-----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, HBA2CtpASTIMaMrE/F8NRlA7O7fskdwhTLZ0b+Jp8406gxPjI2waRI9s9D/EhOYk ftoVL2gGv33V50LuR5+1qg== 0000085149-96-000012.txt : 19960911 0000085149-96-000012.hdr.sgml : 19960911 ACCESSION NUMBER: 0000085149-96-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960727 FILED AS OF DATE: 19960910 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00631 FILM NUMBER: 96627995 BUSINESS ADDRESS: STREET 1: PO DRAWER 947 STREET 2: 218 S GARNETT ST CITY: HENDERSON STATE: NC ZIP: 27536 BUSINESS PHONE: 9194302600 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 27, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-631 ROSE'S STORES, INC. Incorporated Under the Laws of Delaware I.R.S. Employer Identification No. 56-0382475 P. H. Rose Building 218 South Garnett Street Henderson, North Carolina 27536 Telephone No. 919/430-2600 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. As of August 1, 1996, of the 10,000,000 shares of common stock delivered to First Union National Bank of North Carolina ("FUNB"), as Escrow Agent, pursuant to the Modified and Restated First Amended Joint Plan of Reorganization, 8,332,078 of such shares of common stock are outstanding. The remaining 675,841 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 8,624,622 shares of common stock will be outstanding. If all pending claims are resolved in accordance with the Company's records, approximately 8,607,599 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 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 ROSE'S STORES, INC. PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements (Amounts in thousands except per share amounts) The following summary of financial information of Rose's Stores, Inc. (the "Company"), which is unaudited, reflects all adjustments which are, in the opinion of management, necessary to reflect a fair statement of the information presented. Beginning in May 1995, the statements of operations and cash flows reflect the application of Fresh-Start accounting as described in the Company's annual report on Form 10-K for the year ended January 27, 1996, and therefore are not comparable to the prior year. The balance sheet reflects the application of Fresh Start accounting beginning April 1995. ROSE'S STORES, INC. STATEMENTS OF OPERATIONS (Unaudited) (Amounts in Thousands Except Per Share Amounts)
For the Thirteen Weeks Ended July 27, 1996 July 29, 1995 Revenue: Gross sales $ 165,844 168,488 Leased department sales 5,679 5,764 Net sales 160,165 162,724 Leased department income 1,160 1,178 Total revenue 161,325 163,902 Costs and Expenses: Cost of sales 123,089 122,471 Selling, general and administrative 39,579(a) 40,596 Depreciation and amortization (616) (791) Interest 1,979 1,718 Total costs and expenses 164,031 163,994 Net Earnings (Loss) $ (2,706) (92) Net Earnings (Loss) Per Share $ (.31) (.01) Weighted Average Shares 8,625 8,625
(a) Included in 1996 selling, general and administrative costs is a second quarter write-off of $914 of prepaid bank fees related to the former financing agreement (see "ITEM 2. Management's Discussion and Analysis). See notes to financial statements ROSE'S STORES, INC. STATEMENTS OF OPERATIONS (Unaudited) (Amounts in Thousands Except Per Share Amounts)
Successor Successor Predecessor Twenty-Six Thirteen Thirteen Weeks Ended Weeks Ended Weeks Ended July 27, 1996 July 29, 1995 April 29, 1995 Revenue: Gross sales $ 320,270 168,488 159,407 Leased department sales 9,960 5,764 5,117 Net sales 310,310 162,724 154,290 Leased department income 2,240 1,178 1,114 Total revenue 312,550 163,902 155,404 Costs and Expenses: Cost of sales 236,129 122,471 116,838 Selling, general and administrative 76,398(a) 40,596 35,486 Depreciation and amortization (1,288) (791) 1,812 Interest 3,365 1,718 726 Total costs and expenses 314,604 163,994 154,862 Earnings (Loss) before reorganization benefit (expense) (2,054) (92) 542 Reorganization benefit (expense) (Note 1) - - (3,847) Fresh start revaluation - - (17,432) Loss before extraordinary item (2,054) (92) (20,737) Extraordinary item - gain on debt discharge - - 90,924 Net earnings (loss) (Note 2) $ (2,054) (92) 70,187 Earnings (Loss) per share before extraordinary item (Note 3) $ (.24) (.01) (1.11) Net Earnings (Loss) per share (Note 3) $ (.24) (.01) 3.74 Weighted average shares (Note 3) 8,625 8,625 18,758
(a) Included in 1996 selling, general and administrative costs is a second quarter write-off of $914 of prepaid bank fees related to the former financing agreement (see "ITEM 2. Management's Discussion and Analysis). See notes to financial statements PAGE ROSE'S STORES, INC. BALANCE SHEETS (Amounts in thousands)
July 27, January 27, July 29, 1996 1996 1995 (Unaudited) (Audited) (Unaudited) Assets Current Assets Cash and cash equivalents $ 232 593 641 Accounts receivable 10,681 7,209 10,646 Inventories 179,848 153,190 178,551 Other current assets 4,174 4,706 6,661 Total current assets 194,935 165,698 196,499 Property and Equipment, at cost, less accumulated depreciation and amortization 7,066 5,122 1,566 Other Assets 565 424 - $ 202,566 171,244 198,065 Liabilities and Stockholders' Equity Current Liabilities Short-term debt $ 66,546 33,673 72,094 Bank drafts outstanding - 9,530 3,498 Accounts payable 36,761 23,845 26,717 Accrued salaries and wages 6,610 7,456 7,169 Pre-petition liabilities 4,554 4,632 2,980 Other current liabilities 11,701 11,396 12,576 Total current liabilities 126,172 90,532 125,034 Excess of Net Assets Over Reorganization Value, Net of Amortization 23,621 25,371 31,221 Reserve for Income Taxes 12,673 12,673 - Deferred Income 727 974 1,312 Other Liabilities 867 1,134 5,590 Stockholders' Equity Common Stock, authorized 50,000 shares; issued 8,332 at 7/27/96; 8,158 at 1/27/96 (Note 1) 35,000 35,000 35,000 Preferred Stock, authorized 10,000 shares; none issued - - - Paid-in capital 1,159 1,159 - Retained earnings 2,347 4,401 (92) Total stockholders' equity 38,506 40,560 34,908 $ 202,566 171,244 198,065
See notes to financial statements PAGE ROSE'S STORES, INC. STATEMENTS OF CASH FLOWS (Unaudited) (Amounts in thousands)
Successor Successor Predecessor Twenty-Six Thirteen Thirteen Weeks Ended Weeks Ended Weeks Ended July 27, 1996 July 29, 1995 April 29, 1995 Cash flows from operating activities: Net earnings (loss) $ (2,054) (92) 70,187 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization (1,288) (791) 1,812 (Gain) loss on disposal of property and equipment (2) (1) (1) LIFO expense (credit) - - (364) Write-off of prepaid bank fees 914 - - Fresh-Start revaluation and debt discharge - - (73,492) Cash provided by (used in) assets and liabilities: (Increase) decrease in accounts receivable (3,472) (1,411) (630) (Increase) decrease in inventories (26,658) 6,578 (40,291) (Increase) decrease in other current and non-current assets (523) 1,555 (3,620) Increase (decrease) in accounts payable 12,916 (10,925) 14,361 Increase (decrease) in other liabilities (487) 579 (2,142) Increase (decrease) in reserve for store closings (21) (3,401) (1,108) Increase (decrease) in deferred income (247) (169) (201) Increase (decrease) in accumulated PBO (200) 30 7 Net cash provided by (used in) operating activities (21,122) (8,048) (35,482) Cash flows from investing activities: Purchases of property and equipment (2,339) (1,575) (510) Proceeds from disposal of property and equipment 2 1 5 Net cash used in investing activities (2,337) (1,574) (505) Cash flows from financing activities: Net activity on line of credit 32,873 13,440 58,654 Net activity on debtor-in-possession facility - - (600) Payments on pre-petition secured debt - - (26,423) Payments of unsecured priority and administrative claims (78) (1,372) (1,593) Principal payments on capital leases (167) (163) (281) Increase (decrease) in bank drafts outstanding (9,530) (2,264) 5,502 Net cash provided by (used in) financing activities 23,098 9,641 35,259 Net increase (decrease) in cash (361) 19 (728) Cash and cash equivalents at beginning of period 593 622 1,350 Cash and cash equivalents at end of period $ 232 641 622 Supplemental disclosure of additional non-cash investing and financing activities: Retirement of net book value of assets in reserve for store closings $ - - 623
See notes to financial statements PAGE Notes to Financial Statements: (1) 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"). 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 "Effective Date"), the Plan became effective. The periods and dates prior to the Company's emergence from Chapter 11 are referred to as those of the predecessor company (the "Predecessor"), while the period and dates subsequent to its emergence are referred to as those of the successor company (the "Successor"). Since emergence, distributions of the common stock, no par value, of the Company (the "Common Stock") have been made to holders of Allowed Class 3 Unsecured Claims (as defined in the Plan) in accordance with the provisions of the Plan. As a result of distributions of the Common Stock pursuant to the Plan, as of August 1, 1996, the Company had 8,332 shares of Common Stock outstanding of the 10,000 shares of Common Stock which were delivered pursuant to the Plan on the Effective Date to First Union National Bank of North Carolina ("FUNB") as escrow agent. In addition, as of August 1, 1996, and pursuant to the provisions of the Plan, 992 shares have reverted to the Company from escrow and have been retired. The remaining 676 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 remained unresolved at August 1, 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 293 additional shares of Common Stock will be issued and outstanding, and there will be a total of approximately 8,625 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 276 additional shares of Common Stock will be issued, and there will be a total of approximately 8,608 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 (Continued): (1) Continued On the Effective Date, all shares of the Company's pre-emergence Voting Common Stock and Non-Voting Class B Stock were cancelled and the record owners of such stock as of such date received 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 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 exercise price was adjusted to $12.01 on April 28, 1996, the first anniversary of the Effective Date, and will be adjusted on the second and third anniversaries of the Effective Date to reflect adjustments to the total of allowed and disputed claims of the Company's unsecured creditors. The exercise price 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. Under the New Equity Compensation Plan, nonqualified stock options to purchase 313 shares of Common Stock were outstanding on July 27, 1996. The option price per share is $2.875 for one half of the shares and $5.750 for the remainder of the shares issuable upon the exercise of such options. The options vest over a three year period (unless earlier vested by reason of certain acceleration events, including a change of control of the Company). One half of the options expire five years from the date of issuance and the remainder seven years from the date of issuance. The exercise of outstanding stock options and warrants would not result in a dilution of earnings per share and are excluded from the calculation of earnings per share. (2) If the Company had emerged from Chapter 11 at the beginning of fiscal 1995, the application of Fresh Start accounting would have resulted in net earnings on a pro forma basis of approximately $498 for the twenty- six weeks ended July 29, 1995. (3) Accounts receivable is net of an allowance for doubtful accounts of $289 as of July 27, 1996; $398 as of January 27, 1996 and $2,571 as of July 29, 1995. (4) The operating results presented herein are not necessarily indicative of the operating results for a full year due to seasonal factors, among other reasons. (5) 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 accordance with the provisions of Statement of Postion 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under Notes to Financial Statements (Continued): the Bankruptcy Code", and to reduce noncurrent assets below their fair values for the excess of the fair values of assets over the reorganization value. The extraordinary gain of $90,924 represents the gain on debt discharge for liabilities subject to settlement under the Plan. (6) LIFO expense (credit) is included as an adjustment to reconcile net loss to net cash used in operating activities in the statements of cash flows because LIFO expense (credit) is a noncash item included in cost of sales to adjust inventories stated on a FIFO basis to a LIFO basis. (7) Certain information concerning benefits (expenses) resulting from the Company's reorganization are as follows:
Successor Successor Predecessor Twenty-six Thirteen Thirteen Weeks Ended Weeks Ended Weeks Ended July 27, 1996 July 29, 1995 April 29, 1995 DIP financing fees, amortization and expenses $ - - (1,342) Estimated professional fees - - (2,318) Other reorganization costs and expenses - - (187) TOTAL REORGANIZATION EXPENSE $ - - (3,847)
(8) Certain reclassifications were made to 1995 balances to conform to the 1996 presentation. These reclassifications have no effect on stockholders' equity. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands) General On May 1, 1995, the Company announced that it had satisfied all conditions required under its plan of reorganization and had emerged from Chapter 11 of the United States Bankruptcy Code on April 28, 1995 (the "Effective Date"). In accordance with SOP 90-7, the Company adopted Fresh Start accounting. Under Fresh Start accounting, a new reporting entity was 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 amortization related to property and equipment; and created a deferred credit, excess of net assets over reorganization value, which is being amortized over 8 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. To facilitate a better comparison of the Company's operating results for the periods presented, the following discussion of the results of operations is presented on a pro forma basis (as described below) for the twenty-six weeks ended July 29, 1995. The combined historical statement of operations for the thirteen weeks ended April 29, 1995 (Predecessor) and thirteen weeks ended July 29, 1995 (Successor), are not included in the discussion due to the lack of comparability caused by the adoption of Fresh Start accounting at the end of the first quarter of 1995. Certain items in the Successor's pro forma statement of operations are not affected by Fresh Start adjustments and are comparable to the historical combined results of the Predecessor and the Successor. The pro forma statement of operations gives 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 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 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; the accrual of additional shrinkage; and the recording of an appropriate income tax expense. Pro Forma Results of Operations (Unaudited) The following table sets forth the results of operations for the thirteen and twenty-six weeks ended July 27, 1996, and July 29, 1995: (Amounts in thousands, except per share amounts.)
Thirteen Weeks Ended Twenty-six Weeks Ended July 27, 1996 July 29, 1995 July 27, 1996 July 29, 1995 Historical Pro Forma Historical Pro Forma Revenue: Gross sales $ 165,844 168,488 320,270 327,895 (a) Leased department sales 5,679 5,764 9,960 10,881 (a) Net sales 160,165 162,724 310,310 317,014 (a) Leased department income 1,160 1,178 2,240 2,292 (a) Total revenue 161,325 163,902 312,550 319,306 Costs and Expenses: Cost of sales 123,089 122,471 236,129 238,078 Selling, general and administrative 39,579 40,596 76,398 78,601 Depreciation and amortization (616) (791) (1,288) (1,591) Interest 1,979 1,718 3,365 3,414 Total costs and expenses 164,031 163,994 314,604 318,502 Earnings (Loss) Before Income Taxes (2,706) (92) (2,054) 804 Income taxes - (34) - 306 Net Earnings (Loss) (2,706) (58) (2,054) 498 Earnings (Loss) Per Share (.31)(b) (.01)(b) (.24)(b) 0.06 (b) Weighted Average Shares 8,625 (b) 8,625 (b) 8,625 (b) 8,625 (b)
(a) The pro forma amounts represent the combination of the Successor's historical amounts with the Predecessor's historical amounts. See statements of operations included in the historical financial statements. (b) The number of shares used in the earnings (loss) per share calculations is 8,625, the number of shares that will be issued and outstanding if all pending claims are resolved adversely to the Company. If all pending claims are resolved in accordance with the Company's records, 8,608 shares will be issued and outstanding. Currently, 8,332 shares are 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. Revenue The Company reported sales for the second quarter of 1996 of $165,844, a decrease of $2,644, or 1.6%, from the second quarter of 1995, and year-to- date sales were $320,270, a decrease of $7,625, or 2.3%, from the comparable period of the prior year. The decline in sales was primarily attributable to a decline in sales on a comparable store basis of .5% for the quarter and 1.3% year-to-date, together with the decrease in the number of stores (105 in 1996 as compared to 106 in 1995). Costs and Expenses Cost of sales as a percent of net sales was 76.9% for the second quarter and 75.3% for the comparable period of the prior year. Year-to-date cost of sales as a percent of net sales was 76.1% for 1996 and 75.1% (pro forma) for the comparable period of the prior year. The increase in the cost of sales as a percent of net sales for the quarter of 1.6% was due primarily to an increase in promotional markdowns (1.0%) and to a lower initial markon (.5%). The increase in the year-to-date cost of sales as a percent of net sales of 1.0% was also due to an increase in promotional markdowns. Selling, general and administrative expenses ("SG&A") as a percent of net sales for the second quarter were 24.7% in 1996 and 24.9% for the comparable quarter of the prior year. Year-to-date SG&A expenses as a percentage of sales were 24.6% in 1996 and 24.8% in 1995 (pro forma). The decrease was due primarily to additional realignment of corporate and administrative costs during the first quarter of 1996, which were offset by a second quarter write- off of $914 related to a former financing facility (see "Liquidity and Capital Resources"). On a pro forma basis, reorganization costs for 1995 would not have been incurred. The actual reorganization costs in 1995 of $3,847 included professional fees, DIP fees and expense amortizations, and other expenditures related to the Chapter 11 filing. No reorganization costs were incurred subsequent to the first quarter of 1995. The fresh start revaluation of $17,432 reflected the net expense to record assets at their fair values and liabilities at their present values in accordance 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. The extraordinary gain of $90,924 represented the gain on debt discharge for liabilities subject to settlement under reorganization proceedings. Liquidity and Capital Resources On May 23, 1996, the Company entered into a new financing arrangement with Foothill Capital, Inc. and PPM Finance, Inc., as co-agents. The financing is a $120,000 three-year revolving credit facility (the "Credit Facility") with a letter of credit sublimit in the aggregate principal amount of $40,000. The Credit Facility is secured by a perfected first priority lien and security interest in all of the assets of the Company and replaced the Company's former revolving credit agreement which would have expired in two years. As a result of closing the Credit Facility, $914 of prepaid bank fees related to the former financing agreement were written off in the second quarter of 1996 and included in SG&A. The interest rate on the direct borrowings under the Credit Facility is the prime rate plus 1.375%, with a minimum rate of 7% payable monthly. The fee on outstanding letters of credit is 1.5% payable monthly. Although there are no compensating balances required, the Company is required to pay a fee of .375% per annum on the average unused portion of the Credit Facility. Borrowing availability is based upon certain eligible inventory times a borrowing base percentage that varies by month. Under the Credit Facility, trade suppliers which extend credit to the Company will continue to be supported by a $5,000 letter of credit and a subordinated lien of $15,000 in the real estate properties of the Company which expire April 29, 1997. The Credit Facility includes certain financial covenants and financial maintenance tests, including those related to minimum working capital and current ratios, capital expenditures limitations, maximum total liabilities to tangible net worth, and minimum tangible net worth which are measured quarterly. The Company was in compliance with these covenants as of July 27, 1996. In addition, there is a requirement that cumulative net losses after May 31, 1996 shall not exceed $10,000. The Credit Facility also includes restrictions on the incurrence of additional liens and indebtedness, a prohibition on paying dividends, and, except under certain conditions, prepayment penalties. As of August 31, 1996, under the Credit Facility, the Company had $82,466 outstanding in short-term borrowings, $13,550 in outstanding letters of credit and unused availability of $13,551. The Company's management believes that the Company's current financing arrangement and cash flows are adequate to meet its liquidity needs. The Company invested $1,479 in cash for property and equipment in the second quarter of 1996 compared to $1,575 invested in the second quarter of 1995. Year-to-date cash investment in property and equipment was $2,339 in 1996 compared to $2,085 in 1995 (combined Successor and Predecessor). The 1996 expenditures were primarily for store remodeling and new computer software. The 1995 expenditures were primarily for store improvements, new softline fixtures, and new computer software. Cash used in operating activities, primarily to fund inventory levels, was $8,163 in the second quarter of 1996, and $21,122 year-to-date. Cash used in operating activities during 1995 was $8,048 in the second quarter and $43,530 year-to-date (combined Successor and Predecessor). Subsequent Event On August 20, 1996, the Company and Fred's, Inc. announced that the previously announced merger agreement providing for the acquisition of the Company by Fred's, Inc., had been terminated. As a result of such termination, prepaid costs relating to the proposed merger of approximately $485 as of July 27, 1996, as well as additional costs incurred subsequent to July 27, 1996, will be written-off during the Company's third quarter. PART II. OTHER INFORMATION ITEM 6: Exhibits and Reports on Form 8-K (a) 10.1 Termination Agreement dated as of August 20, 1996 between the Company, Fred's, Inc., and FR Acquistion Corp. (b) The Company filed the following reports on Form 8-K during the quarter covered by this report: (i) Report on Form 8-K dated May 8, 1996, reporting under Item 5 the definitive merger agreement regarding the acquisition of the Company by Fred's, Inc. (ii) Report on Form 8-K dated August 20, 1996, reporting under Item 5 the termination of the merger agreement providing for the acquisition of the Company by Fred's, Inc. PAGE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROSE'S STORES, INC. Date: September 10, 1996 By /s/ R. Edward Anderson R. Edward Anderson President, Chief Executive Officer Date: September 10, 1996 By /s/ Jeanette R. Peters Jeanette R. Peters Senior Vice President, Chief Financial Officer EX-10 2 TERMINATION AGREEMENT TERMINATION AGREEMENT, dated as of August 20, 1996 (this "Agreement"), among FRED'S, INC., a Tennessee corporation ("Fred's"), FR ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Fred's ("Sub"), and ROSE'S STORES, INC., a Delaware corporation ("Rose's"). W I T N E S S E T H: WHEREAS, Fred's, Sub and Rose's are parties to an agreement and plan of merger, dated as of May 7, 1996 (the "Merger Agreement"), providing, among other things, for the merger of Sub and Rose's (the "Merger"); and WHEREAS, the respective Boards of Directors of Fred's and Rose's have determined that the Merger Agreement should be terminated and that the Merger should be abandoned; NOW, THEREFORE, in consideration of the premises, representations, warranties and agreements herein contained, the parties hereto agree as follows: 1. Termination of Merger Agreement. The Merger Agreement is hereby terminated pursuant to Section 7.1(a) thereof and, notwithstanding the provisions thereof to the contrary, the Merger Agreement is of no further force or effect. 2. Release. Each party hereto hereby releases (for purposes of this Section 2 and in such capacity, the "Releasor") and discharges the other parties hereto, their respective directors, officers, employees, agents, affiliates and professional advisers (for purposes of this Section 2 and in such capacity, the "Releasees") from all actions, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims and demands whatsoever, whether in tort, in contract, or otherwise, which against the Releasees, the Releasor ever had, now has, or hereafter can, shall or may have for, upon or by reason of any matter, cause or thing whatsoever from the beginning of the world to the day of the date of this Agreement; provided, however, that nothing in this Section 2, shall release a party from its obligations contained in this Agreement. 3. Standstill Agreement. Each of the parties hereto agrees that, without the prior written consent of the Board of Directors of the other parties, for a period of five years from the date hereof, neither it nor any Affiliate (as that term is defined in Rule 405 under the Securities Act of 1933) of it (regardless of whether such person or entity is an Affiliate of it on the date hereof) will (a) acquire, offer to acquire or agree to acquire, directly or indirectly, by purchase or otherwise, any voting securities or direct or indirect rights or options to acquire any voting securities of the other parties, (b) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" to vote (as such terms are used in the proxy rules of the Securities and Exchange Commission), or seek to advise or influence any person or entity with respect to the voting of any voting securities of the other parties, (c) form, join or in any way participate in a "group" within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 with respect to any voting securities of the other parties or (d) otherwise act, alone or in concert with others, to seek to control or influence the management, Board of Directors or policies of the other parties; provided, however, that this Section 3 shall not be deemed to prohibit any transactions solely between Fred's and Sub. 4. Confidentiality and Non-Solicitation. (a) Except as and to the extent required by law, each of the parties hereto shall not disclose or use, and it shall cause its representatives not to disclose or use, any Confidential Information (as defined herein) with respect to the other parties furnished at any time or in any manner by the other parties or their respective representatives in connection with the Merger Agreement. For purposes of this Section 4(a), "Confidential Information" means any information about either of Fred's or Rose's stamped "confidential" or identified in writing as such to the other by the affected party; provided that it does not include information which the party which seeks non- confidential treatment shall demonstrate (i) is generally available to or known by the public other than as a result of improper disclosure by such party or (ii) is obtained by such party from a source other than the other party, provided that such source was not bound by a duty of confidentiality to the other party or another party with respect to such information. Each of Fred's and Rose's shall promptly return to the other any Confidential Information in its possession concerning the other party. (b) For a period of one year from and after the date hereof, neither Fred's nor Rose's shall solicit or hire any employee of the other whose salary at the termination of employment with the other was in excess of $80,000. 5. Public Announcements. The joint press release relating to the termination of the Merger Agreement is annexed hereto as Exhibit 1, which joint press release shall be issued by Fred's and Rose's as soon as practicable after the execution hereof. None of the parties hereto shall issue any other press release or otherwise make public announcements inconsistent with such press release with respect to the Merger, the termination of the Merger Agreement or the other transactions contemplated by the Merger Agreement, this Agreement or the other parties hereto, except (i) as may be required by law or by obligations pursuant to any listing agreement with or rules of the Nasdaq Stock Market and (ii) this Agreement may be filed with reports filed with the Securities and Exchange Commission and with the Nasdaq Stock Market. 6. Representations. Each of the parties hereto represents and warrants to the others as follows: (a) All necessary corporate proceedings of such party have been duly taken to authorize the execution, delivery and performance of this Agreement by such party. (b) This Agreement has been duly authorized, executed and delivered by such party, is the legal, valid, and binding obligation of such party and is enforceable as to it in accordance with its terms. (c) No consent, authorization, approval, order, license, certificate or permit of or from, or declaration or filing with, any governmental authority or any court or other tribunal is required by such party for the execution, delivery or performance of this Agreement by such party. (d) No consent of any party to any contract, agreement, instrument, lease, license, arrangement or understanding to which such party is a party, or to which any of its properties or assets are subject, is required for the execution, delivery or performance of this Agreement; and the execution, delivery and performance of this Agreement will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement or understanding, or violate or result in a breach of any term of the certificate of incorporation (or other charter document) or by-laws of such party, or violate, result in a breach of, or conflict with, any law, rule, regulation, order, judgment or decree binding on such party or to which any of its operations, business, properties, or assets are subject. 7. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 8. Separability. If any provision of this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 9. Headings. The headings in this Agreement are solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 10. Counterparts; Governing Law. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. It shall be governed by and construed in accordance with the laws of Tennessee, without giving effect to rules governing the conflict of laws. 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when delivered personally, one day after being delivered to an overnight courier or when telecopied (with a confirmation copy sent by overnight courier) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Rose's to: R. Edward Anderson Rose's Stores, Inc. P.H. Rose Building 218 South Garnett Street Henderson, North Carolina 27536 Facsimile: 919/430-2003 with a copy to: Henry O. Smith III, Esq. Proskauer Rose Goetz & Mendelsohn LLP 1585 Broadway New York, New York 10036-8299 Facsimile: 212/969-2900 if to Fred's or Sub to: Michael J. Hayes Fred's, Inc. 4300 New Getwell Road Memphis, Tennessee 38118 Facsimile: 901/362-3733 ext. 3777 with a copy to: Samuel D. Chafetz, Esq. Waring Cox, PLC 50 North Front Street, Suite 1300 Memphis, Tennessee 38103 Facsimile: 901/543-8036 12. Entire Agreement; No Third Party Beneficiaries. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, including the Merger Agreement. This Agreement is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their duly authorized representatives as of the date first written above. FRED'S, INC. ROSE'S STORES, INC. By /s/ Michael J. Hayes By /s/ R. Edward Anderson Michael J. Hayes R. Edward Anderson President and Chairman, President and Chief Executive Officer Chief Executive Officer FR ACQUISITION CORP. By /s/ Michael J. Hayes Michael J. Hayes President and Chief Executive Officer EXHIBIT 1 For Immediate Release ROSE'S STORES, INC. AND FRED'S, INC. ANNOUNCE TERMINATION OF MERGER AGREEMENT Henderson, North Carolina and Memphis, Tennessee--August 20, 1996...Rose's Stores, Inc. (Nasdaq: "RSTO") and Fred's, Inc. (Nasdaq: "FRED") announced today that the previously announced merger agreement providing for the acquisition of Rose's Stores, Inc. by Fred's, Inc. has been terminated. Rose's operates 105 stores and Fred's operates 207 stores, in the southeastern United States. FOR: Fred's, Inc. FOR: Rose's Stores, Inc. Investor Relations and Press Contact: Investor Relations and Press Contact: Name: Bruce D. Smith Name: G. Templeton Blackburn II Company: Fred's, Inc. Company: Rose's Stores, Inc. Phone: (910)365-8880 Phone: (919) 430-2019 EX-27 3
5 This schedule contains summary financial information extracted from Rose's Stores, Inc., Form 10-Q for the quarter ended July 27, 1996, and is qualified in its entirety by reference to such financial statements. 0000085149 ROSE'S STORES, INC. 1,000 6-MOS JAN-25-1997 JUL-27-1996 232 0 10,970 289 179,848 194,935 7,683 617 202,566 126,172 0 0 0 35,000 3,506 202,566 310,310 312,550 236,129 236,129 (1,288) 0 3,365 (2,054) 0 (2,054) 0 0 0 (2,054) (.24) (.24)
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