-----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, Fg7RgvycmFrInI9fMOS/C/lW1i8pE+in+eMDsNGJL1oX0empsaSUJGYY2xsAbDOV M+UiJ93aG2Uv3/V8XRMHsg== 0000085149-97-000001.txt : 19970428 0000085149-97-000001.hdr.sgml : 19970428 ACCESSION NUMBER: 0000085149-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970125 FILED AS OF DATE: 19970425 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: 97587075 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 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended January 25, 1997 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 (I.R.S. Employer incorporation or organization) Identification Number) 218 S. Garnett Street Henderson, NC 27536 (Address and zip code of principal executive offices) 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 reports 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 March 12, 1997, 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, the Company has 8,571,964 shares of common stock outstanding. The remaining 430,909 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 8,660,179 shares of common stock will be outstanding. If all pending claims are resolved in accordance with the Company's records, approximately 8,613,609 shares of common stock will be outstanding. 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 31, 1997, the aggregate market value of common stock held by non-affiliates of the Company (assuming all pending claims are resolved adverse- ly to the Company) was approximately $15,300,000. DOCUMENTS INCORPORATED BY REFERENCE Incorporated Document Location in Form 10-K Portions of Registrant's definitive Part III, Items 10, 11, Proxy Statement to be filed in 12 and 13 connection with the Annual Meeting of Shareholders to be held June 26, 1997. 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 cent" 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 cent 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, Registrant's business has evolved from a chain of 5, 10 & 25 cent 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 to the Company's Financial Statements included elsewhere herein. (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 did not open or close any stores. Rose's has closed one store subsequent to year-end and plans to open two new stores in 1997. The new stores will average 26,000 square feet. Registrant currently 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 including the leased 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. Store sales are directly affected by general economic conditions in the areas where the stores are located, as well as by consumer spending and disposable income. Merchandising Inventories are purchased in two principal ways. The Company's buyers purchase and distribute merchandise to the various stores, and to a lesser extent the store managers purchase merchandise for their individual stores from listings and sources approved by the Company's 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 material adverse effect on the Company. Rose's does not engage in any material research activities and has no plans for new product lines. The Company has an agreement with an independent contractor to sell shoes within the Company's stores. The Company receives a percentage of the sales under the agreement which expires July 30, 1998. Distribution Approximately 15% of the Company's 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 Christmas season is the period of highest sales volume. During the past fiscal year, a total of approximately 23% of the year's gross sales were made in the months of November and December combined. Competition Rose's business is intensely competitive. Rose's Stores com- pete directly with chains such as Wal-Mart, Kmart, Target, and Hills, and with independently owned stores. At the end of the fiscal year, 91% of Rose's Stores faced competition from these stores. Wal-Mart and Kmart and more recently Target and Hills have been opening or expanding stores in the areas in which Rose's stores are located. Of the Company's 105 stores, 14 faced new competi- tors' openings or expansions in 1996, compared to 28 stores in 1995 and 10 stores in 1994. In 1997, the Company expects to have 5 stores facing new com- petition. There is also competition from grocery stores, drug chains and home improvement centers. In addition, other distribution channels, such as telemar- keting and catalogs also compete with the Registrant's stores. Associates* Rose's employed, on a full-time or part-time basis, approximately 8,800 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 25, 1997: 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 25, 1997, Rose's opened no new stores and closed no stores. The Registrant occupies approximately 5,437,000 total square feet of store space (including office, stockroom, and other non-selling areas), or an average of 51,780 per store. The Registrant has closed one store subsequent to year-end and plans to open two new stores in 1997. The new stores will average 26,000 square feet. Rose's currently leases all store space 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 the terms of its long-term leases.) The two new stores will operate under three year leases with renewal options. Following is a table of the number of stores opened, closed and remodeled in the last five years:
1996 1995 1994 1993 1992 Number of stores at the beginning of year 105 113 172 217 232 Stores opened - - - - - Stores closed - (8) (59) (45) (15) Number of stores at the end of year 105 105 113 172 217 Remodeled stores 19 15 - 21 7
Most of the stores' 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 owned by the 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. The Registrant also leases facilities in Henderson, North Carolina for offices (approximately 30,000 square feet). The Registrant also owns a 78,000 square foot warehouse in Henderson, North Carolina, which is leased to a third party. Subsequent to year-end, the Registrant terminated the lease with respect to approximately 6,000 square feet of office space. On May 21, 1996, the Company entered into a new financing arrangement with Foothill Capital, Inc. and PPM Finance, Inc. as co-agents. The financing is a $120,000,000 three-year revolving credit facility (the "Credit Facility") with a letter of credit sublimit in the aggregate principal amount of $40,000,000. 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. Under the Credit Facility, trade suppliers which extend credit to the Company are support- ed by a $5,000,000 letter of credit and a subordinated lien of $15,000,000 in the real estate properties of the Company, which letter of credit and subordina- ted lien expire April 29, 1997. The Company plans to extend or replace this security package. The Credit Facility includes certain restrictive covenants which the Company was in compliance with at January 25, 1997. (See Debt, Note 7, to the Financial Statements for additional information about the Regis- trant's financing agreement.) 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. 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. PAGE 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 2,846 stockholders of record of common stock on April 3, 1997. High and low prices of the Company's common stock, as reported on NASDAQ, are shown in the table below:
Fiscal Year Thirty-Nine Weeks Ended January 25, 1997 Ended January 27, 1996 High Low High Low 1st Quarter 2 3/32 1 5/16 NA NA 2nd Quarter 2 1/8 1 11/16 3 3/8 1 57/64 3rd Quarter 1 27/32 1 1/2 3 1/4 1 5/8 4th Quarter 1 31/32 1 1/2 2 5/16 1 1/2
On the effective date of the Plan, all shares of the Company's pre-emergence Voting Common Stock and Non-voting Class B Stock were canceled pursuant to the Plan. The stockholders of record of such stock as of such date became entitled to receive their prorata share of 4,285,714 warrants to purchase the newly issued 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. See Stock- holders' Equity, Note 11, to the Financial Statements for additional informa- tion. The warrants are listed on NASDAQ (symbol "RSTOW"). High and low prices of the warrants from the first day listed (October 31, 1995), as reported on NASDAQ, are shown on the table below:
Fiscal Year Thirty-Nine Weeks Ended January 25, 1997 Ended January 27, 1996 High Low High Low 1st Quarter 1/4 1/32 NA NA 2nd Quarter 1/4 1/8 NA NA 3rd Quarter 1/8 1/32 5/16 3/16 4th Quarter 3/32 1/32 1/4 1/16
There were no dividends paid in 1996 and 1995. The Registrant is restricted from paying dividends under the terms of its 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 Fiscal Year January 27, | April 29, Fiscal Years 1996 1996 | 1995 1994 1993 1992 | Net sales $ 641,884 524,397 | 154,290 731,926 1,203,223 1,362,243 Leased department income 4,647 3,784 | 1,114 5,288 8,707 9,816 Earnings (loss) before | reorganization expense, | fresh-start revaluation, | income taxes, and | extraordinary items 1,370 5,484 | 542 6,617 (27,069) (59,509) 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 items 1,294 4,401 | (20,737) (51,282) (66,207) (58,560) Cumulative effect of | accounting change(d) - - | - - - (5,031) Extraordinary items | Gain on debt | discharge(e) - - | 90,924 - - - Loss on early extinguishment | of debt(f) (914) - | - - - - Net earnings (loss)(g) 380 4,401 | 70,187 (51,282) (66,207) (63,591) Per Share Results | Earnings (loss) before | cumulative effect of | accounting change and | extraordinary items 0.15 0.51 | (1.11) (2.73) (3.53) (3.14) Net earnings (loss) 0.04 0.51 | 3.74 (2.73) (3.53) (3.41) Cash dividends - - | - - - - Total assets 160,322 171,244 | 204,561 183,186 308,105 337,040 Excess of net assets over | reorganization value 21,872 25,371 | 32,201 - - - Reserve for income | taxes(h) 12,996 12,673 | - - - - Long-term obligations 1,079 2,108 | (i) (i) (i) 83,433
(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 respects 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. PAGE (b) Reorganization costs include the DIP facility fee amortization and expenses, professional fees and other reorganization costs. Additionally, 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 administrative costs. Included in the reorganization expense for 1993 is a provision of $39,500 for the costs of closing 43 stores in January 1994. Offsetting the 1993 expense is a reversal of prior reserves for closings due to the anticipated 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 extinguish- ment of liabilities subject to settlement under reorganization proceedings in accordance with the Plan. (f) The extraordinary item - loss on early extinguishment of debt represents the deferred financing costs of the previous facility which were written off as a result of the Company obtaining a new financing facility. (g) Included in 1996 net earnings is a charge of $657 related to a merger agree- ment which was terminated on August 20, 1996, a charge of $207 for the reserve for a store closing in 1997 and income of $1,397 resulting from the settlement of pre-petition liabilities. Included in 1995 earnings is a gain of $4,701 which represents the effect of canceling a postretirement healthcare benefit, a charge of $1,170 for severance costs, and a gain of $586 on the sale of a store lease. (h) During 1995, the Company filed for and received a federal refund of $16,898 to carry back losses described in Section 172(f) of the Internal Revenue Code. Additionally, during 1996 the Company filed a $10,620 refund claim under Section 172(f), which is currently being evaluated by the IRS. Section 172(f) is an area of tax law without substantial legal precedent or guidance. The IRS may challenge the Company's ability to carry back such a substantial portion of losses under this provision. Accordingly, assurances cannot be made as to the Company's entitlement to all of these claims. Consequently, an income tax re- serve has been set up in the amount of the refund already received 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. (i) 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:
Fiscal Years % to Net 1995(a) % to Net % to Net 1996 Sales Pro forma Sales 1994 Sales Revenue: Gross sales $661,684 103.1% 700,325(b) 103.2% 756,356 103.3% Leased department sales 19,800 3.1 21,638(b) 3.2 24,430 3.3 Net sales 641,884 100.0 678,687(b) 100.0 731,926 100.0 Leased department income 4,647 0.7 4,898(b) 0.7 5,288 0.7 Total revenue 646,531 100.7 683,585 100.7 737,214 100.7 Costs and Expenses: Cost of sales 489,450 76.3 519,727 76.6 555,087 75.8 Selling, general and administrative 150,143 23.4 153,900 22.7 160,346 21.9 Depreciation and amortization (2,378) (0.4) (3,349) (0.5) 9,257 1.3 Interest 7,946 1.2 6,927 1.0 5,907 0.8 Total costs and expenses 645,161 100.5 677,205 99.8 730,597 99.8 Earnings (loss) before reorganization expense, income taxes, and extraordinary item 1,370 0.2 6,380 0.9 6,617 0.9 Reorganization expense (a) - - - - (57,899) (7.9) Earnings (loss) before income taxes and extraordinary item 1,370 0.2 6,380 0.9 (51,282) (7.0) Income taxes 76 0.0 1,272 0.2 - - Earnings (loss) before extraordinary item 1,294 0.2 5,108 0.7 (51,282) (7.0) Extraordinary item - loss on early extinguishment of debt (914) 0.1 - - - - Net earnings (loss) $ 380 0.1% 5,108 0.7% (51,282) (7.0)%
(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 Succes- sor'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 Reorgan- ization (which was confirmed by the Bankruptcy Court on December 14, 1994) 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 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. 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 (Successor), 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 1996 of $661,684, a decrease of $38,641 or 5.5% from 1995. The decline in sales was due primarily to a decline in sales on a comparable store basis of 5.0%. Same store sales were negatively affected by the Company's program in the fourth quarter of running less intensive promotions thereby improving the gross margin rate. In 1995, the Company reported sales of $700,325, a decrease of $56,031 or 7.4% from fiscal 1994. The closings of 7 stores in May 1995 and 1 store in October 1995 were the reasons for a significant portion of the sales decrease. Same store sales for 1995 decreased 1.5% from 1994. Same store sales in 1995 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 closing 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. 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 or expanding stores in the areas in which Rose's stores are located. Of the 105 stores open in 1996, 14 faced new competitors' openings or expansions, compared to 28 in 1995 and 10 in 1994. In 1997, the Company expects to have 5 stores facing new competition. Inflation has had little effect on the Company's operations in the last three years. Costs and Expenses In 1996, the cost of sales as a percent of sales decreased .3% from the 1995 pro forma percent to sales. This was due primarily to (i) lower shrinkage resulting in a decrease of the cost of sales rate by .1%, (ii) decreased markdowns resulting in a decrease in the rate by .2%, and (iii) an increase in the initial markon resulting in a decrease in the rate by .1%. These decreases in the cost of sales were offset somewhat by a decrease in advertising co-op income resulting in an increase of .1% in the 1996 cost of sales. In 1995, the pro forma 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. Selling, general and administrative (SG&A) expenses as a percent of sales were 23.4% in 1996, 22.7% in 1995 (pro forma), and 21.9% in 1994. The 1996 SG&A included a charge of $657 related to a merger agreement with Fred's, Inc., which was terminated on August 20, 1996, and a $207 charge for the reserve for a store closing in 1997. Also included in 1996 SG&A, is income of $1,397 resulting from the settlement of pre-petition tax claims (See "Other") and some pre-petition workers' compensation insurance claims. The 1995 pro forma SG&A 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 a downsizing on February 23, 1996, 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 SG&A is due in part to the realignment of corporate and administrative costs as well as a reduction in store expenses. 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. Interest expense for 1996 was $7,946. Interest for 1995 pro forma and 1994 including the interest on the DIP facility was $6,927 and $9,352, respectively. Interest expense increased 14.7% in 1996 due primarily to increased amortization of deferred financing costs and other interest. Interest expense decreased 25.9% in 1995 (pro forma), and 29.6% in 1994 (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 The Internal Revenue Service has examined the Company's federal income tax returns for the years 1988 through 1991, and claims arising from those examinations have been settled. The provision for these claims made in prior years was reduced by $397 during 1996 to the amount of the settled claim. Federal net operating loss carryovers for fiscal years subsequent to January 1992 are subject to future adjustments, if any, by the IRS. 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 to carry back losses described in Section 172(f) of the Internal Revenue Code. Additionally, during 1996 the Company filed a $10,620 refund claim under Section 172(f), which is currently being evaluated by the IRS. Section 172(f) is an area of tax law without substantial legal precedent or guidance. The IRS may challenge the Company's ability to carry back such a substantial portion of losses under this provision. Accordingly, assurances cannot be made as to the Company's entitlement to all of these claims. Consequently, an income tax reserve has been set up in the amount of the refund already received 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 May 21, 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, a loss on early extinguishment of debt of $914 in prepaid bank fees related to the former facility was recognized as an extraordinary item. The interest rate on the direct borrowings under the Credit Facility is the prime rate plus 1.375% (9.625% at January 25, 1997), 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 are support- ed 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 Company plans to extend or replace this security package. The Credit Facility includes certain financial covenants and financial maintenance tests, including those related to minimum working capital and cur- rent ratios, capital expenditures limitations, maximum total liabilities to tangible net worth, and minimum tangible net worth which are measured quarterly. 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. The Company is in compliance with these covenants as of January 25, 1997. The Company's management believes that the Company's current financing arrangement is adequate to meet its liquidity needs. On April 28, 1995 (the "Effective Date"), the Company closed on its exit financing loan (which was replaced on May 21, 1996, see above), thereby satisfying the last condition of the Plan and emerged from bankruptcy. The exit financing was 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 was secured by a perfected first priority lien and securi- ty interest in all of the assets of the Company. The interest rate on the Fa- cility was 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 chose. Although there were no compensating balances required, the Company was required to pay a fee of .5% per annum on the average unused portion of the Facility. Borrowing availability was based upon certain eligible inventory times a borrowing base percentage that varied by month. Under the Facility, trade suppliers which extended credit to the Company were support- ed by a $5,000 letter of credit and subordinated lien of $15,000 in the real estate properties of the Company which expired April 30, 1996 (extended to April 29, 1997). The Facility included 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 were measured quarterly. The Facility also included 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 April 29, 1997. The Company's current ratio for 1996 is 1.82 compared to 1.83 in 1995, and 2.73 in 1994. In 1996, cash and cash equivalents increased $648, compared to a decrease of $757 in 1995 (combined Successor and Predecessor) and a decrease of $10,605 in 1994. The Company's working capital was $68,697 in 1996, $75,166 in 1995, and $92,009 in 1994. The decrease in 1996 of $6,469 was due in part to a decrease in inventory and an increase in borrowings on the financing facility. 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 liabilities subject to settlement under reorganization proceedings and increased bank drafts outstanding. The fixed charge coverage ratio was .93 in 1996, 1.11 in 1995 (pro forma), and (0.65) in 1994. 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 .93 in 1996, 1.11 in 1995 (pro forma), and 1.39 in 1994. In 1996, $5,521 of cash was provided by operating activities, while $3,248 was used in 1995 (combined Successor and Predecessor) and $58,884 was provided in 1994. The increase in cash from operating activities in 1996 is due primarily to lower inventory levels. The decrease in cash from operating activities in 1995 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. Investing activities used cash of $3,608 in 1996, $5,381 in 1995 (combined Successor and Predecessor), and $1,281 in 1994. The Company invested cash in property and equipment totaling $3,644 in 1996, $5,431 (combined Successor and Predecessor) in 1995, and $2,015 in 1994. The 1996 expenditures were primarily for store remodeling, and new computer software. The 1995 expenditures were primarily for store improvements and new computer software. The Company closed no stores in 1996, closed 8 stores in 1995, and closed 59 stores in 1994. The Company plans to invest $2,000 in 1997 primarily for store improvements, new computer software, and improvements to the Company's distribution center. The Company does plan to open two stores and has closed one store in 1997. Financing activities used cash of $1,265 in 1996, provided cash of $7,872 (combined Successor and Predecessor) in 1995, and used cash of $68,208 in 1994. The Company had net borrowings on its line of credit of $10,465 in 1996 and $33,673 in 1995 (combined Successor and Predecessor). The Predecessor made $26,423 of payments on long-term debt in 1995, and $65,437 in 1994. The Company's debt agreements include a restriction on the payment of cash dividends and the repurchase of stock. 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 Registrant will file a definitive proxy statement with the SEC within 120 days after the close of its fiscal year. The information on the Directors required by this Item is disclosed in Registrant's Proxy Statement to Stockholders for the Annual Meeting to be held June 26, 1997 under the caption "Proposal 2. Election of Board of Directors" and is incorporated herein by reference. The information required with respect to Executive Officers is set forth in Part III, Item 10 below. Information with regard to family relationships among Directors and Executive Officers is contained in the Proxy Statement under the caption "Family Relationships". The following information is furnished with respect to each of the executive officers of the Registrant as of April 3, 1997: Name, Age, Position Business Experience During Past Five Years R. Edward Anderson (47) 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 (50) 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 (41) 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. A. Len Priode (52) Appointed November 20, 1996; Senior Vice President, Stirling Douglas, Vice President, U.S. Distribution and Customer Services, December 1995 through Information Services November 1996; Michael's Stores, Vice President, Information Services, March 1994 through December 1995; Rose's Stores, Inc., Vice President, Information Services, May 1988 through March 1994. Bob L. Sasser (44) Appointed December 16, 1996; Michael's Senior Vice President, Stores, Vice President, General Merchandise Merchandising and Manager, March 1994 through November 1996; Marketing Rose's Stores, Inc., Vice President, GMM Hardlines, January 1990 through March 1994. PAGE G. Templeton Blackburn, II Appointed Vice President, Real Estate (46) November 2, 1994; Elected Secretary Vice President, Real February 17, 1993; Appointed Vice President, Estate, General Counsel General Counsel April 19, 1991. and Secretary Barry L. Gouge (49) Appointed January 16, 1997; Divisional Vice President, General Merchandise Manager, Toys and Electronics, Merchandise Manager September 1996 through January 1997; Hardlines Variety Wholesalers, Senior Vice President, Merchandising and Distribution, July 1994 through August 1996; Rose's Stores, Vice President, Marketing, January 1992 through July 1994. Robert A. Greenwald (49) Appointed January 16, 1997; Rich's Vice President, General Department Stores, Executive Vice President, Merchandise Manager Merchandising and Advertising, February Softlines 1996 through December 1996; Senior Vice President, GMM Softlines, April 1995 through January 1996; Jamesway Stores, Inc., Senior Vice President, GMM, July 1992 through January 1995. 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 1996 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 The information required by this Item is disclosed in Registrant's Proxy Statement to Stockholders for the Annual Meeting to be held June 26, 1997, under the caption "Executive Compensation and Other Information" and said information is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is disclosed in Registrant's Proxy Statement (as referenced above) under the captions "Principal Holders of Voting Securities" and "Stock Ownership of Management" and said information is incorporated herein by reference. PAGE ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is disclosed in Registrant's Proxy Statement (as referenced above) under the headings "Certain Relationships and Related Transactions" and said information is incorporated herein by reference. 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 year ended January 25, 1997, for the thirty-nine weeks ended January 27, 1996, thirteen weeks ended April 29, 1995, and the year ended January 28, 1995 Balance Sheets - January 25, 1997 and January 27, 1996 Statements of Stockholders' Equity for the year ended January 25, 1997, for the thirty- nine weeks ended January 27, 1996, thirteen weeks ended April 29, 1995, and the year ended January 28, 1995 Statements of Cash Flows for the year ended January 25, 1997, for the thirty-nine weeks ended January 27, 1996, thirteen weeks ended April 29, 1995, and the year ended January 28, 1995 Notes to the Financial Statements 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. PAGE 3. EXHIBITS Exhibit No. 10.1 Agreement and Plan of Merger dated as of Incorporated May 7, 1996, by and among Fred's Inc., by reference FR Acquisition Corp. and the Registrant. (Incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.2 Loan and Security Agreement among the Incorporated Registrant, as Borrower, the Financial by reference Institutions as listed on the signature pages, as the Lenders, PPM Finance, Inc., as Co-Agent, and Foothill Capital Corporation, as Agent, dated as of May 21, 1996. (Incorporated by reference to Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.3 Deed of Trust, Assignment of Rents and Incorporated Security Agreement for the headquarters by reference property, dated as of May 21, 1996, by and among Registrant, Foothill Capital Corporation, and David L. Huffstetler, pursuant to the Loan and Security Agreement. (Incorporated by reference to Exhibit 10.3 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.4 Deed of Trust, Assignment of Rents and Incorporated Security Agreement for the warehouse by reference property, dated as of May 21, 1996, by and among Registrant, Foothill Capital Corporation, and David L. Huffstetler, pursuant to the Loan and Security Agreement. (Incorporated by reference to Exhibit 10.4 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.5 Subordination Agreement dated as of May 21, Incorporated 1996, among Registrant, Foothill Capital by reference Corporation, M.J. Sherman & Associates, Inc., and Alan H. Peterson. (Incorporated by reference to Exhibit 10.5 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.6 Intellectual Property Security Agreement Incorporated dated as of May 21, 1996, among Registrant by reference and Foothill Capital Corporation, pursuant to the Loan and Security Agreement. (Incorporated by reference to Exhibit 10.6 to Registrant's Form 10-Q for the quarter ended April 27, 1996). 10.7 Termination Agreement dated as of August 20, Incorporated 1996 between the Company, Fred's, Inc., and by reference FR Acquisition Corp. (Incorporated by reference to Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended July 27, 1996). 27. Financial Data Schedule (b) REPORTS ON FORM 8-K The Registrant filed no reports on Form 8-K during the last quarter of the period covered by this report. 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 24, 1997 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/ Jack Howard /s/ Harold Smith Jack Howard, Director Harold Smith, Director /s/ Warren Lichtenstein /s/ N. Hunter Wyche, Jr. Warren Lichtenstein, Director N. Hunter Wyche, Jr., Director /s/ Joseph L. Mullen Joseph L. Mullen, Director MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS January 25, 1997 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 and Treasurer PAGE INDEPENDENT AUDITORS' REPORT The Board of Directors Rose's Stores, Inc.: We have audited the accompanying balance sheets of Rose's Stores, Inc. (the "Successor"), as of January 25, 1997 and January 27, 1996, and the related statements of operations, stockholders' equity, and cash flows for the year ended January 25, 1997 and the thirty-nine weeks ended January 27, 1996. We also have audited the accompanying statements of operations, stockholders' equity and cash flows for the thirteen weeks ended April 29, 1995, and the year ended January 28, 1995 of Rose's Stores, Inc. (the "Predecessor"). These financial statements are the responsibility of the Company's management. Our responsibi- lity 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 25, 1997 and January 27, 1996, and the Successor's results of operations and cash flows for the year ended January 25, 1997 and the thirty-nine weeks ended January 27, 1996, and the Predecessor's results of operations and cash flows for the thirteen weeks ended April 29, 1995, and the year 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 19, 1997 STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts)
Successor | Predecessor Thirty-Nine | Thirteen Year Ended Weeks Ended | Weeks Ended Year Ended January 25, January 27, | April 29, January 28, 1997 1996 | 1995 1995 | Revenue: | Gross sales $ 661,684 540,918 | 159,407 756,356 Leased department sales 19,800 16,521 | 5,117 24,430 Net sales 641,884 524,397 | 154,290 731,926 Leased department income 4,647 3,784 | 1,114 5,288 Total revenue 646,531 528,181 | 155,404 737,214 Costs and Expenses: | Cost of sales 489,450 404,120 | 116,838 555,087 Selling, general and administrative 150,143 115,895 | 35,486 160,346 Depreciation and amortization (2,378) (2,549) | 1,812 9,257 Interest 7,946 5,231 | 726 5,907 Total costs and expenses 645,161 522,697 | 154,862 730,597 Earnings Before Reorganization Expense, | Fresh-Start Revaluation, Income Taxes, | and Extraordinary Items 1,370 5,484 | 542 6,617 Reorganization Expense - - | (3,847) (57,899) Fresh-Start Revaluation - - | (17,432) - Earnings (Loss) Before Income Taxes | and Extraordinary Items 1,370 5,484 | (20,737) (51,282) Income Taxes (Benefits): | Current - 1,159 | - - Deferred 76 (76) | - - Total 76 1,083 | - - Earnings (Loss) Before Extraordinary | Items 1,294 4,401 | (20,737) (51,282) Extraordinary Items: | Gain on debt discharge - - | 90,924 - Loss on early extinguishment | of debt (914) - | - - Net Earnings (Loss) $ 380 4,401 | 70,187 (51,282) | Earnings (Loss) Per Share Before | Extraordinary Items $ 0.15 .51 | (1.11) (2.73) Extraordinary Items: | Gain on debt discharge - - | 4.85 - Loss on early extinguishment | of debt (0.11) - | - - Net Earnings (Loss) Per Share $ 0.04 .51 | 3.74 (2.73) | Weighted Average Shares 8,660 8,660 | 18,758 18,758
See accompanying notes to financial statements. PAGE BALANCE SHEETS (Amounts in thousands)
January 25, January 27, 1997 1996 Assets Current Assets Cash and cash equivalents $ 1,241 593 Accounts receivable 5,101 7,209 Inventories 141,287 153,190 Other current assets 4,503 4,706 Total current assets 152,132 165,698 Property and Equipment, at cost, less accumulated depreciation and amortization 7,710 5,122 Other Assets 480 424 $ 160,322 171,244 Liabilities and Stockholders' Equity Current Liabilities Short-term debt $ 44,138 33,673 Bank drafts outstanding - 9,530 Accounts payable 19,230 23,845 Accrued salaries and wages 6,422 7,456 Pre-petition liabilities 2,737 4,632 Other current liabilities 10,908 11,396 Total current liabilities 83,435 90,532 Excess of Net Assets Over Reorganization Value, Net of Amortization 21,872 25,371 Reserve for Income Taxes 12,996 12,673 Deferred Income 339 974 Other Liabilities 740 1,134 Stockholders' Equity Preferred stock, Authorized 10,000 shares; none issued - - Common stock, Authorized 50,000 shares; issued 8,660 at 1/25/97 and 1/27/96 35,000 35,000 Paid-in capital 1,159 1,159 Retained earnings 4,781 4,401 Total stockholders' equity 40,940 40,560 $ 160,322 171,244
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 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 8,660 35,000 - - - - - - Balance April 29, 1995 8,660 35,000 - - - - - - Net earnings for thirty-nine weeks ended January 27, 1996 - - - - - 4,401 - - Paid-in capital - taxes - - - - 1,159 - - - Balance January 27, 1996 8,660 35,000 - - 1,159 4,401 - - Net earnings for fiscal year 1996 - - - - - 380 - - Balance January 25, 1997 8,660 $35,000 - $ - $ 1,159 $ 4,781 - $ -
See accompanying notes to financial statements. PAGE STATEMENTS OF CASH FLOWS (Amounts in thousands)
Successor | Predecessor Thirty-Nine | Thirteen Year Ended Weeks Ended | Weeks Ended Year Ended January 25, January 27, | April 29, January 28, 1997 1996 | 1995 1995 | Cash flows from operating activities: | Net earnings (loss) $ 380 4,401 | 70,187 (51,282) Expenses not requiring the outlay of cash: | Depreciation & amortization (2,378) (2,549) | 1,812 9,257 Amortization of deferred financing costs 562 46 | 502 1,433 (Gain) loss on disposal of property | & equipment (34) (46) | (1) (278) Deferred income taxes 76 (76) | - - Additional paid-in capital - 1,159 | - - LIFO expense (credit) - - | (364) (4,816) Extraordinary loss on early extinguishment | of debt 914 - | - - Write off of merger costs 657 - | - - Provision for closed stores & severance 77 1,170 | - 43,000 Settlement of pre-petition liabilities (1,397) - | - - 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 2,108 824 | (630) 2,917 (Inc.) dec. in inventories 11,903 31,939 | (40,291) 91,817 (Inc.) dec. in other assets (273) 3,577 | (1,197) 6,346 Inc. (dec.) in accounts payable (4,615) (13,797) | 14,361 (17,152) Inc. (dec.) in other liabilities (553) (177) | (2,142) (9,429) Inc. (dec.) in income tax reserves 323 12,673 | - - Inc. (dec.) in reserve for store closings | & severance (1,227) (4,674) | (1,108) (13,060) Inc. (dec.) in deferred income (635) (507) | (201) (303) Inc. (dec.) in accumulated PBO (367) 47 | 7 434 Net cash provided by (used in) operating | activities 5,521 29,309 | (32,557) 58,884 Cash flows from investing activities: | Purchases of property & equipment (3,644) (4,921) | (510) (2,015) Proceeds from disposal of property | & equipment 36 45 | 5 734 Net cash used in investing activities (3,608) (4,876) | (505) (1,281) Cash flows from financing activities: | Net activity on line of credit 10,465 (24,981) | 58,654 - Net activity on debtor-in-possession | facility - - | (600) 600 Payments on pre-petition secured debt - - | (26,423) (65,437) Payments on unsecured priority & | administrative claims (403) (2,463) | (1,593) - Principal payments on capital leases (285) (346) | (281) (2,047) Payments of deferred financing costs (1,512) (440) | (2,925) (1,324) Inc. (dec.) in bank drafts outstanding (9,530) 3,768 | 5,502 - Net cash provided by (used in) | financing activities (1,265) (24,462) | 32,334 (68,208) Net inc. (dec.) in cash & cash equivalents 648 (29) | (728) (10,605) Cash & cash equivalents at beginning of period 593 622 | 1,350 11,955 Cash & cash equivalents at end of period $ 1,241 593 | 622 1,350 STATEMENTS OF CASH FLOWS (continued) (Amounts in thousands) Successor | Predecessor Thirty-Nine | Thirteen Predecessor Year Ended Weeks Ended | Weeks Ended Year Ended January 25, January 27, | April 29, January 28, 1997 1996 | 1995 1995 Supplemental disclosure of additional noncash | investing & financing activities: | Retirement of net book value of assets | in reserve for store closings $ - 17 | 623 7,018 Capital lease obligations entered | into for new equipment 67 374 | - -
See accompanying notes to financial statements. PAGE NOTES TO FINANCIAL STATEMENTS Year Ended January 25, 1997; Thirty-Nine Weeks Ended January 27, 1996; Thirteen Weeks Ended April 29, 1995; and Year Ended January 28, 1995 (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 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. 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 of 1995, 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 $ 0.59 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 25, 1997 and January 27, 1996 are that of a reorganized entity, and are therefore not comparable in material respects to the financial statements of the Predecessor. Accordingly, a vertical black line is shown to separate post-emergence operations from those ended prior to April 29, 1995 in the financial statements. Basis of Presentation The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's financial statements include the accounts of a wholly-owned subsidiary for fiscal year ending January 28, 1995. Intercompany accounts and transactions are eliminated. In January 1995, the wholly-owned subsidiary was merged with the Company. Nature of Operations The Company is a retail concern with 105 general merchandise discount stores located in the southeastern United States. The Company has closed one store subsequent to year-end and plans to open two stores in 1997. Fiscal Year Fiscal year 1996 ended on January 25, 1997. 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 year 1994 ended on January 28, 1995. Fiscal years 1996, 1995 and 1994 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. Cash equivalents are stated at cost, which approximates market. Bank drafts NOTES TO FINANCIAL STATEMENTS outstanding have been reported as a current liability. Inventories Substantially all merchandise inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method, or market and include the capitalization of transportation and distribution center costs. Deferred Financing Costs The costs related to the issuance of debt are capitalized and amortized to interest expense straight-line over the life of the related 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. Leased Department Sales and Income The Company has an agreement with an independent contractor to sell shoes within the Company's stores. The Company receives a percentage of the sales under the agreement. Depreciation and Amortization The provision for depreciation and amorti- zation 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 and is amortized over 8 years. The amortization of the excess of net assets over reorganization value was $3,499 for fiscal year 1996 and $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 accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates. PAGE NOTES TO FINANCIAL STATEMENTS Advertising The Company expenses the cost of advertising during the month the sale is effective. 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 fiscal year 1996 and 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 8,660 shares for fiscal year 1996 and for the thirty-nine weeks ended January 27, 1996; 18,758 shares for the thirteen weeks ended April 29, 1995 and fiscal year 1994. The exercise of outstanding stock options would not result in a dilution of earnings per share for 1996 and 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 are excluded from the calculation. Stock-Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock- based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Refer to Note 12. Reclassifications Certain reclassifications have been made to the 1995 and 1994 financial statements to conform with the 1996 presentation. 4 ACCOUNTS RECEIVABLE A summary of accounts receivable as of January 25, 1997 and January 27, 1996, is as follows: January 25, January 27, 1997 1996 Layaway receivables $ 1,856 2,496 Other receivables 3,665 5,111 5,521 7,607 Allowance for doubtful accounts (420) (398) $ 5,101 7,209 Other receivables consist primarily of amounts due from vendors for returns, co-op advertising, and coupons. Also, other receivables as of January 27, 1996, included a receivable for shoe department income. The Company does not provide for an allowance for doubtful accounts for layaways because the Company holds the merchandise. PAGE NOTES TO FINANCIAL STATEMENTS 5 INVENTORIES A summary of inventories as of January 25, 1997 and January 27, 1996 is as follows: January 25, January 27, 1997 1996 Inventories valued at FIFO cost $ 141,287 153,190 LIFO reserve - - Inventories substantially valued at LIFO cost $ 141,287 153,190 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 25, 1997 and January 27, 1996 inventories at LIFO cost are greater than FIFO cost, no LIFO reserve is warranted. 6 PROPERTY AND EQUIPMENT Property and equipment, adjusted for Fresh-Start Reporting (see Note 2), consists of the following: January 25, January 27, 1997 1996 Buildings $ 46 27 Furniture, fixtures, and equipment 4,777 2,871 Improvements to leased premises 3,724 2,005 Total 8,547 4,903 Less accumulated depreciation and amortization (1,190) (155) 7,357 4,748 Capitalized leases 441 374 Less accumulated amortization (88) - 353 374 Net property and equipment $ 7,710 5,122 7 DEBT As of January 25, 1997, the Company had $44,138 outstanding in short-term borrowings, $11,971 in outstanding letters of credit and unused availability of $8,649. As of January 27, 1996, the Company had $33,673 outstanding in direct borrowings, $11,610 in outstanding letters of credit and unused availability of $19,690. The average direct borrowings were $66,576 in 1996 and $66,501 in 1995 with an average daily weighted annual interest rate of 9.7% in 1996 and 9.8% in 1995. The average borrowings under the Debtor-in-Possession Facility (DIP Facility) were $13,700 in the thirteen weeks ended April 29, 1995 with a daily weighted average annual interest rate of 8.6%. The maximum amount of direct borrowings at any period end was $96,202 in 1996 and $83,579 in 1995. Foothill Capital, Inc. Facility On May 21, 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 NOTES TO FINANCIAL STATEMENTS 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, a loss on early extinguishment of debt of $914 in prepaid bank fees related to the former facility was recognized as an extraordinary item. The interest rate on the direct borrowings under the Credit Facility is the prime rate plus 1.375% (9.625% at January 25, 1997), 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 are support- ed 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 Company plans to extend or replace this security package. The Credit Facility includes certain financial covenants and financial maintenance tests, including those related to minimum working capital and cur- rent ratios, capital expenditures limitations, maximum total liabilities to tangible net worth, and minimum tangible net worth which are measured quarterly. 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. The Company is in compliance with these covenants as of January 25, 1997. 8 PRE-PETITION LIABILITIES The Company had pre-petition liabilities of $2,737 at January 25, 1997 and $4,632 at January 27, 1996. During 1996, the Company settled pre-petition tax claims and some pre- petition workers' compensation insurance claims resulting in a reduction to pre- petition liabilities of $1,397. The Company paid $403 for pre-petition liabilities and reclassed $95 related to landlords to other liabilities. 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. PAGE NOTES TO FINANCIAL STATEMENTS 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 $113,000 in allowed claims which have received distributions of common stock pursuant to the plan of reorganization (See Note 11), and there are approximately $2,326 of disputed claims remaining which may receive distributions of common stock pursuant to the plan. 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 Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 | Long-term debt $ - - | 683 5,494 Short-term debt 7,128 5,051 | 16 118 Capital leases 106 72 | 27 295 Amortization of deferred | financing costs 562 46 | - - Other 150 62 | - - Interest expense $ 7,946 5,231 | 726 5,907
Interest expense and amortization of deferred financing costs associated with the DIP facility are included in reorganization costs (See Note 13). The Company paid interest (including deferred financing costs) of $7,776 in 1996, $1,888 for the thirty-nine weeks ended January 27, 1996, $3,650 for the thirteen weeks ended April 29, 1995, and $7,100 in 1994. The interest paid includes $291 in the thirteen weeks ended April 29, 1995, and $612 in 1994 related to the DIP facility classified as reorganization expense. PAGE NOTES TO FINANCIAL STATEMENTS 10 RESERVE FOR FUTURE STORE CLOSINGS The closed store reserve increased $94 in 1996, decreased $4,691 in the thirty-nine weeks ended January 27, 1996 and $1,731 in the thirteen weeks ended April 29, 1995. Following are the cash and noncash changes to the reserves in 1996 and 1995:
Thirty-Nine | Thirteen Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, 1996 1996 | 1995 | Noncash activity: | Retirement of net book | value of assets $ - 17 | 623 Provision for additional | closing (207) - | - Other noncash expenses (100) - | - Cash expenses 213 4,674 | 1,108 (Increase) decrease in the | closed store reserve $ (94) 4,691 | 1,731
The cash expenses include the operating results until closing, rental payments and costs of removing fixtures from closed stores as well as subsequent expenses associated with closings. 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. The Company has closed one store subsequent to year-end. 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 Bankrupt- cy Court on February 14, 1995. PAGE NOTES TO FINANCIAL STATEMENTS 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 under the Plan) in accordance with the provisions of the Plan. As the result of distributions of the Common Stock pursuant to the Plan, the Company had the following: January 25, January 27, 1997 1996 Common Stock outstanding 8,461 8,065 Shares reverted to the Company 997 976 Shares held in escrow 542 959 Shares delivered to FUNB on the Effective Date 10,000 10,000 As of March 12, 1997, the Company has 8,572 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 March 12, 1997, and pursuant to the provisions of the Plan, 997 shares have reverted to the Company from escrow to be retired or held in the treasury of the Company. The remaining 431 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 25, 1997 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 88 additional shares of Common Stock will be issued and outstanding, and there will be a total of approximately 8,660 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 42 additional shares of Common Stock will be issued, and there will be a total of approximately 8,614 shares of Common Stock issued and outstanding. 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. 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 was 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 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 NOTES TO FINANCIAL STATEMENTS 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. 12 STOCK OPTIONS 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. The options vest over a three year period. The price of the options granted will not be less than 100 percent of the fair market value of the shares on the date of grant. One half of the options expire in five years and the remainder in seven years. The following table summarizes stock option activity: Option Price Number of Weighted Range Options Average Price Granted 2.88 - 5.75 388 4.31 Outstanding, January 27, 1996 2.88 - 5.75 388 4.31 Granted 1.78 - 1.88 55 1.85 Canceled 2.88 - 5.75 (125) 4.31 Outstanding, January 25, 1997 1.78 - 5.75 318 3.89 Exercisable at: January 27, 1996 - - January 25, 1997 2.88 - 5.75 88 The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plan. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Expected dividend yield 0.00% Expected stock price volatility 28.00% Risk-free interest rate 6.63% Expected life of options 5 years The weighted average grant-date fair value of options granted during 1996 and 1995 was $.70 and $.73 per share. The pro forma disclosures have not been included as the compensation cost based on the fair value of the options granted in 1996 and 1995 is immaterial. PAGE NOTES TO FINANCIAL STATEMENTS 13 REORGANIZATION COSTS Professional fees and expenditures directly related to Chapter 11 have been segregated from normal operations and are disclosed separately. The major components of these costs are as follows:
Thirty-Nine | Thirteen Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 | Closed store provision $ - - | - 43,000 DIP financing fees and expense | amortization - - | 1,342 3,445 Professional fees and other | bankruptcy related expenses - - | 2,505 11,454 Total reorganization costs $ - - | 3,847 57,899
The 1994 store closing provision covered the costs incurred in closing 59 stores in May 1994 and closing 7 stores in May 1995. 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 remained in the liability for reorganization costs which was paid during 1996. 14 INCOME TAXES Income tax expense consists of the following:
Thirty-Nine | Thirteen Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 | Current: | Federal $ - 952 | - - State - 207 | - - - 1,159 | - - Deferred (benefit): | Federal 67 (67) | - - State 9 (9) | - - 76 (76) | - - $ 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 Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 % of Pretax Earnings (Loss) | | Income taxes (benefits) at | federal statutory rates 35.0% 34.0% | (34.0)% (34.0)% State income taxes, net of | federal income tax benefits 4.5 4.6 | (4.3) (4.3) Amortization of excess value (302.8) (19.0) | - - Reorganization items (5.6) - | 39.3 6.6 Net operating loss | carryforward - - | (1.0) 31.7 Valuation allowance 268.9 - | - - Other - 0.1 | 0.0 0.0 - % 19.7% | - % - %
The tax effects of temporary differences since the Effective Date that give rise to significant portions of the deferred tax assets and liabilities were as follows: January 25, January 27, 1997 1996 Deferred tax assets: Reserves $ 2,271 473 Capitalized inventory 73 14 Co-op credits 10 29 VHS inventory 354 104 Percentage rent 254 - Net Operating Loss Carryforward 3,096 - Tax Credit Carryforward 2 - Total deferred tax assets 6,060 620 Deferred tax liabilities: Reserves - (401) Percentage rent - (18) Fixed Assets (244) (125) Total deferred tax liabilities (244) (544) Total deferred tax assets (liabilities) net 5,816 76 Less: Valuation Allowance (5,816) - Net deferred tax assets (liabilities) $ - 76 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 NOTES TO FINANCIAL STATEMENTS the statements of operations. At January 25, 1997, the Company has certain net operating loss carry- forwards totaling $70,629 which are scheduled to expire during the period 2008 through 2012. The Company has treated net operating losses incurred prior to the Effective Date in accordance with Section 382(l)(5) of the Internal Revenue Code. As a result, there is approximately $59,565 in net operating losses incurred prior to the Effective Date available as carryovers without any annual limitation. 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, and claims arising from those examinations have been settled. The provision for these claims made in prior years was reduced during 1996 to the amount of the settled claim. Federal net operating loss carryovers for fiscal years subsequent to January, 1992 are subject to future adjustments, if any, by the IRS. 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 to carry back losses described in Section 172(f) of the Internal Revenue Code. Additionally, during 1996 the Company filed a $10,620 refund claim under Section 172(f), which is currently being evaluated by the IRS. Section 172(f) is an area of tax law without substantial legal precedent or guidance. The IRS may challenge the Company's ability to carry back such a substantial portion of losses under this provision. Accordingly, assurances cannot be made as to the Company's entitlement to all of these claims. Consequently, an income tax reserve has been set up in the amount of the refund already received 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 25, 1997, minimum rental payments due under the above leases are as follows: Capital Operating Leases Leases 1997 $ 339 16,305 1998 259 14,827 1999 259 12,634 2000 114 11,599 2001 - 11,367 Later Years - 50,526 Total minimum lease payments 971 117,258 Imputed interest (rates ranging from 7.6% to 11.3%) (168) Present value of net minimum lease payments 803 Less current maturities 260 Capital lease obligations $ 543 Executory costs, such as real estate taxes, insurance, and maintenance, are generally the obligation of the lessor. Amortization of capitalized leases was approximately $88 in 1996, $220 in the thirteen weeks ended April 29, 1995, and $1,746 in 1994. 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 25, 1997 was as follows:
Successor | Predecessor Thirty-Nine | Thirteen Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 | Operating Leases: | Minimum rentals $ 20,430 15,787 | 5,265 22,481 Contingent rentals 3,417 2,990 | 843 4,309 $ 23,847 18,777 | 6,108 26,790
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 year ended January 25, 1997 and 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, and $665 for 1994, 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 NOTES TO FINANCIAL STATEMENTS addition, the associate must have been covered under the active medical plan at 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 periodic postretirement benefit cost under SFAS 106 was as follows: Net Periodic Postretirement Benefit Costs:
Thirty-Nine | Thirteen Fiscal Weeks Ended | Weeks Ended Fiscal Year January 27, | April 29, Year 1996 1996 | 1995 1994 | Service costs $ - 76 | 28 236 Interest costs - 249 | 93 493 Other - - | (39) 72 Net periodic costs $ - 325 | 82 801
The present value of accumulated postretirement benefit obligations and the amount recognized in the balance sheets were as follows: Accumulated Postretirement Benefit Obligations: January 25, January 27, 1997 1996 Retirees $ - 367 Fully eligible active plan participants - - Other active plan participants - - 367 Unrecognized gain (loss) - - Total accumulated postretirement benefit obligations $ - 367 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 of 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 the 1995 selling, general and administrative expenses. The Company made payments of $1,014 and reversed $130 of the accrual during 1996. The Company plans to make payments of $26 in 1997. 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 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments are cash and cash equivalents, accounts receivable, accounts payable and short-term debt. The carrying values of these financial instruments approximate fair value. 20 MERGER COSTS On May 7, 1996, the Company and Fred's, Inc. ("Fred's") executed a definitive merger agreement providing for the acquisition of the Company by Fred's. On August 20, 1996, the Company and Fred's, Inc. announced that the previously announced merger agreement had been terminated. As a result of such termination, costs related to the proposed merger of $657 were written-off in the third quarter. These costs are included in the 1996 selling, general and administrative expenses. PAGE NOTES TO FINANCIAL STATEMENTS 21 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Following is a summary of the quarterly results of operations during the years ended January 25, 1997 and January 27, 1996:
Fiscal 1996 Quarters Ended April 27, July 27, October 26, January 25, 1996 1996 1996 1997 Gross sales $ 154,426 165,844 160,796 180,618 Leased department sales 4,281 5,679 4,907 4,933 Leased department income 1,080 1,160 1,124 1,283 Cost of sales 113,040 123,089 116,813 136,508 Earnings (loss) before extraordinary item 652 (1,792) 448 1,986 Extraordinary item - loss on early extinguishment of debt(b) - (914) - - Net earnings (loss) $ 652 (2,706) 448 1,986 Earnings (loss) per share before extraordinary item $ 0.08 (0.21) 0.05 0.23 Net earnings (loss) per share $ 0.08 (0.31) 0.05 0.23 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) | (92) (775) 5,268 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) 0.61 Net earnings (loss) | per share $ 3.74 | (0.01) (0.09) 0.61
(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 periods. (b) The second quarter reflects the early extinguishment of debt as an extraordinary item. The 10-Q for that period reflected it as part of SG&A. EX-27 2
5 This schedule contains summary financial information extracted from Rose's Stores, Inc., Form 10-K for the year ended January 25, 1997, and is qualified in its entirety by reference to such financial statements. 0000085149 ROSE'S STORES, INC. 1,000 12-MOS JAN-25-1997 JAN-25-1997 1,241 0 5,521 420 141,287 152,132 8,988 1,278 160,322 83,435 0 0 0 35,000 5,940 160,322 641,884 646,531 489,450 489,450 (2,378) 0 7,946 1,370 76 1,294 0 (914) 0 380 .04 .04
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