-----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, NHgcQruB0QMFozuWiPFBcX80wsxZxeA9uyXdtTO2X1Wla8rU3X3dT9q8sDsccBd5 sD2thdA+P2kitxYMx32v6A== 0000085149-96-000003.txt : 19960411 0000085149-96-000003.hdr.sgml : 19960411 ACCESSION NUMBER: 0000085149-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960127 FILED AS OF DATE: 19960410 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROSES STORES INC CENTRAL INDEX KEY: 0000085149 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 560382475 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00631 FILM NUMBER: 96545595 BUSINESS ADDRESS: STREET 1: PO DRAWER 947 STREET 2: 218 S GARNETT ST CITY: HENDERSON STATE: NC ZIP: 27536 BUSINESS PHONE: 9194302600 10-K 1 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 Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on September 5, 1993 (the "Filing Date"). The Company's Modified and Restated First Amended Joint Plan of Reorganization (the "Plan") was consummated on April 28, 1995 (the "Effective Date"). The Plan provided for, among other things, the cash payment of $26,423 to the Company's pre-petition secured lenders and amounts owing under the debtor-in- possession revolving credit agreement (Note 7) and various administrative and tax claims due at the Effective Date (Note 8), and the distribution of common stock of reorganized Rose's to be issued pursuant to the Plan to creditors (Note 11). Additionally, stockholders of record as of the Effective Date received their pro-rata share of warrants (Note 11) and the shares of stock, stock options, and stock warrants of the Company's Predecessor were canceled. In addition, RSI Trading, Inc., a wholly owned subsidiary of the Company, was merged into the Company under the provisions of the Plan. Also, a new board of directors was elected for the Successor. Upon consummation of the Plan, the Company obtained $125 million of post-emergence financing (Note 7). Under Chapter 11, the Company elected to assume or reject real estate leases, employment contracts, and unexpired executory pre-petition contracts subject to Bankruptcy Court approval. The Company established and recorded its estimated liabilities for such items and settled or carried forward portions of the liabilities (for assumed leases) at the Effective Date. 2 FRESH-START REPORTING In 1990, the American Institute of Certified Public Accountants issued Statement of Position 90-7 ("SOP 90-7") "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (sometimes called "Fresh-Start Reporting"). The application of Fresh-Start Reporting changed the Company's basis of accounting for financial reporting purposes. Specifically, SOP 90-7 required the adjustment of the Company's assets and liabilities to reflect their estimated fair market value at the Effective Date. At the same time, the Company made certain reclassifications between gross margin and expenses and changed the method of accruing certain expenses between periods. Accordingly, the statements of operations and changes in cash flows commencing May 1995, and the balance sheets beginning with April 1995, are not comparable to the financial informa- tion for prior periods. In accordance with SOP 90-7, the reorganization value of the Company was determined as of the Effective Date. The reorganization value of $35,000 was derived by an outside company using various valuation methods, including discounted cash flow analyses (utilizing the Company's projections), analyses of the market values of other publicly traded companies whose businesses are reasonably comparable, and analyses of the present value of the Company's equity. PAGE NOTES TO FINANCIAL STATEMENTS The adjustments to reflect the consummation of the Plan and the adoption of Fresh-Start Reporting, including the gain on debt discharge for liabilities subject to settlement under reorganization proceedings, the adjustment to re- state assets and liabilities at their fair value, and the adjustment to non- current assets for the excess of the fair value of net assets which exceeded reorganization value, have been reflected in the financial statements below: BALANCE SHEETS (Amounts in thousands)
Actual Fresh- Restated April 29, Debt Start April 29, 1995 Discharge Accounting 1995 Assets Current Assets Cash and cash equivalents $ 622 622 Accounts receivable 12,076 (2,841)(a) 9,235 Inventories 160,111 25,018 (b) 185,129 Prepaid merchandise 7,100 7,100 Other current assets 2,475 2,475 Total current assets 182,384 - 22,177 204,561 Property and Equipment, at cost, less accumulated depreciation and amortization 33,703 (33,703)(c) - Other Assets 6,302 - (6,302)(c) - $ 222,389 - (17,828) 204,561 Liabilities and Stockholders' Equity (Deficit) Current Liabilities Current maturities of capital lease obligations $ 400 400 Bank drafts outstanding 5,762 5,762 Accounts payable 37,642 37,642 Short-term debt 58,654 58,654 Reserve for store closings and remerchandising 4,952 4,952 Accrued salaries and wages 5,212 50 (d) 5,262 Pre-petition liabilities - 4,352 (e) 4,352 Other current liabilities 9,543 3,878 (f) 13,421 Total current liabilities 122,165 4,352 3,928 130,445 Liabilities Subject to Settlement Under Reorganization Proceedings 130,276 (130,276)(g) - Excess of Net Assets Over Reorganization Value - 32,021 (h) 32,021 Capital Lease Obligations 593 593 Deferred Income 1,792 (311)(i) 1,481 Accumulated Postretirement Benefit Obligation 6,055 (1,034)(j) 5,021 Stockholders' Equity (Deficit) (38,492) 90,924 (k) (17,432)(l) 35,000 $ 222,389 (35,000) 17,172 204,561
PAGE NOTES TO FINANCIAL STATEMENTS (2) Continued Explanations of adjustment columns of the balance sheet are as follows: (a) To reflect appropriate current value of accounts receivable (b) Adjusted inventories to current market value (c) Wrote off long-term assets (d) Increased bonuses payable as a result of emergence from bankruptcy (e) Reclassified pre-petition priority claims and cure amounts (f) Accrued an additional year of property taxes to reflect such taxes on assessment date basis, increased insurance and loss reserves, and accrued any remaining reorganization costs to be incurred after emergence from Chapter 11 (g) Unsecured pre-petition claims settled as follows: (a) $4,352 of priority claims and cure amounts reclassified to current liabilities (b) The remaining unsecured claims settled with stock (h) The excess reorganization value was allocated to non- current assets, with any excess recorded as a deferred credit to be amortized over the period of 8 years (i) Reduction of deferred income to current value (j) Adjustment to reverse unrecognized gain on transition obligation (k) Extraordinary item-gain on debt discharge (l) Value of new company established During the third quarter, the excess of net assets over reorganization value was decreased by $3,945 for increases in the reserve for workers' compensation claims and an additional allowance for receivables of the Predecessor. The following unaudited pro forma statement of operations reflects the financial results of the Company as if the Plan had been consummated on January 29, 1995: Pro forma Year Ended January 27, 1996 Total revenue $ 683,585 Total costs and expenses 677,205 Earnings before income taxes 6,380 Income taxes 1,272 Net earnings $ 5,108 Earnings per share $ 0.58 PAGE NOTES TO FINANCIAL STATEMENTS The unaudited pro forma statement of operations has 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. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fresh-Start Reporting The Company has implemented the required accounting for entities emerging from Chapter 11 in accordance with the American Institute of Certified Public Accountant's (AICPA) Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (SOP 90-7), and reflected the effects of such adoption in the balance sheet as of April 29, 1995. Under Fresh-Start Reporting, the balance sheet as of April 29, 1995, became the opening balance sheet of the reorganized Company. Since Fresh-Start Reporting was reflected in the balance sheet as of April 29, 1995, the financial statements as of January 27, 1996, are not comparable in material respects to the financial statements of the Predecessor since the January 27, 1996 financial statements are that of a reorganized entity. Accordingly, a vertical black line is shown to separate post-emergence operations from those ended prior to April 29, 1995 in the financial statements. Financial Statements The Company's financial statements include the accounts of a wholly-owned subsidiary for fiscal years ending January 28, 1995 and Jan- uary 29, 1994. Intercompany accounts and transactions are eliminated. In Jan- uary 1995, the wholly-owned subsidiary was merged with the Company. 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. Nature of Operations The Company is a retail concern with 105 general merchandise discount stores located in the southeastern United States. Fiscal Year Due to the emergence from Chapter 11, fiscal year 1995 is comprised of the thirty-nine weeks ended January 27, 1996 (Successor), and the thirteen weeks ended April 29, 1995 (Predecessor). Fiscal years 1994 and 1993 ended on January 28, 1995; and January 29, 1994, respectively. Fiscal years 1994 and 1993 contained 52 weeks. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Interest-bearing cash equivalents are carried at cost, which approximates market. Bank drafts outstanding have been reported as a current liability. NOTES TO FINANCIAL STATEMENTS Inventories Substantially all merchandise inventories are valued on a last-in, first-out (LIFO) cost basis. Debt Issuance Costs The costs related to the issuance of debt are capital- ized and amortized to interest expense straight-line over the life of the re- lated debt. Revenue Sales are recorded at the time merchandise is exchanged for tender. The Company does not make any warranties on the merchandise sold, but allows customers to return merchandise which reduces sales. In many cases, the Company returns damaged goods to the vendor for credit or has negotiated a damage allowance to offset the cost of writing off the merchandise. In the case of layaways, sales are recorded for the total amount of the merchandise when the customer puts the merchandise on layaway. If the layaway is not paid in full by the end of 60 days, the Company's policy is to cancel the layaway, reduce sales and return the merchandise to stock. Depreciation and Amortization The provision for depreciation and amortization is based upon the estimated useful lives of the individual assets and is computed principally by the declining balance and straight-line methods. The principal lives for depreciation purposes are 40 to 45 years for buildings and 5 to 10 years for furniture, fixtures, and equipment. Improvements to leased premises are amortized by the straight-line method over the term of the lease or the useful lives of the improvements, whichever is shorter. Capitalized leases are generally amortized on a straight-line basis over the lease term or life of the asset, whichever is shorter. The amortization of the excess of net assets over reorganization value is included with depreciation and amortization. Retroactively, the Company changed the amortization period to 8 years. The amortization of the excess of net assets over reorganization value was $2,705 for the thirty-nine weeks ended January 27, 1996. Profit-Sharing and 401(k) Plan The Company's noncontributory trusteed profit-sharing plan was merged into the 401(k) plan maintained by the Company effective July 1, 1995. The merger was approved by the Board of Directors on February 15, 1995. The Company's 401(k) plan covers employees who meet minimum service requirements and who elect to participate. Contributions are at the discretion of the Company while participants' contributions are voluntary. Income Taxes The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", effective January 31, 1993 and reported that the cumulative effect of that change in the 1993 statement of operations was immaterial. Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected 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. Advertising The Company expenses the cost of advertising during the month the sale is effective. NOTES TO FINANCIAL STATEMENTS Earnings (Loss) Per Share Earnings (loss) per share is computed on the estimated number of shares that will be outstanding if all pending claims are resolved adversely to the Company for the thirty-nine weeks ended January 27, 1996, and on the weighted average number of shares outstanding during the period for prior periods. The average number of shares used to compute earnings (loss) per share was 8,853 shares for the thirty-nine weeks ended January 27, 1996; 18,758 shares for the thirteen weeks ended April 29, 1995 and fiscal year 1994; and 18,740 shares in 1993. The exercise of outstanding stock options would not result in a dilution of earnings per share for 1995 and are excluded from the calculation. The exercise of outstanding stock options and warrants would have resulted in an anti-dilutive effect on loss per share for 1994 and 1993 and are excluded from the calculation. 4 ACCOUNTS RECEIVABLE A summary of accounts receivable as of January 27, 1996 and January 28, 1995, is as follows: January 27, | January 28 1996 | 1995 Layaway receivables $ 2,496 | 2,651 Other receivables 5,111 | 9,514 7,607 | 12,165 Allowance for doubtful accounts (398) | (25) $ 7,209 | 12,140 Other receivables consist primarily of amounts due from vendors for returns, co-op advertising, shoe department income, and coupons. The Company does not provide for an allowance for doubtful accounts for layaways because the Company holds the merchandise. The Company adjusted the allowance for doubtful accounts for other receivables as part of Fresh-Start Reporting (see Note 2). 5 INVENTORIES A summary of inventories as of January 27, 1996 and January 28, 1995 is as follows: January 27, | January 28, 1996 | 1995 | Inventories valued at FIFO cost $ 153,190 | 145,762 LIFO reserve - | (26,195) Inventories substantially valued | at LIFO cost $ 153,190 | 119,567 As a part of Fresh-Start Reporting (See Note 2), the LIFO reserve was written off and the base year inventory was restated to the April 29, 1995 value. Since the January 27, 1996, inventory at its LIFO cost is greater than its FIFO cost, no LIFO reserve is warranted. During fiscal year 1994, inventories were reduced, resulting in the liquidation of LIFO inventory layers. The effect of this inventory liquidation was a reduction in the costs related to closed stores of approximately $3,419. NOTES TO FINANCIAL STATEMENTS 6 PROPERTY AND EQUIPMENT Property and equipment, adjusted for Fresh-Start Reporting (see Note 2), consists of the following: January 27, | January 28, 1996 | 1995 Land $ - | 641 Buildings 27 | 20,408 Furniture, fixtures, and equipment 2,871 | 82,978 Improvements to leased premises 2,005 | 13,164 Total 4,903 | 117,191 Less accumulated depreciation | and amortization (155) | (83,265) 4,748 | 33,926 Capitalized leases 374 | 6,400 Less accumulated amortization - | (5,619) 374 | 781 Net property and equipment $ 5,122 | 34,707 The Company adopted Fresh-Start Reporting as of April 29, 1995, which required that a portion of the excess of the fair value of net assets which exceeded reorganization value be allocated to property and equipment. This adjustment resulted in the write-off of net property and equipment of $33,703 as of April 29, 1995. Management does not believe that these assets are operationally impaired. The adoption of Fresh-Start Reporting did not result in any significant change in the remaining useful lives of the Company's property and equipment. 7 DEBT Debt outstanding was as follows: January 27, | January 28, 1996 | 1995 Senior notes, interest payable semi- | annually at 11.00% and principal payable | 1993 to 1998 $ - | 21,136 Term note, interest payable monthly | at 11.00% and principal payable | 1993 to 1998 - | 5,063 Pre-petition interest - | 224 Total Debt - | 26,423 Less: Liabilities subject to settlement | under reorganization proceedings - | (26,423) Current portion (See Note 8) - | - | Debt due after one year $ - | - | Borrowings under Debtor-in-Possession | Financing $ - | 600 Borrowings under Revolving Credit | Facility $ 33,673 | - PAGE NOTES TO FINANCIAL STATEMENTS On April 28, 1995, 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 expires April 30, 1996. 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 the Effective Date, pursuant to the Plan, the Company paid in full the claims of its Pre-Petition Secured Lenders in the amount of $26,423, all amounts owing to GE Capital Corporation (the "Debtor-in-Possession (DIP) Facility"), and various administrative and tax claims as defined in the Plan. As of January 27, 1996, $33,673 was outstanding in direct borrowings under the Facility, and $11,610 of letters of credit were outstanding. The average direct borrowings were $66,501 in 1995 with an average daily weighted annual interest rate of 9.8%. The maximum amount of direct borrowings under the Facility at any period end was $83,579 in 1995. As of January 27, 1996 the Company has unused borrowing availability of $19,690. 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 entered into the DIP Facility as of September 20, 1993, with G. E. Capital Corporation, as lender, under which the Company was allowed to borrow or issue letters of credit up to $125,000 for general corporate purposes, NOTES TO FINANCIAL STATEMENTS subject to certain restrictions defined in the DIP Facility. The term of the DIP Facility was for twenty-four months unless extended by the lender and the Bankruptcy Court upon request by the Company. The DIP facility was terminated on the Effective Date. The DIP Facility included limitations on capital expenditures, limitations on the incurrence of additional liens and indebted- ness, limitations on the sale of assets, limitations on adequate protection pay- ments, and a prohibition on paying dividends. The DIP Facility also included financial covenants pertaining to EBITDA (earnings before interest, taxes, depreciation, and amortization) and net cash flows. The DIP Lender had a super- priority claim against the property of the Company, other than real property. The DIP Facility had a sub-limit of $35,000 for the issuance of letters of credit. As of January 28, 1995 approximately $9,416 in letters of credit were outstanding. At the Company's option, the Company could borrow at an index rate, which was the highest prime or base rates of interest quoted by specified banks or the latest annualized yield on 90 day commercial paper, plus 1.25% or at the LIBOR rate plus 2.25%. Although there were no compensating balance requirements, the Company was required to pay a fee of .5% per annum of the average unused portion of the DIP Facility. At January 28, 1995, $600 was outstanding under the DIP Facility. The average borrowings under the DIP facility were $13,700 in 1995 and $9,320 in 1994 with a daily weighted average annual interest rate of 8.6% in 1995 and 7.4% in 1994. The maximum amount of borrowings outstanding under the DIP Facility at any period end was $21,100 in 1995 and $34,975 in 1994. As a result of the Company's Chapter 11 filing on September 5, 1993 (See Note 1), the remaining amount of pre-petition secured debt and accrued interest totaling $26,423 at January 28, 1995, was classified as "Liabilities Subject to Settlement Under Reorganization Proceedings" (See Note 8). These liabilities were settled with proceeds from the Facility when the Company emerged from Chapter 11 on April 28, 1995. On May 29, 1992, the Company signed an agreement with its long-term lenders to restructure the principal payments of its long-term debt. The agreement re- sulted in a six and one-half year amortization of the then outstanding long- term notes of $102,500. The restructuring of the term notes required a fee payment. The agreement with some of the long-term lenders granted them warrants exercisable into the Company's Non-Voting Class B stock at an option price of $5 per share. These warrants were canceled upon emergence in accordance with the Company's Plan of Reorganization. Also on May 29, 1992, the Company signed an agreement with its banks to provide revolving credit facilities through May 31, 1994, including an amount designated for letters of credit related to imports. The Company pledged inventories located in approximately 50% of its stores and a collateral pool of $26,500 to its long-term lenders and banks. The $26,500 collateral pool consisted of the Company's Distribution Center and, to the extent necessary, the inventory located in the Distribution Center. In addition, all other real property and equipment were pledged as collateral. The Company also pledged approximately $3,000 of inventory to a long-term lender to collateralize the lender's deferral of previously scheduled payments. PAGE NOTES TO FINANCIAL STATEMENTS At the time of the Company's filing on September 5, 1993, debt and accrued interest totaling $92,762 were outstanding under its long-term notes and debt and accrued interest totaling $15,617 were outstanding under its revolving credit facilities. The Bankruptcy Court ordered the Company to make certain adequate protection payments relating to cash collateral and proceeds resulting from the stores closed in 1993 and 1994 that were pledged to its lenders and banks. In 1993 and 1994, the Company made adequate protection payments totaling $16,518 and $65,437, respectively, to its lenders in accordance with the related Bankruptcy Court orders. The payments were applied against debt and accrued interest outstanding as of September 5, 1993, in accordance with the applicable loan documents. 8 LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS AND PRE-PETITION LIABILITIES Liabilities subject to settlement under the reorganization proceedings were separately classified and consisted of the following: Fiscal Years 1995 | 1994 Pre-petition secured debt and interest $ - | 26,423 Accounts payable - | 83,991 Lease rejection claims - | 36,724 Accrued liabilities - | 9,336 Liabilities subject to | settlement under reorganization $ - | 156,474 Pre-petition liabilities $ 4,632 | - During the thirteen weeks ended April 29, 1995, the liabilities subject to settlement under reorganization proceedings increased by $1,818 due primarily to an additional accrual for lease rejection claims for the seven stores closed in 1995. As of the Effective Date, the Company paid $1,593 and reclassified to current liabilities $4,352 of priority claims and cure amounts included in the remaining liabilities subject to settlement under reorganization proceedings. The pre-petition secured debt and interest were paid with proceeds from the exit financing when the Company emerged from Chapter 11 (See Note 7.) Subsequent to the Effective Date, the Company paid $2,463 of pre-petition liabilities and established an additional liability of $2,743 for pre-petition workers' compensation insurance claims. The remaining liabilities subject to settlement at April 29, 1995 of $125,924 were written off as these were settled or are in the process of being settled in common stock. The Company is actively negotiating with creditors and/or seeking the court-ordered disallowance of claims which have been filed in the Chapter 11 proceeding and are disputed by the Company. The Company estimates that the ultimate liability for unsecured claims will be approximately $119,000. There are currently approximately $112,000 in allowed claims which have received distributions of common stock pursuant to the plan of reorganization (See Note 11), and there are approximately $9,700 of disputed claims remaining which may receive distributions of common stock pursuant to the plan. PAGE NOTES TO FINANCIAL STATEMENTS Additional bankruptcy claims and pre-petition liabilities may arise from the settlement of disputed claims. Consequently, the amount included in the balance sheet as pre-petition liabilities may be subject to further adjustment. 9 INTEREST EXPENSE Interest expense consisted of the following: Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 Long-term debt $ - | 683 5,494 9,629 Short-term debt 4,757 | 16 118 917 Capital leases 72 | 27 295 579 Other 402 | - - 929 Interest expense $ 5,231 | 726 5,907 12,054 The Company paid interest (including prepaid bank fees) of $1,888 for the thirty-nine weeks ended January 27, 1996, $3,650 for the thirteen weeks ended April 29, 1995, $7,100 in 1994, and $8,944 in 1993. The interest paid includes $291 in the thirteen weeks ended April 29, 1995, $612 in 1994, and $299 in 1993 related to the DIP facility classified as reorganization expense. 10 RESERVE FOR FUTURE STORE CLOSINGS During 1994, the reserve for future closings was increased by $43,000 to provide for the effect of 59 stores closed in May 1994. Liabilities subject to settlement under reorganization proceedings were increased by $15,585 for relat- ed closed store lease rejection claims. The reserve remaining at the end of 1994 was adequate to cover the costs of closing an additional seven stores in May 1995. The closed store reserve decreased $4,691 in the thirty-nine weeks ended January 27, 1996 and $1,731 in the thirteen weeks ended April 29, 1995 and increased $26,489 in 1994. Following are the cash and noncash changes to the reserves in 1995 and 1994: Thirty-Nine | Thirteen Weeks Ended | Weeks Ended Fiscal January 27, | April 29, Year 1996 | 1995 1994 Noncash activity: | Reserve for additional store closings $ - | - (43,000) Closed store lease rejection benefit - | - (148) Retirement of net book | value of assets 17 | 623 7,018 Benefit from liquidating | LIFO inventory - | - (3,419) Cash expenses 4,674 | 1,108 13,060 (Increase) decrease in the | closed store reserve $ 4,691 | 1,731 (26,489) PAGE NOTES TO FINANCIAL STATEMENTS The cash expenses include the operating results until closing, rental payments and costs of removing fixtures from closed stores. The Company closed an additional store in the third quarter of 1995. The proceeds of the sale of that store lease were sufficient to cover the costs of closing expenses and inventory write-offs; therefore, the Company recognized a net gain of $586 in the fourth quarter of 1995. 11 STOCKHOLDERS' EQUITY Effective April 28, 1995, the Company authorized 50,000 shares of Common Stock and 10,000 shares of Preferred Stock. No Preferred Stock has been issued. Pursuant to the Plan, the Company issued and delivered to First Union National Bank of North Carolina ("FUNB"), as Escrow Agent for the unsecured creditors of the Company, 9,850 shares of the Company's new Common Stock for distribution on allowed claims of unsecured creditors in accordance with a schedule for distributions set forth in the Plan; and 150 shares of the Company's new common stock were delivered to the Escrow Agent for distribution to officers of the Company pursuant to a consummation bonus plan approved by order of the Bank- ruptcy Court on February 14, 1995. During the thirty-nine weeks since emergence, distributions of the common stock, no par value, of the Company (the "Common Stock") were made to holders of Allowed Class 3 Unsecured Claims (as defined under the Plan) in accordance with the provisions of the Plan. As the result of distributions of the Common Stock pursuant to the Plan, as of February 19, 1996, the Company has 8,158 shares of Common Stock outstanding of the 10,000 shares of Common Stock which were delivered to FUNB pursuant to the Plan on the Effective Date. In addition, as of February 19, 1996, and pursuant to the provisions of the Plan, 976 shares have reverted to the Company from escrow to be retired or held in the treasury of the Company. The remaining 866 shares held in escrow will be distributed by FUNB in satisfaction of disputed Class 3 claims as and when such claims are resolved. The disputed Class 3 claims which remain unresolved at January 27, 1996 were primarily claims of landlords with respect to leases which were rejected during the course of the Chapter 11 proceeding and general liability claims being resolved under an alternative dispute resolution program established by the Bankruptcy Court. If all pending claims are resolved adversely to the Company, approximately 695 additional shares of Common Stock will be issued and outstanding, and there will be a total of approximately 8,853 shares of Common Stock issued and outstanding. If all pending claims are resolved in accordance with the Company's records and/or position as to such claims, approximately 443 additional shares of Common Stock will be issued, and there will be a total of approximately 8,601 shares of Common Stock issued and 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 negotiated 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. PAGE NOTES TO FINANCIAL STATEMENTS On the Effective Date, all shares of the Company's pre-emergence Voting Common Stock (8,262 shares) and Non-Voting Class B Stock (10,496 shares) were canceled and the record owners of such stock as of such date became entitled to warrants to purchase the new common 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. The total number of warrants issued were 4,286. The warrants may be exercised at any time until they expire on April 28, 2002. The initial warrant exercise price of $14.45 was calculated pursuant to a formula set forth in the Plan. The formula requires that the total allowed and disputed claims of the Company's unsecured creditors be divided by 9,850, the number of shares of the reorganized Company's stock to be issued under the Plan. The exercise price will be recalculated on each of the first three anniversaries of April 28, 1995 to reflect adjustments to the total of allowed and disputed claims of the Company's unsecured creditors, and will be further adjusted on the fourth, fifth and sixth anniversaries to reflect 105%, 110% and 115%, respectively, of the total of the allowed and disputed claims of the unsecured creditors. Although there can be no assurance, the Company anticipates that the warrant exercise price will decrease as certain disputed claims are resolved over time. 12 STOCK OPTIONS All stock options outstanding under the Predecessor's Equity Compensation Plan, which was approved by the stockholders on May 22, 1991, and the Adjunct Stock Plan, which was approved on October 19, 1992, were canceled on April 28, 1995, the effective date of the Plan of Reorganization. Information regarding the Predecessor's stock option plan is summarized below: Price Number of Range Shares Outstanding, January 29, 1994 $2.50 - 7.00 1,730 Canceled 2.50 - 7.00 (823) Outstanding, January 28, 1995 2.50 - 7.00 907 Exercisable, January 28, 1995 2.50 - 7.00 669 Canceled 2.50 - 7.00 (907) Outstanding, January 27, 1996 - - Exercisable, January 27, 1996 - - 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 shares of stock. Under the New Equity Compensation Plan, 388 nonqualified stock options were granted on July 27, 1995. The option price per share is $2.875 for the first half of the shares and $5.750 for the remainder of the shares. The options vest over a three year period. One half of the options expire in five years and the remainder in seven years. As of January 27, 1996, no options had been canceled or exercised. PAGE NOTES TO FINANCIAL STATEMENTS 13 REORGANIZATION COSTS Professional fees and expenditures directly related to the filing have been segregated from normal operations and are disclosed separately. The major components of these costs are as follows:
Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 Closed store provision $ - | - 43,000 39,500 Closed store lease rejections - | - - (13,026) DIP financing fees and expense | amortization - | 1,342 3,445 1,238 Write-off of pre-petition debt | issue costs - | - - 4,528 Professional fees and other | bankruptcy related expenses - | 2,505 11,454 6,898 Total reorganization costs $ - | 3,847 57,899 39,138
The 1994 store closing provision covered the costs incurred in closing 59 stores in May 1994 and closing 7 stores in May 1995. The 1993 store closing provision covered the costs incurred in closing 43 stores in January 1994. The store closing provision included penalties to be incurred upon the rejection of related building and personal property leases. In addition, during Fresh-Start Reporting, the Company increased the liability for reorganization costs by $1,666 to cover post-emergence expenses. At January 27, 1996, $158 remains in the liability for reorganization costs. 14 INCOME TAXES Income tax expense consists of the following:
Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 | Current: | Federal $ 952 | - - - State 207 | - - - 1,159 | - - - | Deferred (benefit): | Federal (67) | - - - State (9) | - - - (76) | - - - $ 1,083 | - - -
PAGE NOTES TO FINANCIAL STATEMENTS A reconciliation of the statutory federal income tax rate to the effective tax rate is as follows:
Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 | % of Pretax Earnings (Loss) | Income taxes (benefits) at | federal statutory rates 34.0% | (34.0)% (34.0)% (34.0)% State income taxes, net of | federal income tax benefits 4.6 | (4.3) (4.3) (4.3) Amortization of excess value (19.0) | - - - Reorganization items - | 39.3 6.6 2.5 Net operating loss | carryforward - | (1.0) 31.7 35.6 Other 0.1 | 0.0 0.0 0.2 19.7% | - % - % - %
The tax effects of temporary differences since the Effective Date that give rise to significant portions of the deferred tax assets and deferred tax lia- bilities at January 27, 1966, are presented below: January 27, 1996 Current deferred tax assets: Reserves $ 473 Capitalized inventory 14 Co-op credits 29 Gross current deferred tax assets 516 Current deferred tax liabilities: Reserves (401) Percentage rent (18) Gross current deferred tax liabilities (419) Net current deferred tax assets $ 97 Non-current deferred tax assets: Inventory -video tapes $ 104 Gross non-current deferred tax assets 104 Non-current deferred tax liabilities: Fixed assets (125) Gross non-current deferred tax liabilities (125) Net non-current deferred tax liabilities $ (21) In connection with the adoption of Fresh-Start Reporting (Note 2), the carrying values of several assets were adjusted. As a result, SFAS No. 109, in conjunction with SOP 90-7 (Note 2), requires that any tax benefits realized after the Effective Date, from cumulative temporary differences, net operating loss carryovers and tax credit carryovers be reported in the future as an addition to paid-in capital rather than as a reduction in the tax provision in the statements of operations. NOTES TO FINANCIAL STATEMENTS At January 27, 1996, the Company has certain net operating loss carry- forwards totaling $162,000 which are scheduled to expire during the period 2008 through 2011. These NOLs will likely be reduced or their availability restricted, in accordance with provisions of federal tax laws. All of the factors necessary to evaluate the appropriate treatment, and the resulting reduction or restriction of the NOLs, have not been determined, and accordingly, the amount and availability of NOLs cannot be determined. The Company also has substantial potential state net operating loss carryovers. It is difficult, however, to quantify the utilizable amounts of such state operating losses because of the uncertainty related to the mix of future profits in specific states. 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. 15 LEASED ASSETS AND LEASE COMMITMENTS The Company has entered into leases for store locations which expire during the next 20 years. Computer equipment, transportation equipment and certain other equipment are also leased under agreements which will expire during the next five years. Management expects that leases which expire in the normal course of business will be renewed or replaced by other leases. Under Chapter 11, the Company renegotiated or rejected leases that it may otherwise have retained had no filing been made. PAGE NOTES TO FINANCIAL STATEMENTS At January 27, 1996, minimum rental payments due under the above leases are as follows: Capital Operating Leases Leases 1996 $ 373 18,092 1997 322 16,800 1998 241 14,710 1999 241 13,127 2000 97 11,087 Later Years - 53,589 Total minimum lease payments 1,274 127,405 Imputed interest (rates ranging from 7.6% to 11.3%) (254) Present value of net minimum lease payments 1,020 Less current maturities 274 Capital lease obligations $ 746 Executory costs, such as real estate taxes, insurance, and maintenance, are generally the obligation of the lessor. Amortization of capitalized leases was approximately $220 in the thirteen week ended April 29, 1995, $1,746 in 1994, and $2,191 in 1993. The capital lease assets were written off in Fresh-Start Reporting (See Note 2), thus no amortization was incurred in the thirty-nine weeks ended January 27, 1996. Total rental expense for the three years ended January 27, 1996 was as follows: Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 Operating Leases: | Minimum rentals $ 15,787 | 5,265 22,481 40,842 Contingent rentals 2,990 | 843 4,309 5,205 $ 18,777 | 6,108 26,790 46,047 Contingent rentals are determined on the basis of a percentage of sales in excess of stipulated minimums for certain store facilities and on the basis of mileage for transportation equipment. Rent expense for the thirty-nine weeks ended January 27, 1996, did not include any payments to lessors controlled by or affiliated with directors of the Successor. Included in rent expense was $132 for the thirteen weeks ended April 29, 1995, $665 for 1994, and $908 for 1993, paid to lessors controlled by or affiliated with certain directors of the Predecessor. 16 POSTRETIREMENT HEALTH INSURANCE BENEFITS The Company provided health insurance benefits for retirees who met minimum age and service requirements until they reached the age of sixty-five. In addition, the associate must have been covered under the active medical plan at NOTES TO FINANCIAL STATEMENTS the time of retirement to be eligible for postretirement benefits and must have agreed to contribute a portion of the cost. The plan was not funded. The expected cost of retiree health care benefits was charged to expense during the year that the employees rendered service. Effective December 30, 1995, the Board of Directors terminated postretirement and post-service benefits under the Rose's Stores, Inc. Health Care Plan, except for one year of benefits for current retirees. The termination of these benefits resulted in a gain of $4,701. The adoption of Fresh-Start Reporting required the accumulated postretirement benefit obligation to be adjusted to fair value. This adjustment resulted in a $1,034 decrease in the liability at April 29, 1995 (See Note 2). The periodic postretirement benefit cost under SFAS 106 was as follows: Net Periodic Postretirement Benefit Costs: Thirty-Nine | Thirteen Weeks Ended | Weeks Ended January 27, | April 29, Fiscal Years 1996 | 1995 1994 1993 Service costs $ 76 | 28 236 203 Interest costs 249 | 93 493 451 Other - | (39) 72 12 Net periodic costs $ 325 | 82 801 666 The present value of accumulated postretirement benefit obligations and the amount recognized in the balance sheets were as follows: Accumulated Postretirement Benefit Obligations: January 27, | January 28, 1996 | 1995 Retirees $ 367 | 2,354 Fully eligible active plan | participants - | 780 Other active plan participants - | 1,840 367 | 4,974 Unrecognized gain (loss) - | 1,074 Total accumulated postretirement | benefit obligations $ 367 | 6,048 The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.5% for fiscal year 1994. 17 SEVERANCE RESERVE The Company completed a downsizing of the Home Office, Distribution and Store Operations support work force by approximately 175 positions on February 23, 1996. The Company accrued $1,170 in other current liabilities as of January 27, 1996, for the costs associated with the downsizing. The expense is included in selling, general and administrative. No payments had been made as of year-end. NOTES TO FINANCIAL STATEMENTS 18 CONTINGENCIES Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. In the opinion of management and counsel, all material contingencies are either adequately covered by insurance or are without merit. 19 SUBSEQUENT EVENTS 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 Com- mon 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 of (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. PAGE NOTES TO FINANCIAL STATEMENTS 20 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations during the years ended January 27, 1996 and January 28, 1995:
Fiscal 1995(a) Quarters Ended April 29, | July 29, October 28, January 27, 1995 | 1995 1995 1996 | Gross sales $ 159,407 | 168,488 162,937 209,493 Leased department sales 5,117 | 5,764 4,995 5,762 Leased department income 1,114 | 1,178 1,140 1,466 Cost of sales 116,838 | 122,471 119,900 161,749 Income (loss) before | reorganization expense, | income taxes, and | extraordinary item 542 | (92) (775) 6,351 Reorganization expense (3,847) | - - - Fresh-Start revaluation (17,432) | - - - Earnings (loss) before | extraordinary item (20,737) | - - - Extraordinary item - | gain on debt discharge 90,924 | - - - Net earnings (loss) $ 70,187 | (92) (775) 5,268 Earnings (loss) per share | before extraordinary item (1.11) | (0.01) (0.09) 0.60 Net earnings (loss) | per share $ 3.74 | (0.01) (0.09) 0.60
Fiscal 1994 Quarters Ended April 30, July 30, October 29, January 28, 1994 1994 1994 1995 Gross sales $ 174,583 175,231 178,531 228,011 Leased department sales 5,514 6,368 6,088 6,460 Leased department income 1,300 1,150 1,248 1,590 Cost of sales 126,696 127,535 129,178 171,678 Income (loss) before reorganization expense (767) (936) 1,434 6,886 Reorganization expense (58,781) 7,971 (3,936) (3,153) Net income (loss) (59,548) 7,035 (2,502) 3,733 Income (loss) per share $ (3.17) 0.38 (0.13) 0.20
(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 statements of operations reflect the application of Fresh-Start Reporting (Note 2), and are therefore not comparable to prior years. EX-10.9 2 ROSE'S STORES, INC. SEVERANCE PAY PLAN (Effective December 14, 1995) INTRODUCTION The purpose of this Severance Pay Plan (the "Plan") is to enable Rose's Stores, Inc. (the "Company") to offer a form of protection to Officers and Selected Associates of the Company and its Affiliates in the event their employment with the Company and its Affiliates terminates. Accordingly, the Company's Board of Directors has adopted this Plan, upon the recommendation of the Compensation Committee, effective December 14, 1995, for Officers and Selected Associates of the Company and its Affiliates in an effort to assist in replacing the loss of income caused by a termination of employment under the circumstances described herein. The Plan, effective December 14, 1995, amends and supersedes any severance plans, policies and/or practices of the Company or any Affiliate. Any Participant in the Plan shall not be eligible to participate in any other severance plan, policy or practice of the Company or any Affiliate. ARTICLE i Definitions i.1 "Affiliate" shall mean the Company and any entity affiliated with the Company within the meaning of Code Section 414(b) with respect to a controlled group of corporations, Code Section 414(c) with respect to trades or businesses under common control with the Company, Code Section 414(m) with respect to affiliated service groups and any other entity required to be aggregated with the Company under Code Section 414(o). No entity shall be treated as an Affiliate for any period during which it is not part of the controlled group, under common control or otherwise required to be aggregated under Code Section 414. i.2 "Associate" shall mean any individual employed by an Employer, other than those employed on a temporary and/or seasonal basis as determined in accordance with the Company's policies and practices. i.3 "Board" shall mean the Board of Directors of the Company. i.4 "Cause" shall mean (with regard to a Participant's termination of employment with the Control Group): (a) the refusal or willful failure by the Participant to substantially perform his or her duties,(b) the Participant's dishonesty, willful misconduct, misappropriation, breach of fiduciary duty or fraud with regard to the Control Group or any of their assets or businesses, or (c) the Participant's conviction of, or plea of nolo contendere with respect to, a felony (other than a traffic violation) or any other crime involving, in the sole discretion of the Committee, moral turpitude. i.5 "Change in Control" shall have the meaning set forth in Appendix A attached hereto. i.6 "Code" shall mean the Internal Revenue Code of 1986, as amended. i.7 "Committee" shall mean the Compensation Committee of the Board or an administrative committee appointed by the Compensation Committee. i.8 "Company" shall mean Rose's Stores, Inc., a Delaware corporation, and any successor as provided in Article VI hereof. i.9 "Control Group" shall mean the Company and its Affiliates. i.10 "Disability" shall mean a disability resulting from a physical or mental condition of such severity and probable prolonged duration as to entitle a Participant to disability retirement benefits under the Federal Social Security Act. i.11 "Effective Date" shall mean December 14, 1995. i.12 "Employer" shall mean the Company and any Affiliate which has adopted this Plan in accordance with Section 6.1 hereof. i.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. i.14 "Exempt Associate" shall mean an Associate who is exempt from minimum wage and overtime requirements pursuant to the Fair Labor and Standards Act 29 U.S.C. Section 213. i.15 "Good Reason" shall mean (with respect to a Participant's termination of employment with the Control Group): (a) the complete elimination of a Participant's position, unless the Participant is offered a comparable or better position with the Employer as determined by the Committee, in its sole discretion; (b) the Participant's constructive or voluntary termination, during the sixty (60) day period prior to the Participant's Termination Date, due to a material reduction in Salary; or (c) the Participant's constructive or voluntary termination, during the sixty (60) day period prior to the Participant's Termination Date,due to a material change in job responsibilities. i.16 "Hour of Service" shall mean each hour for which an Associate is or will be directly or indirectly compensated by an Employer or an Affiliate for the performance of the Associate's work duties. Hours of Service shall be credited (based on an Associate's normally scheduled Hours of Service) during any period which an Associate is not working due to disability, leave of absence or layoff so long as he or she is being paid by the Employer (other than through any employee benefit plan). Hours of Service also shall also be credited for service in any branch of the armed forces of the United States by any person who is an Associate on the date such service commenced, but only to the extent required by applicable law. i.17 "Officer" shall mean any of the following Associates of the Company: Executive Vice Presidents, Senior Vice Presidents, Vice Presidents or Treasurers. i.18 "Participant" shall mean any Officer or Selected Associate, or former Officer or Selected Associate who is receiving payments under the Plan. i.19 "Plan" shall mean the Rose's Stores, Inc. Severance Pay Plan. i.20 "Salary" shall mean a Participant's regular annual salary from the Employer on his or her Termination Date exclusive of overtime, bonuses, awards, imputed income or extraordinary payments. In calculating the amount of Severance Benefit, the Committee shall use the following guidelines: (a) the monthly Salary rate shall be computed by dividing the Participant's Salary by twelve (12); (b) the weekly Salary rate shall be computed by dividing the Participant's Salary by fifty-two (52); and (c) with respect to an Associate who is a truck driver, the weekly Salary rate shall be computed by dividing the Associate's year to date earnings by the total number of pay checks he or she has received during such year as of his or her Termination Date multiplied by twenty- six (26); such sum shall then be divided by fifty-two (52). i.21 "Selected Associate" shall mean any Exempt Associate or any other non-Exempt Associate who is regularly employed at the corporate office of the Company. i.22 "Severance Benefit" shall mean the benefit paid to the Participant by the Employer in accordance with Appendix B attached hereto. Any Severance Benefit shall be reduced by (a) any monies arising out of the employment relationship which are owed to the Employer by the Participant, and (b) deductions for taxes, withholding or benefits provided or elected hereunder. i.23 "Termination Date" shall mean the last official work day for which the Participant receives pay for service with the Employer and specifi- cally excludes any period for which a Severance Benefit payment is made. i.24 "Year of Service" shall mean each twelve (12) consecutive month period commencing on the Associate's date of hire by the Employer and each anniversary thereof. ARTICLE ii Benefits ii.1 Eligibility for Benefits. Any Participant (a) whose employment with the Control Group is terminated without Cause by an Employer; (b) who terminates employment with the Control Group after the occurrence of a Good Reason event with regard to such Participant; or (c) who terminates employment due to Disability, shall be entitled to a Severance Benefit in the manner set forth in Section 2.2 below. A Participant shall not be entitled to a Severance Benefit under this Plan if he or she is terminated for Cause. ii.2 Amount and Form of Benefits. Any Participant described in Section 2.1 above shall receive his or her Severance Benefit in an amount calculated in accordance with Appendix B attached hereto. Such Severance Benefit shall be paid in the form of bi-weekly installments, unless otherwise specified in Appendix B, with the first installment beginning as soon as administratively feasible after the Participant's Termination Date. ii.3 Additional Benefits. An Officer entitled to receive a Severance Benefit in accordance with Section 2.1 shall also be entitled to receive additional benefits as provided in (a) and (b) below: (a) An Officer shall be reimbursed for reasonable fees for outplacement assistance or other reasonable expenses incurred in the pursuit of subsequent employment. The reasonableness of such fees and expenses shall be determined by the Committee, in its sole discretion. The maximum reimbursement for all fees and expenses incurred shall be ten thousand dollars ($10,000). (b) An Officer shall be entitled to continued medical, dental and disability coverage under the plans in which he or she participated prior to his or her Termination Date. Such coverage shall be under substantially similar terms and conditions as an active Associate for a period of three (3) months following the Officer's Termination Date; provided that participation in such plans shall cease if the Officer becomes employed on a full-time basis with an Employer or any other employer, as determined by the Committee in its sole discretion. Notwithstanding the foregoing, the Officer may not continue to participate in any such plan on a pre-tax or tax-favored basis. Any benefits or payments under this section shall be in addition to any extended group health plan coverage to which the Associate is entitled under the provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. ii.4 Release. As a condition of receiving benefits hereunder, the Participant shall be required to sign the Agreement of Release, attached as Appendix C hereto. ii.5 Mitigation/Termination of Severance Benefits. No Participant entitled to receive a Severance Benefit hereunder shall be required to seek other employment or to attempt in any way to reduce any amounts payable to him or her pursuant to this Plan. However, any remaining installment payments payable to a Participant under the Plan shall cease as of the date the Partici- pant becomes actively employed on a full-time basis with an Employer or any other employer, as determined by the Committee in its sole discretion. In the event the Participant obtains new employment, the Participant is required to immediately notify the Personnel Department of the Company in writing. If the Participant does not provide such notice in a timely and accurate manner, as determined by the Committee, the Employer shall be entitled to terminate the Severance Benefit payments to the Participant and the Employer shall be entitled to recover from the Participant the amount of any Severance Benefit payments that were made as a result of the failure to provide timely and/or accurate notice. ARTICLE iii Funding iii.1Funding. The Plan shall be funded out of the general assets of the Company as and when benefits are payable under the Plan. All Participants shall be solely general creditors of the Company. If the Company decides to establish any advance accrued reserve on its books against the future expense of benefits payable hereunder, such reserve shall not under any circumstances be deemed to be an asset of the Plan. ARTICLE iv Administration of the Plan iv.1 Plan Administrator. The general administration of the Plan on behalf of the Employers shall be placed with the Committee. iv.2 Reimbursement of Expenses of Committee. The Company may, in its sole discretion, pay or reimburse the members of the Committee for all reasonable expenses incurred in connection with their duties hereunder. iv.3 Action by the Committee. Decisions of the Committee shall be made by a majority of its members attending a meeting at which a quorum is present, or by written action in accordance with applicable law. All decisions of the Committee on any question concerning the selection of Participants and the interpretation and administration of the Plan shall be final, conclusive and binding upon all parties. iv.4 Decisions of Committee are Binding on All Persons. The Committee (or its delegate) shall have the exclusive right, power,and authority, in its sole and absolute discretion, to administer, apply and interpret the Plan and any other Plan documents and to decide all matters arising in connection with the operation or administration of the Plan. Without limiting the general- ity of the foregoing, the Committee shall have the sole and absolute discretion- ary authority: (a) to take all actions and make all decisions with respect to the eligibility for, and the amount of, benefits payable under the Plan; (b) to formulate, interpret and apply rules, regulations and policies necessary to administer the Plan in accordance with its terms; (c) to decide questions, including legal or factual questions, relating to the calculation and payment of benefits under the Plan; (d) to resolve and/or clarify any ambiguities, inconsistencies and omissions arising under the Plan or other Plan documents; (e) to decide for purposes of paying benefits hereunder, whether, based on the terms of the Plan, a termination of employment is for Good Reason or for Cause; and (f) except as specifically provided to the contrary in Section 4.11, to process and approve or deny benefit claims and rule on any benefit exclusions. All determinations made by the Committee (or any delegate) with respect to any matter arising under the Plan and any other Plan documents shall be final, binding and conclusive on all parties. iv.5 Delegation of Authority. The Committee may delegate any and all of its powers and responsibilities hereunder to other persons by formal resolution filed with and accepted by the Board. Any such delegation shall not be effective until it is accepted by the Board and the persons designated and may be rescinded at any time by written notice from the Committee to the person to whom the delegation is made. iv.6 Retention of Professional Assistance. The Committee may employ such legal counsel, accountants and other persons as may be required in carrying out its work in connection with the Plan. iv.7 Accounts and Records. The Committee shall maintain such accounts and records regarding the fiscal and other transactions of the Plan and such other data as may be required to carry out its functions under the Plan and to comply with all applicable laws. iv.8 Compliance with Applicable Law. The Company shall be deemed the Plan Administrator for the purposes of any applicable law and shall be responsible for the preparation and filing of any required returns, reports, statements or other filings with appropriate governmental agencies. The Company shall also be responsible for the preparation and delivery of information to persons entitled to such information under any applicable law. iv.9 Liability. No member of the Committee and no officer, director or employee of the Company or any other member of the Control Group shall be liable for any action or inaction with respect to his or her functions under the Plan unless such action or inaction is adjudged to be due to gross negligence, willful misconduct or fraud. Further, no member of the Committee shall be personally liable merely by virtue of any instrument executed by him or her or on his or her behalf as a member of the Committee. iv.10 Indemnification. Each Employer shall indemnify, to the full extent permitted by law and its Certificate of Incorporation and By-laws (but only to the extent not covered by insurance) its officers and directors (and any employee involved in carrying out the functions of such Employer under the Plan) and each member of the Committee against any expenses, including amounts paid in settlement of a liability, which are reasonably incurred in connection with any legal action to which such person is a party by reason of his or her duties or responsibilities with respect to the Plan, except with regard to matters as to which he or she shall be adjudged in such action to be liable for gross negligence, willful misconduct or fraud in the performance of his or her duties. iv.11 Claims Procedure. Any claim by a Participant with respect to eligibility, participation, contributions, benefits or other aspects of the operation of the Plan shall be made in writing to the Secretary of the Company or such other person designated by the Committee from time to time for such purpose. If the designated person receiving a claim believes, following consultation with the Chairman of the Committee,that the claim should be denied, he or she shall notify the Participant in writing of the denial of the claim within ninety (90) days after his or her receipt thereof (this period may be extended an additional ninety (90) days in special circumstances and, in such event, the Participant shall be notified in writing of the extension). Such notice shall (a) set forth the specific reason or reasons for the denial making reference to the pertinent provisions of the Plan or of Plan documents on which the denial is based, (b) describe any additional material or information necessary to perfect the claim, and explain why such material or information, if any, is necessary, and (c) inform the Participant of his or her right pur- suant to this Section 4.11 to request review of the decision. A Participant may appeal the denial of a claim by submitting a written request for review to the Committee, within sixty (60) days after the date on which such denial is received. Such period may be extended by the Committee for good cause shown. The claim shall then be reviewed by the Committee. A Participant or his or her duly authorized representative may discuss any issues relevant to the claim, may review pertinent documents and may submit issues and comments in writing. If the Committee deems it appropriate, it may hold a hearing as to a claim. If a hearing is held, the Participant shall be entitled to be represented by counsel. The Committee shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Committee for up to an additional sixty (60) days in special circumstances. Written notice of any such special circumstances shall be sent to the Participant. Any claim not decided upon in the required time period shall be deemed denied. All interpretations, determinations and decisions of the Committee with respect to any claim shall be made in its sole discretion based on the Plan and other relevant documents and shall be final, conclusive and binding on all persons. ARTICLE v Amendment and Termination v.1 Amendment and Termination. The Company reserves the right, in its sole and absolute discretion to amend or terminate, in whole or in part, any or all of the provisions of this Plan by action of the Board (or a duly authorized committee thereof) at any time, provided that any amendment reducing the benefits provided hereunder or any Plan termination (a) shall not be effective prior to the second anniversary of the Effective Date and (b) no such amendment or Plan termination may take effect sooner than one (1) year following the date on which the Board takes such action. Any termination or amendment of the Plan, however, shall not affect the Severance Benefit or other benefits hereunder, if any, payable to any Participant who is entitled to such Severance Benefit or other benefits as of the date of the amendment or termination of the Plan. ARTICLE vi Participating Employers and Successors vi.1 Participating Employers. Upon approval by the Committee, this Plan may be adopted by any Affiliate of the Company. Upon such adoption, the Affiliate shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Associates of that Affiliate. vi.2 Successors. Subject to Section 5.1 hereof, the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally to assume and agree to perform the Company's obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no such succession or assignment had taken place. In such event, the term "Company", as used in this Plan, shall mean the Company as hereinbefore defined and any successor or assignee to the business or assets which by reason hereof becomes bound by the terms and provisions of this Plan. In the event an Affiliate ceases to be a member of the Control Group, it may by such written agreement, but shall not be obligated to, continue the Plan as a separate plan and all reference to the "Company" shall become reference to the Affiliate. If this Plan is not specifically continued by the Affiliate, it shall terminate as to Associates of such Affiliate. If this Plan is specifically continued by the Affiliate, the Affiliate, but not the Company, shall be liable to the Associates of the Affiliate for any benefits due hereunder. ARTICLE vii Miscellaneous vii.1Rights of Associates. Nothing herein contained shall be held or construed to create any liability or obligation upon the Employer to retain any Associate in its service. All Associates shall remain subject to discharge or discipline to the same extent as if the Plan had not been put into effect. vii.2Headings. The headings of the Plan are inserted for convenience of reference only and shall have no effect upon the meaning of the provisions hereof. vii.3Use of Words. Whenever used in this instrument, a masculine pronoun shall be deemed to include the masculine and feminine gender, and a singular word shall be deemed to include the singular and plural, in all cases where the context so requires. vii.4Controlling Law. The construction and administration of the Plan shall be governed by ERISA. To the extent not so governed, it shall be governed by the laws of the State of North Carolina (without reference to rules relating to conflicts of law). vii.5Withholding. The Employer shall have the right to make such provisions as it deems necessary or appropriate to satisfy any obligations it reasonably believes it may have to withhold federal, state or local income or other taxes incurred by reason of payments pursuant to this Plan. In lieu thereof, the Employer shall have the right to withhold the amount of such taxes from any other sums due or to become due from the Employer to the Participant upon such terms and conditions as the Committee may prescribe. vii.6Severability. Should any provisions of the Plan be deemed or held to be unlawful or invalid for any reason, such fact shall not adversely affect the other provisions of the Plan unless such determination shall render impossible or impracticable the functioning of the Plan, and in such case, an appropriate provision or provisions shall be adopted so that the Plan may continue to function properly. vii.7Incompetency. In the event that the Committee finds that a Participant is unable to care for his or her affairs because of illness or accident, then benefits payable hereunder, unless claim has been made therefor by a duly appointed guardian, committee, or other legal representative, may be paid in such manner as the Committee shall determine,and the application thereof shall be a complete discharge of all liability for any payments or benefits to which such Participant was or would have been otherwise entitled under this Plan. vii.8Payments to a Minor. Any payments to a minor from this Plan may be paid by the Committee in its sole and absolute discretion (a) directly to such minor; (b) to the legal or natural guardian of such minor; or (c) to any other person, whether or not appointed guardian of the minor, who shall have the care and custody of such minor. The receipt by such individual shall be a complete discharge of all liability under the Plan therefor. vii.9Assignment and Alienation. The benefits payable under the Plan shall not be subject to alienation, transfer, assignment, garnishment, execution or levy of any kind, and any attempt to cause any benefits to be so subjected shall not be recognized. IN WITNESS WHEREOF, the Company has caused this instrument to be executed this ____ day of ________, 1995. ROSE'S STORES, INC. By: Title: APPENDIX A Change in Control A Change in Control shall be deemed to occur if: (i) any "person" (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) (a "Person") becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) (a "Beneficial Owner") of securities of the Company representing 50.1% or more of the total combined voting power of the Company's then outstanding voting securities, (ii) the Company merges or is consolidated with any Person or substantially all of the Company's assets are sold or disposed of to a Person other than (a) in a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such event to conti- nue to represent (either by remaining outstanding or by conversion into voting securities of the surviving or parent entity) 50.1% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (b) a merger or capitalization effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities representing more than 50.1% or more of the total combined voting power of the Company's then outstanding voting securities, or (iii) during any period of not more than two (2) consecutive years, individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in (i) and (ii) of this paragraph) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds () of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof. APPENDIX B Severance Benefits shall be paid in the following amounts and forms according to the Participant's classification of employment. Unless otherwise specified, Severance Benefits shall be payable in bi-weekly installment payments commencing as soon as administratively feasible following a Participant's Termination Date. The calculation for each classification is based on the Participant's Salary as of the Termination Date and is as follows: - Officers. A Severance Benefit based on twelve (12) months of Salary to be paid in (i) a lump sum representing six (6) month's Salary, paid to the Participant as soon as administratively feasible following the Officer's Termination Date and (ii) bi-weekly installments representing the remaining six (6) months Salary, to commence as soon as administratively feasible following the six (6) month anniversary of the Officer's Termination Date if, and only if, the Officer has not become employed on a full- time basis by an Employer or any other employer, as determined in the Committee's sole discretion. Notwithstanding anything to the contrary, in the event of a Change in Control, the entire Severance Benefit shall be paid in a lump sum as soon as administratively feasible following the Officer's Termination Date. - Director's, Senior Managers, Managers, and Senior Buyers with a Pay Grade of Ten (10) or Greater. A Severance Benefit based on three (3) weeks' Salary for each Year of Service, with a minimum of twelve (12) weeks' Salary and a maximum of twenty-six (26) weeks' Salary. - Buyers and Store Managers. A Severance Benefit based on two (2) weeks' Salary for each Year of Service, with a minimum of twelve (12) weeks' Salary and a maximum of twenty-six (26) weeks' Salary. - Managers and other Exempt Associates with a Pay Grade of Seven (7) to Nine (9). A Severance Benefit based on two (2) weeks' Salary for each Year of Service, with a minimum of six (6) weeks' Salary and a maximum of twenty-six (26) weeks' Salary. - Managers and other Exempt Associates with a Pay Grade of One (1) to Six (6). A Severance Benefit based on one (1) week's Salary for each Year of Service, with a minimum of four (4) weeks' Salary and a maximum of twelve (12) weeks' Salary. - Truck Drivers. A Severance Benefit of one (1) week's Salary for each Year of Service, with a minimum of four (4) weeks' Salary and a maximum of twelve (12) weeks' Salary. - Corporate Office Non-Exempt Associates. A Severance Benefit of one-half (1/2) week's Salary for each Year of Service, with a minimum of two (2) weeks' Salary and a maximum of eight (8) weeks' Salary. APPENDIX C AGREEMENT OF RELEASE Agreement made as of ______________________, by and between Rose's Stores, Inc. (the "Company") with its principal office at 218 South Garnett Street, Henderson, North Carolina 27536 and _____________________ _______________________, residing at _____________________________________________________ (the "Associate"). W I T N E S S E T H: WHEREAS, the Associate's employment with the Company terminated or will terminate on _____________________; and WHEREAS, the Associate and the Company desire to settle all matters arising, directly or indirectly, out of the Associate's employment or the conclusion thereof according to the terms of this Agreement. NOW, THEREFORE, for and in consideration of the mutual covenants contained in this Agreement, as well as the payment of the monies hereafter recited, Associate and the Company (the "Parties") agree as follows: 1. Concluding Employment. Associate agrees that the Associate's employment with the Company terminated or will terminate as of ______________ (the "Termination Date"). Associate hereby waives all rights to reemployment or reinstatement from and after the Termination Date. 2. Associate's Release and Indemnity. (a) In consideration of the promises and covenants set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is hereby, acknowledged, Associate releases and forever irrevocably discharges the Company, its past, present and future officers, directors, agents, shareholders, employees, representatives and associates, jointly and individually,(all of which are collectively referred to as "Released Parties") from any and all claims, demands, charges, lawsuits, debts, actions or causes of action, obligations, damages, sums of money, loss of services, compensation, pain and suffering, attorneys fees, costs and expenses of suit and liabilities whatsoever, which Associate had, now has or may have, whether the same be in law, in equity, or mixed, upon or by reason of any manner or cause existing as of the date of execution of the Agreement, including but not limited to, any claim, action or cause of action arising under the Age Discrimination in Employment Act, as amended ("ADEA"),the Civil Rights Acts of 1964 (Title VII) and 1991, the Employee Retirement Income Security Act, as amended ("ERISA"), the Americans with Disabilities Act, all Federal, state, and local civil rights statutes, and any other statutory, equitable or common law claims. Except for those Severance Benefits expressly set forth in the Rose's Severance Pay Plan (the "Plan") to be paid by the Company to Associate,Associate expressly waives any and all benefits or claims under any prior severance policy or program published by the Company, agreeing in lieu thereof to accept the Severance Benefit as granted under the Plan. (b) Associate agrees to indemnify the Company and its officers, directors, agents, shareholders, employees, representatives and associates from all claims including all attorney's fees, costs and expenses, arising out of Associate's breach of this Agreement or any misrepresentation of fact made by Associate which is contained in or made the basis of this Agreement. The Company acknowledges that the only representations that Associate has made which are contained in or made the basis of this Agreement are the representations expressly set forth in this Agreement in writing as being made by the Associate and the representation that Associate has not incurred any liability or expense to the Company or contracted any unpaid debt with or on behalf of the Company of which the Associate has not advised the Company prior to the execution hereof, and will not do so on or prior to the Termination Date. The provisions of this Section 2 shall survive the Termination Date. 3. No Legal Action. Associate represents that, as of the effective date of this Agreement, he or she has not filed with any agency or any court any complaints or lawsuits against the Company arising out of his or her employment with or termination by the Company, and that he or she will not do so at any time thereafter. 4. Company Covenants. (a) As a material inducement to and in consideration of Associate entering into this Agreement,and conditioned upon the waivers and releases given by Associate herein, the Company agrees to pay Associate the Severance Benefit, as calculated under Appendix B of the Plan, of $______________ (which represents ______ weeks Salary), payable in bi-weekly installments of $____________, less any taxes or other standard deductions ordinarily deductible from any of said sums; subject however to termination of such payments at such time as Associate becomes actively employed on a full-time basis, as set forth in the Plan. (b) On the Termination Date, Associate will be entitled to whatever rights, if any, to continuation coverage which are available under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. 5. Termination of Associate's Authority and Use. (a) Effective immediately, Associate is no longer authorized to incur any expenses or obligations or liabilities on behalf of the Company. (b) Associate warrants that no later than the Termination Date, he or she shall return all property of the Company including,without limitation, all reports, files, memoranda, records and software, credit cards, card-key passes, door, file, vehicle, and other keys, computer access codes, disks and instructional manuals, calculators and other physical or personal property which have been provided for his or her use in connection with his or her employment with the Company. 6. Confidential Information. (a) Associate agrees that in the course of his or her employment with the Company, he has acquired information ("Confidential Information") which is (i) confidential and proprietary to the Company, and (ii) other technical, business, or financial information, the use or disclosure of which may be contrary to the Company interests. Associate agrees that he or she will: (i) hold in confidence such Confidential Information at all times during and after his or her employment with the Company; (ii) not disclose or communicate Confidential Information to any third party; and (iii) not make use of Confidential Information on his or her behalf or on behalf of any third party. Confidential Information specifically includes, but is not limited to, information about individuals currently employed by the Company including, but not limited to, the names of any such individuals and the terms of their employment. The Associate shall not, either directly or indirectly, disclose any Confidential Information concerning the Company employees and,in particular, shall not disclose any information, the use of which could result in the resignation or other termination of employment by any current Company employee. (b) Associate acknowledges that any unauthorized disclosure of Confidential Information would cause irreparable damage to the Company. In the event of any violation or a threatened violation of this Section 6, the Company shall be entitled to obtain preliminary and permanent relief enjoining Associate's use or disclosure, or attempted use or disclosure, of Confidential Information. Associate agrees to pay all reasonable costs and attorney's fees incurred by the Company in successfully enforcing its rights under this provision. The provisions of this Section 6 shall survive the Termination Date and continue in full force and effect for a period of five (5) years thereafter. Associate may make reference to his or her status with the Company provided no Confidential Information is disclosed. 7. Disclaimer. This Agreement shall, in no way be construed as an admission by the Company or Associate that either has acted wrongfully with respect to Associate's employment or the conclusion thereof, or that Associate's rights were violated in any way by the Released Parties. This Agreement may not be received in evidence in any action or proceeding as an admission of liability or wrongdoing on the part of the Released Parties. Both parties specifically disclaim any liability to each other or any other person. 8. Nondisclosure. Associate agrees that he or she will not reveal the terms of this Agreement to anyone other than his or her legal counsel, financial consultant and immediate family, who will be bound to maintain the confidence of the terms of this Agreement. 9. Voluntary Agreement. (a) Associate acknowledges that he or she has carefully read and fully understands all of the provisions of this Agreement, including the release of any potential claims under ADEA. Associate acknowledges that he or she has voluntarily and knowingly signed this Agreement in exchange for valuable consideration that Associate is not otherwise entitled to receive. (b) Associate further acknowledges that, in entering this Agreement, he or she has not relied upon any representation or statement made by any of the Company agents or representatives which is not set forth in this Agreement. 10. Period for Review and Consideration of Agreement. Associate acknowledges that he or she has been given at least [forty-five (45)/twenty- one (21)]* days to review and consider this Agreement before signing it. 11. Associate's Right to Revoke Agreement. Associate is advised that he or she may revoke this Agreement within seven (7) days of signing it. Revocation must be made by delivering a written notice of revocation to the Vice President, General Counsel and Secretary, Rose's Stores, Inc., P.O. Drawer 947, Henderson, NC 27536. If this Agreement is revoked by Associate in this seven (7) day period, the Agreement will not be effective and enforceable. 12. Effective Date. This Agreement shall not become effective until the eighth day following Associate's execution of this Agreement (the "Effective Date"). 13. Severability. If any provision of this Agreement is held to be unenforceable, the enforcement of the remaining provisions shall not be impaired. 14. Successors and Assigns. This Agreement shall be binding upon the parties and their respective heirs, successors and assigns. *Forty-five (45) days in the event of a group termination or reduction in force. Twenty-one (21) days in the event of a single termination not in connection with any other termination or event. 15. Modification. This Agreement cannot be modified except by written agreement signed by Associate and the Company's duly authorized officer. 16. Entire Agreement. This Agreement sets forth the entire Agreement between the parties, and supersedes all prior agreements, understandings, negotiations and correspondence between the parties concerning the matters described in this Agreement. 17. Gender Neutral. The use of masculine terms in this Agreement includes the feminine and vice versa. 18. North Carolina Law Governs. This Agreement shall be interpreted and enforced in accordance with the laws of the State of North Carolina. PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and the Associate's hand has hereunto been set as of the date first set forth above. ROSE'S STORES, INC. By: Title: By: Name of Associate EX-99.4 3 AMENDMENT NO. 4 This AMENDMENT NO. 4 (this "Amendment") dated as of January 31, 1996 among The First National Bank of Boston ("FNBB"), The CIT Group/Business Credit, Inc. ("CIT"), BankAmerica Business, Credit, Inc., Congress Financial Corporation, NatWest Bank N.A., LaSalle Business Credit, Inc. and Sanwa Business Credit Corpo- ration as the Banks party to the Credit Agreement hereinafter re- ferred to below and Rose's Store, Inc. (the "Borrower"). W I T N E S S E T H: WHEREAS, the Borrower is a party to the Revolving Credit Agreement dated as of April 28, 1995 among the Borrower, the Banks, FNBB as administrative agent (in such capacity, the "Adminis- trative Agent") and FNBB and CIT as facility agents (in such capacities, the "Facility Agents") (as such agreement has and may be amended and restated, amended, supplemented or modified from time to time, the "Credit Agreement"); WHEREAS, the Borrower has asked the Banks to amend certain provisions of the Credit Agreement; and WHEREAS, subject to all of the terms, conditions and limitations set forth herein, the Banks are willing to amend certain provisions of the Credit Agreement. NOW, THEREFORE, in consideration of the premises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree to the following: 1. Definitions. Capitalized terms defined in the preceding preliminary paragraphs shall have such meanings provided therein and, unless otherwise defined herein, capitalized terms which are defined in the Credit Agreement shall have the meanings assigned thereto in the Credit Agreement. 2. Amendments to Section 1.1. (a) The definition of Effective Borrowing Base Percentage in Section 1.1 of the Credit Agreement is amended by replacing the line in respect of the 5th calender week of November which currently reads "5th clndr wk 58%" with the following line: "5th clnr wk 62%" (b) The definition of EBITDA in Section 1.1 of the Credit Agreement is amended and restated to read as follows: EBITDA. The Net Operating Income (or Deficit) of the Borrower for any period (which amount shall in accordance with the definition thereof be determined after deduction of all expenses and other proper charges payable for such period) but before payment or provision in respect of such period for (i) income taxes, (ii) interest expense, (iii) commitment fees, agency fees, facility fees and other similar fees, (iv) adjustments relating to Lifo reserves in accordance with generally accepted accounting principles, (v) depreciation, amortization and other similar noncash charges, (vi) noncash reserves taken in such period for any and all obligations re- lating to store closings; provided however that the amount of any cash payments during such period and any and all subsequent periods in respect of all such obligations shall be treated as a reduction of EBITDA in the period of payment and (vii) noncash reserves taken in such period for any and all obligations relating to severance obligations; provided further that the amount of any cash payments during such pe- riod and any and all subsequent periods in respect of all such obligations shall be treated as a reduction of EBITDA in the period of payment. (c) The definition of Net Operating Income (or Deficit) in Section 1.1 of the Credit Agreement is amended and restated to read as follows: Net Operating Income (or Deficit). The net income (or deficit) of the Borrower after deduction of all expenses, taxes, and other proper charges, determined in accordance with generally accepted accounting principles after eliminating therefrom (i) all extraordinary items of income (but not of expense or loss), (ii) all net gains (but not losses) from the sale, transfer or other disposition of any assets consisting or real estate interests (including, without limitation, leasehold interest), (iii) all other gains and items of income arising from transactions that are not in the ordinary course of the Borrower's retail business, including, without limita- tion, gains arising from income tax refunds or from the reversal of reserves previously taken in accordance with generally accepted accounting principles, and (iv) for the fiscal year ended January 27, 1996 only, the extraordinary charges incurred through the Effective Date in connection with the reorganization of the Borrower in connection with the Bankruptcy Proceeding. (d) Section 1.1 of the Credit Agreement shall be amended by adding the following definition in the proper alphabetical order: "Fourth Amendment Effective Date. The date on which that certain Amendment No. 4 to this Credit Agreement, dated as of January 31, 1996 becomes effective in accordance with the provisions of paragraph 15 thereof. 3. Amendment to Section 2.3. Section 2.3 of the Credit Agreement is amended by (i) eliminating the following sentence cur- rently contained therein: Notwithstanding anything to the contrary in this Credit Agreement, on each anniversary of the Closing Date, the Total Revolving Commitment then in effect shall be permanently reduced in the amount of five million dollars ($5,000,000). and (ii) replacing such sentence with the following sentence: Notwithstanding anything to the contrary in this Credit Agreement, as of and after the Fourth Amendment Effective Date, the Total Revolving Commitment shall be one hundred ten million dollars ($110,000,000). 4. Amendment to Section 2 (addition of new Section 2.10). Section 2 of the Credit Agreement is hereby amended by adding the following new Section 2.10 at the end thereof: 2.10 Termination of LIBOR Option. Notwithstanding anything to the contrary in this Credit Agreement, including without limitation, Section 2.6 and 2.7 hereof and Schedule 2 hereto, on and after the Fourth Amendment Effective Date, the Borrower shall not be permitted to request a LIBOR Rate Loan, continue any LIBOR Rate Loan as a LIBOR Rate Loan upon the expiration of the Interest Period with respect thereto, or convert a Base Rate Loan to a LIBOR Rate Loan. Any Revolving Credit Loan that constitutes a LIBOR Rate Loan on the Fourth Amendment Effective Date shall be automatically converted to a Base Rate Loan on the last day of the Interest Period relating thereto. 5. Amendment to Section 3.2. Subsection (b) of Section 3.2 of the Credit Agreement is hereby amended and restated to read as follows: (b) The Borrower agrees to repay the Revolving Credit Loans such that for a period of thirty consecutive days during every period from December 1 to and including the immediately succeeding January 31 (each such period, a "Cleandown Pe- riod"), the total aggregate outstanding amount of Revolving Credit Loans shall be no more than (x) $45,000,000, during such Cleandown Period ending January 31, 1996; provided however, that, for purposes of this clause (x) of this section 3.2(b) only, any and all repayments of the Revolving Credit Loans with the proceeds of tax refunds and rebates received by the Borrower shall not be treated as reducing the total ag- gregate outstanding amount of Revolving Credit Loans; (y) $35,000,000, during such Cleandown Period ending January 31, 1997 and (z) $32,000,000, during such Cleandown Period ending January 31, 1998. 6. Amendment to Section 4.1.3. Section 4.1.3 of the Credit Agreement is hereby amended by deleting the last sentence thereof. 7. Amendment to Section 9.2. Subsection (j) of Section 9.2 of the Credit Agreement is hereby amended by replacing the phrase "for a period ending no later than one year after the Closing Date only," with the phrase "for a period ending no later than May 30, 1997,". 8. Amendment to Section 8.4. Section 8.4 of the Credit Agreement is amended by (i) deleting the word "and " at the end of subsection (l) thereof, (ii) deleting the period at the end of subsection (m) and adding "; and" in replacement thereof and (iii) adding the following new subsection (n) at the end of such Section 8.4: (n) as soon as practicable, but in any event within thirty (30) days after the end of each month in each fiscal year of the Borrower, a report, in a format acceptable to the Administrative Agent, which sets forth an analysis of monthly income, by store and on a monthly and year-to-date basis, and such other by store information requested by the Ad- ministrative Agent. 9. Amendment to Section 10.1 Section 10.1 of the Credit Agreement is amended and restated in its entirety to read as follows: "10.1 [Intentionally Omitted]" 10. Amendment to Section 10.2. Section 10.2 of the Credit Agreement is amended and restated in its entirety to read as follows: 10.2. Minimum EBITDA. (a) Cumulative Monthly EBITDA. For each fiscal month set forth below, the Borrower will not permit cumulative EBITDA for the period commencing either (i) January 28, 1996 in the case of fiscal months in the fiscal year ended January 25, 1997 and (ii) January 26, 1997 in the case of fiscal months in the fiscal year ended January 31, 1998, and ending on the last day of each such fiscal month (treated as a single accounting period) to be less than the amount set forth below opposite such fiscal month: Fiscal Month Minimum EBITDA February, 1996 ($1,000,000) March, 1996 (500,000) April, 1996 $1,900,000 May, 1996 $4,100,000 June, 1996 $5,000,000 July, 1996 $4,900,000 August, 1996 $4,800,000 September, 1996 $6,000,000 October, 1996 $6,800,000 November, 1996 $11,800,000 December, 1996 $19,300,000 January, 1997 $12,700,000 February, 1997 ($700,000) March, 1997 ($250,000) April, 1997 $2,000,000 May, 1997 $4,600,000 June, 1997 $5,600,000 July, 1997 $5,500,000 August, 1997 $5,500,000 September, 1997 $6,700,000 October, 1997 $7,500,000 November, 1997 $12,400,000 December, 1997 $19,700,000 January, 1998 $13,100,000 February, 1998 ($700,000) March, 1998 ($250,000) (b) Quarterly EBITDA. As of each date set forth below, the Borrower shall not permit EBITDA for the single fiscal quarter ended on such date to be less than the amounts set forth below opposite such date: Fiscal Quarter Ended Minimum EBITDA April 27, 1996 $1,900,000 July 27, 1996 $2,600,000 October 26, 1996 $1,500,000 April 26, 1997 $2,000,000 July 26, 1997 $2,800,000 October 25, 1997 $1,600,000 In addition, the Borrower shall not permit EBITDA (i) for the period commencing January 29, 1995 and ending October 28, 1995 to be less than $2,800,000, (ii) for the period commencing January 29, 1995 and ending December 2, 1995 to be less than $9,500,000, (iii) for the period commencing January 29, 1995 and ending December 30, 1995 to be less than $15,000,000 and (iv) for the fiscal year ending January 27, 1996 to be less than $6,500,000. 11. Amendment to Section 10.3. Section 10.3 of the Credit Agreement is amended and restated in its entirety to read as follows: 10.3. Capital Expenditures and Capitalized Leases. As of any date in any fiscal quarter set forth below (each a "Date"), the Borrower will not make any Capital Expenditures if the aggregate amount of Capital Expenditures for the pe- riod commencing either (i) January 28, 1996 in the case of dates in the fiscal year ended January 25, 1997 and (ii) January 26, 1997 in the case of dates in the fiscal year ended January 31, 1998, and ending on such date, would exceed the amount set forth below in the respective fiscal quarter: Dates in Quarter Ended Capital Expenditures April 27, 1996 $ 2,000,000 July 27, 1996 $ 4,000,000 October 26, 1996 $ 5,700,000 January 25, 1997 $ 6,000,000 April 26, 1997 $ 2,100,000 July 26, 1997 $ 4,200,000 October 25, 1997 $ 5,800,000 January 31, 1998 $ 6,000,000 In addition, the Borrower shall not make any Capital Expendi- tures with respect to the opening of new retail locations. The Borrower shall not make payments in respect of Capital- ized Leases in an aggregate amount that exceeds (i) for the fiscal year ended January 25, 1997, $200,000 in any fiscal quarter and (ii) for the fiscal year ended January 31, 1998, $225,000 in any fiscal quarter. 12. Amendment to Section 10.5. Section 10.5 of the Credit Agreement is amended and restated in its entirety to read as follows: Maximum Eligible Inventory. The Borrower shall not permit Eligible Inventory (excluding for this purpose only, Eligible Inventory described in clause (iii) of the defini- tion thereof) on the last date of any fiscal month set forth below to be more than the amount set forth below opposite such fiscal month: Maximum Eligible Fiscal Month Inventory February, 1996 $176,800.000 March, 1996 $186,200,000 April, 1996 $189,300,000 May, 1996 $186,800,000 June, 1996 $185,100,000 July, 1996 $186,600,000 August, 1996 $186,300,000 September, 1996 $196,200,000 October, 1996 $216,200,000 November, 1996 $195,800,000 December, 1996 $161,700,000 January, 1997 $161,500,000 February, 1997 $178,300.000 March, 1997 $188,000,000 April, 1997 $191,800,000 May, 1997 $189,300,000 June, 1997 $187,800,000 July, 1997 $189,300,000 August, 1997 $189,100,000 September, 1997 $199,100,000 October, 1997 $219,000,000 November, 1997 $198,700,000 December, 1997 $164,000,000 January, 1998 $163,900,000 February, 1998 $180,000,000 March, 1998 $191,000,000 13. Amendments to Section 10 (new covenants).Section 10 of the Credit Agreement is hereby amended by adding the following new Section 10.6, Section 10.7 and Section 10.8 at the end thereof: 10.6 Days on Hand Inventory. On the last day of any fiscal month set forth below, the Borrower shall not permit the product of (i) the quotient of Eligible In- ventory on such date divided by the Borrower's costs of good sold (as determined in accordance with generally accepted accounting principles) for the twelve month pe- riod ended on such date and (ii) three hundred sixty five (365) to be greater than the amounts set forth below opposite such fiscal month: Fiscal Month Days on Hand Inventory February, 1996 130 March, 1996 137 April, 1996 139 May, 1996 137 June, 1996 136 July, 1996 137 August, 1996 137 September, 1996 144 October, 1996 158 November, 1996 144 December, 1996 118 January, 1997 118 February, 1997 130 March, 1997 137 April, 1997 140 May, 1997 138 June, 1997 137 July, 1997 138 August, 1997 137 September, 1997 144 October, 1997 159 November, 1997 143 December, 1997 118 January, 1998 116 February, 1998 130 March, 1998 137 10.7 Maximum Exposure. On any date in any fiscal month set forth below, the Borrower shall not permit the sum of (i) the outstanding amount of the Revolving Credit Loans, (ii) the Maximum Drawing Amount on all Letters of Credit and (iii) all Unpaid Reimbursement Ob- ligations on such date to exceed the amount set forth below opposite such fiscal month: Fiscal Month Amount February, 1996 $ 77,400,000 March, 1996 $ 81,000,000 April, 1996 $ 83,100,000 May, 1996 $ 86,000,000 June, 1996 $ 85,100,000 July, 1996 $ 88,700,000 August, 1996 $ 91,500,000 September, 1996 $100,000,000 October, 1996 $108,500,000 November, 1996 $110,000,000 December, 1996 $ 86,500,000 January, 1997 $ 59,700,000 February, 1997 $ 77,400,000 March, 1997 $ 82,000,000 April, 1997 $ 85,000,000 May, 1997 $ 85,000,000 June, 1997 $ 86,500,000 July, 1997 $ 90,500,000 August, 1997 $ 96,000,000 September, 1997 $105,000,000 October, 1997 $110,000,000 November, 1997 $110,000,000 December, 1997 $ 86,500,000 January, 1998 $ 60,300,000 February, 1998 $ 77,400,000 March, 1998 $ 82,000,000 10.8 Interest Coverage Ratio. As of each date set forth below, the Borrower will not permit the ratio of (a) the cumulative EBITDA for the period commencing ei- ther (i) January 28, 1996 in the case of dates in the fiscal year ended January 25, 1997 and (ii) January 26, 1997 in the case of dates in the fiscal year ended Janu- ary 31, 1998, and ending on such date to (b) the cumula- tive interest expense for such period, to be less than the amount set forth below opposite such date: Period Ended Required Ratio April 27, 1996 1.0 July 27, 1996 1.2 October 26, 1996 1.1 January 25, 1997 1.5 April 26, 1997 1.0 July 26, 1997 1.4 October 25, 1997 1.2 January 31, 1998 1.6 14. Amendment to Section 13.1. Subsection (c) of Sec- tion 13.1 is amended by deleting the proviso at the end thereof. 15. Effectiveness of Amendment. The amendments to be made pursuant to Sections 2 through 14 of this Amendment shall become effective upon the later to occur of (i) the Adminis- trative Agent shall have received counterparts of this Amend- ment signed by the Banks and the Borrower and (ii) the Borrower shall have paid to the Administrative Agent for the pro rata account of each Bank in accordance with its Commit- ment Percentage an amendment fee of $412,500. 16. Matters Relating to Trade Letter of Credit. The Banks and the Borrower agree and acknowledge that the Admin- istrative Agent shall (i) extend until a date no later than May 30, 1997 the expiration date of that certain Letter of Credit issued on May 8, 1995 for the benefit of a representa- tive of the Borrower's trade creditors and (ii) permit the expiration date of the subordinate lien on the Henderson Property in favor of such representative to be extended until a date no later than May 30, 1997, in each case pursuant to documentation (including, without limitation, agreements of such representative of the Borrower's trade creditors and amendments to the existing subordination agreement between such representative and the Facility Agents) and subject to conditions acceptable to the Administrative Agent in its sole discretion; provided that the Borrower satisfies all condi- tions in Article 12 of the Credit Agreement at the time of such extension of such Letter of Credit and at the time of consummation of the transaction described in clause (ii) hereof. 17. Matters Relating to Administrative Reserve. The Banks and the Borrower agree and acknowledge that the Admin- istrative Agent has established an administrative reserve to Eligible Inventory in the amount of five percent (5%) pursu- ant to the last sentence of the definition of Eligible Inven- tory. The parties hereto acknowledge and agree that such re- serve shall not be terminated or reduced without the consent of each of the Banks. 18. Representations and Warranties; No Default. The Borrower hereby represents and warrants to the Banks, the Facility Agent and the Administrative Agent as follows: (a) Each of the representations and warran- ties contained in the Credit Agreement, the other Loan Documents or any in any document or instrument delivered pursuant to or in connection with the Credit Agreement are true at and as of the date hereof with the same effect as if made at and as of the date hereof (except to the extent of changes resulting directly from the transactions contem- plated or permitted by the Credit Agreement and the other Loan Documents and changes occurring in the ordinary course of business that singly or in the aggregate are not materially adverse to the Banks or the business or financial affairs of the Bor- rower, and to the extent that such representations and warranties relate expressly to an earlier date). No event has occurred and is continuing on the date hereof that constitutes a Default or Event of Default. (b) The execution and delivery by the Bor- rower of this Amendment and the performance by the Borrower of its obligations hereunder in accordance with its terms: (i) are within the corporate powers of the Borrower, have been duly authorized by all necessary corporate action, and do not and will not contravene any provision of law applicable to the Borrower; (ii) do not require any approval, con- sent, order, authorization, or license by, or giving notice to, or taking any other action with respect to any governmental or regulatory authority, under any provisions of any laws or any governmental rules, regulations, orders or decrees applicable to and binding upon the Borrower, except such as have been obtained, and are in full force and effect and adequate for their purposes; (iii) do not require any filing, recording or enrolling of any instrument with any governmental or regulatory authority of any political subdivision thereof except such as have been obtained and are in full force and effect and adequate for their purposes; (iv) do not contravene the terms of the certificate of incorporation, by-laws or other corporate governance documents; (v) will not conflict with or result in any breach or contravention of or the creation of any Lien under any indenture, agreement, lease, instrument or undertaking to which the Borrower is a party or by which any of its properties, assets or rights is or will become bound or affected; and (vi) is and will be a valid and legally binding obligation of the Borrower and is and will be enforceable in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or simi- lar laws relating to or affecting generally the enforcement of creditors' rights. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Ad- ministrative Agent, the Facility Agents or any Bank under the Credit Agreement or any of the other Loan Documents. Without limiting the generality of the foregoing, the Borrower agrees and acknowledges that, except as expressly set forth herein, this Amendment shall not constitute a waiver by the Banks, the Facility Agents or the Administrative Agent of any condition, provision or covenant in the Credit Agreement or any Loan Document, including, without limitation, any condition to borrowings and shall not in any way preclude the Banks, the Facility Agents or the Administrative Agent from exercising all rights, powers and remedies under and in respect of the Credit Agreement, the Loan Documents or otherwise (d) The Borrower shall reimburse the Administra- tive Agentand the Banks for all of their expenses, including, without limitation, attorneys' fees and expenses, incurred in connection with the negotiation, preparation, execution, and administration of the provisions, of this Amendment and the other documents and instruments contemplated hereby. 19. Governing Law. This Amendment shall be deemed to be a contract under the laws of the State of New York and shall for all purposes be construed in accordance with and governed by the laws of said State. 20. Miscellaneous. The captions in this Amendment are for convenience of reference only and shall not define or limit the provisions hereof. This Amendment may be executed in separate counterparts, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Amendment, it shall not be necessary to produce or account for more than one such counterpart. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the day and year first hereinabove set forth. BANKS THE FIRST NATIONAL BANK OF BOSTON as a Bank and as Administrative Agent By:/s/ Elizabeth A. Ratto Title:Vice President THE CIT GROUP/BUSINESS CREDIT, INC. By:/s/ Cyril Prince Title:Vice President BANKAMERICA BUSINESS, CREDIT, INC., By:/s/ Illegible Title:Vice President CONGRESS FINANCIAL CORPORATION (NEW ENGLAND) By:/s/ Kathleen J. Merritt Title:Assistant Vice President NATWEST BANK N.A. By:/s/ Therese Earley Title:Vice President LASALLE BUSINESS CREDIT, INC. By:/s/ J.K. Williams Title:Vice President SANWA BUSINESS CREDIT CORPORATION By:/s/ Illegible Title:Vice President BORROWER ROSE'S STORES, INC. By:/s/ Jeanette Peters Title:CFO and Senior Vice President EX-27 4
5 This schedule contains summary financial information extracted from Rose's Stores, Inc., Form 10K for the thirty-nine weeks ended January 27, 1996, and is qualified in its entirety by reference to such financial statements. 0000085149 ROSE'S STORES, INC. 1,000 9-MOS JAN-27-1996 JAN-27-1996 593 0 7,607 398 153,190 165,698 5,277 155 171,244 90,532 0 0 0 35,000 5,560 171,244 524,397 528,181 404,120 517,466 0 0 5,231 5,484 1,083 4,401 0 0 0 4,401 .50 .50 The Company emerged from Chapter 11 on April 28, 1995. The results included above are for thirty-nine weeks and represent those of the successor company.
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