and without management being present, to discuss the results
of their audit and their opinions on the quality of financial reporting.
/s/ R. Edward Anderson
R. Edward Anderson
President and
Chief Executive Officer
/s/ Jeanette R. Peters
Jeanette R. Peters
Senior Vice President,
Chief Financial Officer
PAGE
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Rose's Stores, Inc.:
We have audited the accompanying balance sheet of Rose's Stores, Inc. (the
"Successor"), as of January 27, 1996, and the related statements of operations,
stockholders' equity, and cash flows for the thirty-nine weeks then ended. We
also have audited the accompanying balance sheet of Rose's Stores, Inc. (the
"Predecessor") as of January 28, 1995, and the related statements of operations,
stockholders' equity and cash flows for the thirteen weeks ended April 29, 1995,
and for each of the fiscal years in the two-year period ended January 28, 1995.
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 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 audits provide 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 the Successor as of January
27, 1996, and the Successor's results of operations and cash flows for the
thirty-nine weeks then ended, and the financial position of the Predecessor as
of January 28, 1995, and the Predecessor's results of operations and cash flows
for the thirteen weeks ended April 29, 1995, and for each of the fiscal years
in the two-year period ended January 28, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, effective April 29,
1995, the Company was required to adopt "Fresh-Start" reporting principles in
accordance with the American Institute of Certified Public Accountant's State-
ment of Position 90-7, "Financial Reporting by Entities in Reorganization under
the Bankruptcy Code." As a result, the financial information for the period
subsequent to the adoption of Fresh-Start reporting are presented on a different
cost basis than for prior periods and therefore, are not comparable.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina KPMG Peat Marwick LLP
March 26, 1996
PAGE
STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
Revenue: |
Gross sales $ 540,918 | 159,407 756,356 1,245,697
Leased department sales 16,521 | 5,117 24,430 42,474
Net sales 524,397 | 154,290 731,926 1,203,223
Leased department income 3,784 | 1,114 5,288 8,707
Total revenue 528,181 | 155,404 737,214 1,211,930
Costs and Expenses: |
Cost of sales 404,120 | 116,838 555,087 932,238
Selling, general and administrative 115,895 | 35,486 160,346 281,723
Depreciation and amortization (2,549) | 1,812 9,257 12,984
Interest 5,231 | 726 5,907 12,054
Total costs and expenses 522,697 | 154,862 730,597 1,238,999
Earnings (Loss) Before Reorganization |
Expense, Fresh-Start Revaluation |
Income Taxes, and Extraordinary Item 5,484 | 542 6,617 (27,069)
Reorganization Expense (Note 13) - | (3,847) (57,899) (39,138)
Fresh-Start Revaluation (Note 2) - | (17,432) - -
Earnings (Loss) Before Income Taxes |
and Extraordinary Item 5,484 | (20,737) (51,282) (66,207)
Income Taxes (Benefits) |
Current 1,159 | - - -
Deferred (76) | - - -
Total 1,083 | - - -
Earnings (Loss) Before Extraordinary |
Item 4,401 | (20,737) (51,282) (66,207)
Extraordinary Item - Gain on Debt |
Discharge (Note 2) - | 90,924 - -
Net Earnings (Loss) $ 4,401 | 70,187 (51,282) (66,207)
Earnings (Loss) Per Share Before |
Extraordinary Item $ .50 | (1.11) (2.73) (3.53)
Net Earnings (Loss) Per Share $ .50 | 3.74 (2.73) (3.53)
See accompanying notes to financial statements.
PAGE
BALANCE SHEETS
(Amounts in thousands)
Successor | Predecessor
January 27, | January 28,
1996 | 1995
|
Assets |
Current Assets |
Cash and cash equivalents $ 593 | 1,350
Accounts receivable 7,209 | 12,140
Inventories 153,190 | 119,567
Other current assets 4,706 | 12,163
Total current assets 165,698 | 145,220
|
Property and Equipment, at cost, |
less accumulated depreciation and amortization 5,122 | 34,707
Other Assets 424 | 3,259
$ 171,244 | 183,186
Liabilities and Stockholders' Equity (Deficit) |
Current Liabilities |
Short-term debt $ 33,673 | -
Debtor-in-possession financing - | 600
Bank drafts outstanding 9,530 | -
Accounts payable 23,845 | 23,392
Accrued salaries and wages 7,456 | 7,821
Reserve for store closings 261 | 8,530
Pre-petition liabilities 4,632 | -
Other current liabilities 11,135 | 12,868
Total current liabilities 90,532 | 53,211
|
Liabilities Subject to Settlement Under |
Reorganization Proceedings - | 156,474
Excess of Net Assets Over Reorganization Value, |
Net of Amortization 25,371 | -
Reserve for Income Taxes 12,673 | -
Deferred Income 974 | 1,993
Other Liabilities 1,134 | 6,694
|
Stockholders' Equity (Deficit) |
Common stock, Authorized 50,000 shares; |
issued 8,158 at 1/27/96 (Note 11) 35,000 | -
Preferred stock, Authorized 10,000 shares; |
none issued - | -
Voting common stock (Canceled 4/28/95) |
Authorized 30,000 shares; issued |
10,800 shares at 1/28/95 - | 2,250
Non-voting Class B stock (Canceled 4/28/95) |
Authorized 30,000 shares; issued |
12,659 shares at 1/28/95 - | 18,795
Paid-in capital-stock warrants (Canceled 4/28/95) - | 2,700
Paid-in capital 1,159 | -
Retained earnings (accumulated deficit) 4,401 | (40,313)
40,560 | (16,568)
Treasury stock, at cost (Canceled 4/28/95) - | (18,618)
|
Total stockholders' equity (deficit) 40,560 | (35,186)
|
$ 171,244 | 183,186
See accompanying notes to financial statements.
PAGE
STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Retained
Voting Non-Voting Earnings
Common Stock Class B Stock Paid-In (Accumulated) Treasury Stock
Shares Amount Shares Amount Capital (Deficit) Shares Amount
Balance January 30, 1993 10,800 $ 2,250 12,659 $ 19,017 $ 2,700 $ 77,176 (4,775) $(19,034)
Net loss for fiscal year 1993 - - - - - (66,207) - -
Other - - - (222) - - 74 416
Balance January 29, 1994 10,800 2,250 12,659 18,795 2,700 10,969 (4,701) (18,618)
Net loss for fiscal year 1994 - - - - - (51,282) - -
Balance January 28, 1995 10,800 2,250 12,659 18,795 2,700 (40,313) (4,701) (18,618)
Net earnings for thirteen
weeks ended April 29, 1995 - - - - - 70,187 - -
Cancellation of former equity and
elimination of retained
earnings (10,800) (2,250) (12,659) (18,795) (2,700) (29,874) 4,701 18,618
Issuance of new equity
under the Plan (Note 11) 8,158 35,000 - - - - - -
Balance April 29, 1995 8,158 35,000 - - - - - -
Net earnings for thirty-nine
weeks ended January 27, 1996 - - - - - 4,401 - -
Paid-in capital - taxes - - - - 1,159 - - -
Balance January 27, 1996 8,158 $35,000 - $ - $ 1,159 $ 4,401 - $ -
See accompanying notes to financial statements.
PAGE
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
Cash flows from operating activities: |
Net earnings (loss) $ 4,401 | 70,187 (51,282) (66,207)
Adjustments to reconcile net earnings |
(loss) to net cash provided by |
(used in) operating activities: |
Depreciation & amortization (2,549) | 1,812 9,257 12,984
(Gain) loss on disposal of property |
& equipment (46) | (1) (278) 98
Deferred income taxes (76) | - - -
Additional paid-in capital 1,159 | - - -
LIFO expense (credit) - | (364) (4,816) 179
Write off of deferred financing costs - | - - 4,528
Provision for closed stores & severance 1,170 | - 43,000 26,474
Gain on termination of postretirement |
healthcare (4,701) | - - -
Fresh-Start revaluation & debt discharge - | (73,492) - -
Cash provided by (used in) assets & liabilities: |
(Inc.) dec. in accounts receivable 824 | (630) 2,917 (1,773)
(Inc.) dec. in inventories 31,939 | (40,291) 91,817 (13,948)
(Inc.) dec. in other assets 3,183 | (3,620) 6,455 (9,898)
Inc. (dec.) in accounts payable (13,797) | 14,361 (17,152) 35,051
Inc. (dec.) in other liabilities (177) | (2,142) (9,429) 724
Inc. (dec.) in income taxes 12,673 | - - 8,005
Inc. (dec.) in reserve for store closings (4,674) | (1,108) (13,060) 13,088
Inc. (dec.) in deferred income (507) | (201) (303) (1,250)
Inc. (dec.) in accumulated PBO 47 | 7 434 318
Net cash provided by (used in) operating |
activities 28,869 | (35,482) 57,560 8,373
Cash flows from investing activities: |
Purchases of property & equipment (4,921) | (510) (2,015) (9,109)
Proceeds from disposal of property |
& equipment 45 | 5 734 9
Net cash used in investing activities (4,876) | (505) (1,281) (9,100)
Cash flows from financing activities: |
Net activity on line of credit (24,981) | 58,654 - -
Net activity on debtor-in-possession facility - | (600) 600 -
Payments on pre-petition secured debt - | (26,423) (65,437) (1,127)
Payments on unsecured priority & |
administrative claims (2,463) | (1,593) - -
Principal payments on capital leases (346) | (281) (2,047) (2,358)
Inc. (dec.) in bank drafts outstanding 3,768 | 5,502 - (3,128)
Other - | - - 194
Net cash provided by (used in) |
financing activities (24,022) | 35,259 (66,884) (6,419)
Net inc. (dec.) in cash & cash equivalents (29) | (728) (10,605) (7,146)
Cash & cash equivalents at beginning of period 622 | 1,350 11,955 19,101
Cash & cash equivalents at end of period $ 593 | 622 1,350 11,955
PAGE
STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands)
Successor | Predecessor
Thirty-Nine | Thirteen Predecessor
Weeks Ended | Weeks Ended Years Ended
January 27, | April 29, January 28, January 29,
1996 | 1995 1995 1994
Supplemental disclosure of additional noncash |
investing & financing activities: |
Retirement of net book value of assets |
in reserve for store closings $ 17 | 623 7,018 4,054
Write-off of inventory in reserve |
for store closings - | - - 43,661
Capital lease obligations entered |
into for new equipment 374 | - - -
See accompanying notes to financial statements.
PAGE
NOTES TO FINANCIAL STATEMENTS
Thirty-Nine Weeks Ended January 27, 1996; Thirteen Weeks Ended April 29, 1995;
and Years Ended January 28, 1995; and January 29, 1994
(Amounts in thousands except per share amounts)
1 REORGANIZATION AND EMERGENCE FROM CHAPTER 11
The Company filed a petition for reorganization under Cha