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 sign)" 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 sign) 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 sign) 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"). Rose's is presently operating its business as a debtor-in- possession under Chapter 11 and is subject to the jurisdiction and supervision of the Bankruptcy Court. In the Chapter 11 case, substantially all liabilities as of the date of the filing of the petition for reorganization are subject to settlement under a plan of reorganization to be voted upon by Rose's impaired creditors and stockholders and confirmed by the Bankruptcy Court. As of the date of this report, Rose's has not yet presented its plan of reorganization. Details of the bankruptcy proceedings are discussed in Note 1 of the Consolidated Financial Statements.
(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 172 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 76,000 square feet. During the year, Rose's opened no new stores and closed 45 stores. Rose's anticipates closing approximately 58 stores during the 1994 fiscal year and realigning corporate and administrative costs accordingly.
Registrant operates one class of stores, known as "ROSES". The stores carry a wide range of general merchandise and popularly priced consumer goods such as clothing, shoes, household furnishings, small appliances, toiletries, cosmetics, sporting goods, automobile accessories, food, yard and garden products, electronics and occasional furniture. Registrant operates all of the departments in its stores with the exception of the shoe departments.
Sales are primarily for cash, although credit cards such as MASTER CARD, VISA and DISCOVER are honored. During the past fiscal year, credit card sales amounted to approximately 10% of gross sales. Sales are directly affected by general economic conditions in the southeastern states, consumer spending, and disposable income.
* Reference in this Annual Report on Form 10-K to "Rose's", the "Registrant", or "the Company" shall mean Rose's Stores, Inc.
Merchandising Inventories are purchased in two principal ways. Buyers purchase and distribute merchandise to the various stores, and the store managers purchase merchandise for their individual stores from listings and sources approved by buyers. Rose's purchases from a large number of suppliers and sells to a large number of customers and does not believe that the loss of any one customer or supplier would have a materially adverse effect on it. Rose's has registered some trademarks as private label brands. During the past fiscal year, private label merchandise constituted approximately 11% of Rose's gross sales. Rose's does not engage in any material research activities and has no plans for new product lines.
Distribution Approximately 20% of merchandise is shipped directly to stores from suppliers, and 80% 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 Roses; the majority of tractors are leased.
Seasonal Aspects of Operations Rose's business is highly seasonal and directly influenced by general economic conditions in its operating area. The fourth quarter, which includes Christmas, is the period of highest sales volume. During the past fiscal year, a total of approximately 30% of the year's gross sales were made in the fourth quarter, beginning October 31, 1993.
Competition Rose's business is intensely competitive. Some of Rose's lines of merchandise compete directly with chains and independent stores including Sears, J. C. Penney, Belk, Leggett's and other similar stores. Other lines compete with chain and independent stores such as Wal-Mart, Kmart, Ames, Hills, Jamesway, Jack Eckerd, Peoples Drug, A&P, Winn-Dixie, Lowe's, Phar-Mor, Marshall's, Office Depot and similar stores. Wal-Mart and Kmart have been opening stores in the area in which Rose's stores are located. In 1993, 15 Company stores faced new competitors' openings, compared to 40 stores in 1992 and 26 stores in 1991. Increasing competition also results from grocery and drug chains expanding merchandise lines to carry goods and products normally identified with general merchandise and variety stores. In addition, other distribution channels, such as telemarketing and catalogs also compete with stores of the Registrant.
Associates* Rose's employed, on a full-time or part-time basis, approximately 14,900 persons at fiscal year-end. Rose's considers its relations with its associates to be good.
ITEM 2:
ITEM 2: PROPERTIES
The following table shows the geographical distribution of the 172 Rose's stores in operation on January 29, 1994:
State Number of Stores North Carolina 79 Virginia 40 South Carolina 10 Georgia 13 Kentucky 9 Tennessee 6 Maryland 4 Delaware 4 Mississippi 4 Alabama 1 West Virginia 2
TOTAL 172
* Persons employed by Rose's Stores, Inc.
During the fiscal year which ended January 29, 1994, Rose's opened no new stores and closed 45 stores. Registrant expects to close approximately 58 stores in the coming year. The Registrant occupies approximately 8,864,000 square feet of store space (including office, stockroom, and other non- selling areas). Rose's leases all store space from others under long-term leases which are normally for initial terms of 15 to 20 years with one or more five-year renewal options. (See Leased Assets and Lease Commitments, Note 14, to the Consolidated Financial Statements for additional information about the Registrant's commitments under terms of long-term leases.)
Following is a table of the number of stores opened, closed and remodeled in the last 5 years:
1993 1992 1991 1990 1989
Number of stores at the beginning of year 217 232 256 259 250 Stores opened - - 3 2 15 Stores closed (45) (15) (27) (5) (6) Number of stores at the end of year 172 217 232 256 259
Remodeled stores 21 7 - 9 3
Most of the store fixtures are owned by the Registrant. The remaining fixtures are manufacturers' racks that are supplied by vendors. Most of the electronic equipment located in the stores, including point of sale equipment, is leased by Registrant.
The Registrant owns its Executive and Buying Offices, its 860,300 square foot central warehouse, an additional consolidating warehouse containing 134,400 square feet, a 31,000 square foot graphic productions building and a 30,000 square foot data center all of which are located in Vance County, North Carolina. Registrant also leases facilities in Henderson, North Carolina for offices (approximately 75,000 square feet) and service facilities (approximately 10,000 square feet) and leases warehouse space in Wilmington, North Carolina (approximately 30,000 square feet). Registrant also owns a 78,000 square foot warehouse in Henderson, North Carolina, which is leased to a third party.
The Company has pledged inventories located in approximately 64% of its stores and a collateral pool of $26.5 million consisting of the Distribution Center and, to the extent necessary, its contents, and a secured interest in all other property and equipment to both the short-term and long-term lenders in return for six and one-half year notes and a working capital facility acquired May 29, 1992. Also, the Company pledged approximately $3,000,000 of inventory to a long-term lender to collateralize the lender's deferral of previously scheduled payments.
The Company entered into a Debtor-in-Possession Revolving Credit Agreement (the DIP Facility) on September 20, 1993. The DIP Facility gives the lender, G.E. Capital Corporation, a super-priority claim against the property of the Company other than real property.
ITEM 3:
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 defended by the Registrant's insurance carrier. The Registrant's liability for uninsured general damages and punitive damages is not considered material. No legal proceedings presently pending by or against the Registrant are described because the Registrant believes that the outcome of such litigation should not have a material adverse effect on the financial position of the Registrant.
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 (the "Chapter 11 Case").
The following discussion sets forth certain aspects of the Chapter 11 Case, but is not intended to be an exhaustive summary. For additional information regarding the effect of the Chapter 11 Case on the Company, reference should be made to the Bankruptcy Code.
Chapter 11 Reorganization Under the Bankruptcy Code
Pursuant to Section 362 of the Bankruptcy Code, the commencement of the Chapter 11 Case created an automatic stay, applicable generally to creditors and other parties in interest, of: (i) the commencement or continuation of a judicial administrative or other action or proceeding against the Registrant that was or could have been commenced prior to commencement of the Chapter 11 Case, or to recover for a claim that arose prior to commencement of the Chapter 11 Case; (ii) the enforcement against the Registrant or its property of any judgments obtained prior to commencement of the Chapter 11 Case; (iii) the taking of any action to obtain possession of property of the Registrant or to exercise control over property of the Registrant; (iv) the creation, perfection or enforcement of any lien against the property of the Registrant's bankruptcy estate; (v) any act to create, perfect or enforce against property of the Registrant any lien that secures a claim that arose prior to the commencement of the Chapter 11 Case; (vi) the taking of any action to collect, assess or recover claims against the Registrant that arose before commencement of the Chapter 11 Case; (vii) the setoff of any debt owing to the Registrant that arose prior to commencement of the Chapter 11 Case against any claim against the Registrant or (viii) the commencement or continuation of a proceeding before the United States Tax Court concerning the Registrant. Any entity may apply to the Bankruptcy Court, upon an appropriate showing of cause, for relief from the automatic stay to exercise the foregoing remedies. The Registrant is authorized to operate its business as a debtor-in- possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
Plan of Reorganization - Procedures
Under Section 1121 of the Bankruptcy Code, for 120 days after the date of the filing of a voluntary petition for relief under Chapter 11, only the debtor-in-possession has the right to propose and file a plan of reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan of reorganization during the 120-day exclusivity period, no other party may file a plan of reorganization until 180 days after the date of filing of the Chapter 11 petition, during which period the debtor-in-possession has the exclusive right to solicit acceptances of the plan. If a debtor-in-possession fails to file a plan during the 120-day exclusivity period or such additional period as may be ordered by the Bankruptcy Court or, after such plan has been filed, fails to obtain acceptance of such plan from impaired classes of creditors and equity security holders during the exclusive solicitation period, any party in interest, including a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee may file a plan of reorganization for such debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the exclusivity period, if not previously terminated, would terminate.
The Registrant has not yet filed a plan of reorganization with the Bankruptcy Court and has obtained from its creditors an extension of the exclusivity period to May 31, 1994. The Registrant intends to file a plan of reorganization prior to May 31, 1994.
After a plan of reorganization has been filed with the Bankruptcy Court, it will be sent, together with a disclosure statement approved by the Bankruptcy Court following a hearing, to members of all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of any plan by impaired classes of creditors and equity security holders, the Bankruptcy Court after notice and a hearing would consider whether to confirm the plan. Among other things, to confirm a plan the Bankruptcy Court is required to find (i) with respect to each impaired class of creditors and equity security holders, that each holder of a claim of interest of such class either (a) will, pursuant to the plan, receive or retain property of a value, as of the effective date of the plan, that is at least as much as such holder would have received in a liquidation on such date of the Registrant, or (b) has accepted the plan, (ii) with respect to each class of claims or equity security holders, that such class has accepted the plan or such class is not impaired under the plan and (iii) confirmation of the plan is not likely to be followed by the liquidation or need for further financial reorganization of the Registrant or any successors unless such liquidation or reorganization is proposed in the plan.
If any impaired class of creditors or equity security holders does not accept a plan and assuming that all of the other requirements of section 1129(a) of the Bankruptcy Code are met, the proponent of the plan may invoke the so-called "cramdown" provisions of section 1129(b) of the Bankruptcy Code. Under these provisions, the Bankruptcy Court may confirm a plan, notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity security holders, if certain requirements of the Bankruptcy Code are met, including that (i) the plan does not discriminate unfairly and (ii) the plan is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan. As used in the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and equitable" have narrow and specific meanings unique to bankruptcy law.
Adversary Proceedings
On February 3, 1994, NationsBank as Collateral Agent, for itself and other pre-petition lenders (collectively, the "Pre-Petition Lenders") filed a Complaint under 11 U.S.C. Section 506 to determine the validity, enforceability and priority of the Pre-Petition Lenders' liens and security interests in certain assets of the Company described as collateral in various loan documents entered into by the Company and the Pre- Petition Lenders securing promissory notes dated May 29, 1992.
The Company, under the provisions of the Bankruptcy Code, commenced an Adversary Proceeding on February 4, 1994 against the Pre-Petition Lenders seeking to reduce the claim of the Pre-Petition Lenders to unsecured status on a variety of theories. The complaint alleged, inter alia, defects in financing statements filed to perfect security interests, defects in the perfection of security interests in after-acquired property and cash proceeds, and defective documentation of collateral in a security instrument.
Most claims with respect to the secured status of the Pre-Petition Lenders have been resolved by summary judgment dismissing specific challenges or by dismissal of claims by the Company. Discovery has not been completed with respect to the remaining claims.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the fiscal year.
PART II
ITEM 5:
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
INVESTOR INFORMATION
CORPORATE DATA
Rose's Stores, Inc. is a Delaware Corporation. Rose's stock is listed on the NASDAQ System for over-the-counter securities; the Voting Common Stock has the symbol "RSTOQ" and the Non-Voting Class B Stock has the symbol "RSTBQ".
COMMON STOCK
High and low prices of Rose's Voting Common Stock and Non-Voting Class B Stock as reported on the NASDAQ are shown below.
(Dollars in thousands except per share amounts)
Market Price Range and Dividends (a)
Dividends Total High Low Per Share Dividends
1993 7 1/4 13/32 - - 1992 7 3 1/2 - - 1991 7 1/8 2 1/8 - - 1990 7 1/4 2 1/4 .210 3,991 1989 9 5/8 5 .210 4,138 1988 12 7 1/8 .210 4,194 1987 22 1/2 7 7/8 .210 4,316 1986 23 1/8 10 3/4 .200 4,115 1985 13 1/2 8 3/4 .190 3,900 1984 13 1/2 7 .185 3,798 1983 14 1/2 3 .135 2,660
(a) Adjusted to reflect the 2-for-1 stock split effected in 1986, and the 3-for-2 and 3-for-1 stock splits in 1983.
On January 24, 1991, the Board of Directors adopted a resolution suspending the payment of dividends until future operating profits warrant reinstatement. Among other things, the Company's DIP financing agreement includes restrictions on the payment of cash dividends and the repurchase of stock. In addition, the Company is precluded from paying dividends while the Chapter 11 case is pending and the Registrant does not believe it is likely that it will pay dividends for the foreseeable future following termination of the Chapter 11 case. At January 29, 1994, such restrictions preclude the payment of dividends or the repurchase of stock. The number of holders of record for the Company's Voting Common Stock was 1,074 and for Non-Voting Class B Stock was 1,537 at April 22, 1994.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
(Dollars in thousands except per share amounts)
(Not covered by Independent Auditors' Report)
(a) In 1991, the Company changed its method of accounting for LIFO inventories from the use of the inflation index provided by the Bureau of Labor Statistics to an internally generated price index to measure inflation in the retail prices of its merchandise inventories. This change decreased 1991 cost of sales by $21,428 (or $1.15 per share). Net loss would have been $44,732 in 1991 if the change in accounting method had not been made. The information was not available to determine the cumulative effect of this change nor the impact of any year prior to 1991.
(b) The provision for future store closings and remerchandising represents the anticipated costs of closing approximately 15 stores during fiscal year 1992 and 27 stores during fiscal 1991. The 1991 provision also includes the costs incurred during fiscal 1992 in the remerchandising of the remaining stores.
(c) The gain on sale of shoe department fixtures and inventory results from an agreement with a footwear merchandising company to assume total operations of the shoe departments within all Company stores.
(d) 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 consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern and do not purport to reflect or to provide for all the consequences of the ongoing Chapter 11 reorganization.
Included in the reorganization expense is a provision of $39,500 for the costs of closing 43 stores in January 1994, as well as the DIP fee amortization and expenses, professional fees and other reorganization costs. Offsetting these expenses is a reversal of prior reserves for closings due to the anticipated rejection of closed store leases.
(e) In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postretirement 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.
(f) Not comparable for 1993, the majority of the amounts comprising this item have been reclassed to liabilities subject to settlement under reorganization proceedings.
ITEM 7:
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 bears to net sales:
As a Percentage of Net Sales Fiscal Years 1993 1992 1991 Revenue: Gross sales 103.5% 103.1% 103.1% Leased department sales 3.5 3.1 3.1 Net sales 100.0 100.0 100.0 Leased department income 0.7 0.7 0.7 Total revenue 100.7 100.7 100.7 Costs and Expenses: Cost of sales (a) 77.5 81.0 74.6 Selling, general and administrative 23.4 22.1 22.8 Provision for future store closings and remerchandising (b) - - 2.5 Depreciation and amortization 1.0 1.0 1.2 Interest 1.0 1.0 1.0 Total costs and expenses 102.9 105.1 102.1 Loss before reorganization expense, income taxes (benefits), and cumulative effect of accounting change (2.2) (4.4) (1.4) Reorganization expense (c) (3.3) - - Loss before income taxes (benefits) and before cumulative effect of accounting change (5.5) (4.4) (1.4) Income taxes (benefits) - (0.1) 0.3 Loss before cumulative effect of accounting change (5.5) (4.3) (1.7) Cumulative effect of adopting SFAS 106 (d) - (0.4) - Net loss (5.5)% (4.7)% (1.7)%
(a) In 1991, the Company changed its method of accounting for LIFO inventories from the use of the inflation index provided by the Bureau of Labor Statistics to an internally generated price index to measure inflation in the retail prices of its merchandise inventories. This change decreased 1991 cost of sales by $21,428 (or $1.15 per share). Net loss would have been $44,732 in 1991 if the change in accounting method had not been made.
(b) The 1991 provision for future store closings and remerchandising represents the anticipated costs of closing approximately 15 stores during fiscal 1992 and the costs incurred during fiscal 1992 in the remerchandising of the remaining stores.
(c) 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 consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern and do not purport to reflect or to provide for all the consequences of the ongoing Chapter 11 reorganization.
Included in the reorganization expense is a provision of $39,500 for the costs of closing 43 stores in January 1994, as well as the DIP fee amortization and expenses, professional fees and other reorganization costs. Offsetting these expenses is a reversal of prior reserves for closings due to the anticipated rejection of closed store leases.
(d) In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires 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.
Chapter 11 Filing
On September 5, 1993, the Company filed a voluntary petition for relief under Chapter 11, Title 11 of the United States Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Eastern District of North Carolina (the "Bankruptcy Court"). The Company is in possession of its property and is maintaining and operating its property as a debtor-in-possession pursuant to the provisions of Sections 1107 and 1108 of the Bankruptcy Code.
For further discussion of the Chapter 11 proceedings, see Footnote 1 in the Consolidated Financial Statements.
Revenue
The Company reported sales in 1993 of $1,245,697, a decrease of $158,605 or 11.3% from 1992. Sales in same stores for 1993, on a comparable week- to-week basis, decreased 7.7% compared to 1992. Prior to its bankruptcy filing, poor sales were caused by out-of-stocks resulting from reduced purchases necessitated by the Company's limited borrowing availability. Also, just prior to and immediately after filing the petition under Chapter 11, many suppliers interrupted their shipments of merchandise causing out-of-stock positions on most seasonal merchandise. It took several months to restore inventory levels to acceptable levels.
In 1992, the Company reported sales of $1,404,302, a decrease of $19,043 or 1.3% from fiscal 1991. 1992 same store sales, on a comparable week- to-week basis, increased 2.5% from 1991. Sales in the first half of fiscal 1992 were negatively affected by credit problems related to the Company's bank facility negotiations and by the significant disruptions associated with the remerchandising of all stores. Sales in the second half of 1992 were positively impacted by the sale of clearance merchandise and stronger promotional sales.
Sales have been adversely affected over the last three years as a result of new competition. For the stores open in 1993, 15 faced new competitors, compared to 40 in 1992 and 26 in 1991. In 1994, the Company expects to have 6 stores facing new competition. Also, the Company believes the soft and uncertain economy had a negative impact on the sales results for the sales in 1992 and 1991.
Inflation has had little effect on the Company's operations in the last three years.
Costs and Expenses
In 1993, the cost of sales as a percent of sales decreased 3.5% from the 1992 percent to sales. This was due to (1) decreased markdowns resulting in a decrease in the cost of sales rate of 1.6%, (2) higher markup decreasing the rate by 1.5%, and (3) lower shrinkage resulting in a decrease of the rate by 1.1%. These improvements were offset somewhat by increases in the freight costs. The Company took proactive measures in 1993 to reduce the shrinkage to a normal rate. Some of these measures included strengthening the Company's loss prevention department, implementing systems that automatically calculate markdowns, establishing a shrink incentive program for the stores, and implementing stronger store front-end controls.
In 1992, the cost of sales as a percent of sales increased 6.4% over the 1991 percent to sales. This was due primarily to higher clearance markdowns taken during the year to liquidate old and discontinued hardlines inventory and seasonal apparel, resulting in an increase of 2.6% in the cost of sales rate. Lower markup caused an increase to the 1992 cost
of sales rate of 1.5%. Higher inventory shrinkage increased the cost of sales rate by 1.3% over the 1991 percent to sales. The Company believes that this increase in shrinkage was caused primarily by the disruptions in the stores due to the remerchandising in the first half of 1992 and the large volumes of clearance markdowns taken in the second half of 1992, and by higher internal and external theft. Finally, the cost of sales rate in 1992 increased by .8% due to a higher LIFO charge.
In 1991, the Company developed and used internal price indices instead of the inflation index provided by the Bureau of Labor Statistics. The 1991 pre-tax LIFO provision included in cost of sales (a credit of $10,323) would have been a charge of $11,105 if the accounting change had not been made; therefore, the accounting change had the effect of decreasing cost of sales by $21,428. The net loss for 1991 would have been $44,732 if the change in accounting method had not been made. A decrease in mark-up in 1991 resulting from lowering competitive prices was more than offset by a decrease in markdowns as a percent to sales.
Selling, general and administrative expenses as a percent of sales were 23.4% in 1993, 22.1% in 1992, and 22.8% in 1991. The increase in 1993 is largely attributable to the decline in 1993 sales.
As part of its business plan, the Company decided to close 43 stores in January of 1994 and recognized an expense of $39,500 associated with these closings. Additionally, the Company recognized a $13,026 benefit associated with the anticipated rejection of closed store leases on stores already closed. A net reorganization expense of $39,138 before taxes, relating to these closed stores and other bankruptcy costs, was recorded during 1993.
In addition, the Company made the decision in the first quarter of 1994 to close approximately 58 stores and realign corporate and administrative costs accordingly. It is expected that a charge of approximately $55,000 relating to these closings will be included in the first quarter of 1994.
In 1991, a provision of $24,891 was recorded to provide for the costs of closing 15 stores in 1992. In addition, the Company recorded a charge of $9,000 to provide for payroll costs and inventory reductions that were incurred in 1992 as a result of a significant change in the merchandise mix in the stores.
Interest expense decreased 13% in 1993 due to a decrease in long-term debt outstanding. 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. Although no determination has yet been made regarding the value of the property which collateralizes various creditors' claims, the Bankruptcy Court has ordered the Company to make monthly adequate protection payments which have been booked as interest. The Company is disputing the claims to collateral of its pre-petition long-term debtholders. (See Item 3. Legal Proceedings) Interest on the DIP facility and other related DIP fees and expenses were $1,238 in 1993 (0.1% of net sales), and were included in the reorganization costs. In addition, the Company included in the reorganization costs, a write-off of $4,528 related to unamortized costs of pre-petition debt. Interest expense decreased .3% in 1992 due to a decrease in average short-term debt offset by higher rates on renegotiated long-term senior notes. Interest expense decreased 4.9% in 1991 due to a decrease in average short-term debt outstanding.
Other
In February 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109 the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective the first quarter of 1993, the Company adopted Statement 109. The only effect of adopting Statement 109 was the establishment of a $5,760 current deferred tax liability and a $5,760 non-current deferred tax asset. Under the guidelines provided by APB 11, the Company would have no current or non-current deferred tax liability/asset.
In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires 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 (or $.27 per share).
A write-off of deferred tax assets of $8,970 negatively impacted 1991. This write-off was required so that the Company would not have deferred tax assets greater than the tax carrybacks available. If the Company becomes profitable, the reinstatement of these deferred tax assets will be used to reduce tax expense in future years. Additional tax losses were incurred during 1992; thus the remaining deferred tax assets were consumed with the resulting NOL which eliminated the need for an additional write-off.
The Internal Revenue Service (IRS) has completed its examinations of the Company's federal income tax returns for the years 1988 through 1991 and has proposed tax adjustments of $2,882 plus interest and penalties. These adjustments pertain to issues including the timing of deductions for inventory shrinkage accruals, depreciation expense and amortization of movie rental assets. The Company's management and tax counsel believe that certain of the IRS's proposed adjustments are without merit and are vigorously contesting these, and that the ultimate resolution of the proposed adjustments will not have a material effect on the Company's financial position.
Liquidity and Capital Resources
On September 2, 1993, the Company received a notice of default for failure to make an interest payment due on August 31, 1993 under its primary line of credit facility under the Amended and Restated Loan Agreement dated May 29, 1992. The notice of default demanded payment in full of the $106,000 of outstanding principal and declined to extend any further credit.
The Chapter 11 filing caused a default under many of the agreements to which the Company is a party. Generally, actions to enforce or otherwise effect the repayment of pre-petition liabilities are stayed while the Company is under the protection of Chapter 11 of the Bankruptcy Code. These liabilities will be resolved as a part of the reorganization proceedings. Additional liabilities subject to similar resolution may arise as a result of claims filed by parties related to the rejection of executory contracts, including expired leases, and for the Bankruptcy Court's determination of allowed claims for contingencies and other disputed amounts.
On September 6, 1993, the day after the Company filed for Chapter 11, the Company and G. E. Capital Corporation ("GE Capital") entered into a commitment letter pursuant to which GE Capital would provide debtor-in-possession post-petition financing to the Company in the form of a two-year revolving credit facility of up to the lesser of (i) 50% of the value of inventory of the Registrant acceptable to GE Capital, less reserves to be established in the discretion of GE Capital or (ii) $125,000. (This two-year credit agreement is hereinafter referred to as the "DIP Facility".)
On October 14, 1993, the Bankruptcy Court approved the DIP Facility with certain restrictions on the borrowing base pending approval of the Company's 1994 business plan by the secured lenders.
The DIP Facility provides for interest to accrue at a lower rate than the Company's primary pre-petition revolving credit facility. As part of the cash collateral order, the Company pays the interest on the pre-petition debt monthly in the form of adequate protection payments.
With the approval of the DIP Facility, the Company's short-term liquidity has improved significantly. The cash requirements for the payment of scheduled principal payments, accrued interest, accounts payable and other liabilities incurred prior to the Chapter 11 filing have in most cases been deferred until a Plan of Reorganization is confirmed by the Bankruptcy Court. Pre-petition claims of $207,456 were outstanding as of the end of 1993. In addition, $4,000 of estimated reclamation claims to be paid according to court order are included in current liabilities.
Rose's management expects the Company to realize positive cash flow from its 1994 operations. The filing under Chapter 11 will protect the Company from its pre-petition creditors while a plan of reorganization is being negotiated. Until such a plan is confirmed by the Bankruptcy Court and consummated, payments on pre- petition debt will not be made (except as approved by the Bankruptcy Court) and all existing unexpired contracts and leases will be reviewed to determine whether they should be assumed or rejected (subject to Bankruptcy Court approval). The adequacy of the Company's capital resources and long-term liquidity cannot be determined until a plan of reorganization is developed and confirmed by the Bankruptcy Court.
The Company's current ratio for 1993, which includes $4,000 of reclamation claims, is 3.32 compared to 1.87 in 1992 and 2.08 in 1991. In 1993, cash and cash equivalents decreased $7,146 compared to increases of $13,441 in 1992 and $4,416 in 1991. The Company's working capital was $173,640 in 1993, $127,515 in 1992, and $182,723 in 1991. The increase in working capital in 1993 of $46,125 was primarily due to a reclassification of pre-petition current liabilities to liabilities subject to settlement under reorganization proceedings due to the Chapter 11 filing.
The fixed charge coverage ratio was 0.00 in 1993, 0.10 in 1992 and 0.80 in 1991. 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, and the adoption of SFAS 106 was 0.74 in 1993, 0.19 in 1992 and 1.37 in 1991.
In 1993, $8,373 of cash was provided from operating activities, while $40,071 was provided in 1992 and $16,081 was provided in 1991. Declining sales, as well as an increased investment in inventory and inventory prepayments contributed to the decline in cash.
Investing activities used cash of $9,100 in 1993, $9,140 in 1992, and $2,962 in 1991. The Company invested cash in property and equipment totaling $9,109 in 1993, $9,629 in 1992, and $3,102 in 1991. The 1993 expenditures were primarily for store improvements, remodels and new computer software. The Company closed 45 stores in 1993, closed 15 stores in 1992, and opened three stores and closed 27 in 1991.
Financing activities used cash of $6,419 in 1993, $17,490 in 1992, and $8,703 in 1991. The Company made $1,127 of payments on long-term debt in 1993, and $12,000 in 1992. In 1991, the Company reduced its short-term debt by $5,000 through a reduction of inventory levels. The Board of Directors has suspended dividend payments until future operating profits warrant reinstatement. The Company's debt agreements include a restriction on the payment of cash dividends and the repurchase of stock.
ITEM 8:
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS
See Consolidated Financial Statements contained elsewhere herein.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following is furnished with respect to each of the members of the Board of Directors of the Registrant as of January 29, 1994:
__________________
(a) Monica Scott, Inc., which had remained current in payment of liabilities during his tenure as CEO, later filed for protection under the provisions of Chapter 11, U.S. Bankruptcy Code.
Mr. Lucius H. Harvin, III (Chairman of the Board) is the brother of George M. Harvin (a Director); and they are nephews of Marion J. Church (a Director) and John T. Church. Sr. (Chairman of the Board Emeritus and a Director). Mr. and Mrs. Church are husband and wife.
The following information is furnished with respect to each of the executive officers of the Registrant as of January 29, 1994:
Officers of the Registrant are elected each year at the Annual Meeting of the Board of Directors to serve for the ensuing year and until their successors are elected and qualified.
Section 16(a) Reporting
The Registrant believes that all executive officers and directors of the Registrant and all other persons known by the Registrant to be subject to Section 16 of the Securities Exchange Act of 1934, filed all reports required to be filed during fiscal year 1993 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:
ITEM 11: EXECUTIVE COMPENSATION
Cash And Other Compensation
The following table sets forth all the cash compensation paid or to be paid by the Registrant, as well as certain other compensation paid or accrued, during the fiscal years indicated, to the Chairman of the Board, the Chief Executive Officer, and the three other highest paid executive officers of the Registrant for fiscal year 1993 in all capacities in which they served:
(1) 1993 Salary represents 52 weeks of base salary. 1992 Salary represents 53 weeks of base salary. 1991 Salary represents 52 weeks of base salary. (2) "Other Annual Compensation" consists of tax gross- ups on medical expense reimbursements, and in 1991 also included earnings on LTIP compensation. (3) "All Other Compensation" includes payments by the Registrant for the following:
Name Automobile Allowance Profit Sharing Plan Jones $6,198 $1,372 Harvin $6,198 $1,372 Freeman $5,528 $1,372 Anderson $5,528 $1,372 Gruen $5,528 $1,369
(4) Bonus awards to George L. Jones represent prorated amounts from bonus agreement incident to initial employment with the Registrant and does not represent bonus awards determined during the fiscal year. Amounts shown are not payable until 1994. (5) Bonus awards to Kevin Freeman represent prorated amounts from bonus agreement incident to initial employment with the Registrant and does not represent bonus awards determined during the fiscal year. (6) Messrs. Jones, Freeman, and Gruen joined the Registrant in 1991.
Stock Options Granted During Fiscal Year
The following table sets forth information about the stock options granted to the named executive officers of the Registrant during fiscal year 1993. No stock appreciation rights were granted to the named executive officers during fiscal year 1993.
____________
(1) Options to purchase the above listed number of shares of the Registrant's Non-Voting Class B Stock for $5.00 a share. Options expiring on April 1, 2003 vest and become receivable on April 1, 1995. Options expiring on June 1, 2003 vest and become receivable on June 1, 1994.
(2) Options to acquire an aggregate of 256,250 shares of Common Stock of the Registrant were granted to all employees during fiscal year 1993. Options to acquire an additional 50,000 shares of Common Stock were granted to nonemployee directors of the Registrant during fiscal year 1993.
(3) The potential realizable value of the options reported above was calculated by assuming 5% and 10% annual rates or appreciation of the Common Stock of the Company from the date of grant of the options until the expiration of the options. These assumed annual
rates of appreciation were used in compliance with the rules of the Securities and Exchange Commission and are not intended to forecast future price appreciation of the Common Stock of the Company. The Company chose not to report the present value of the options because the Company does not believe any formula will determine with reasonable accuracy a present value because of unknown or volatile factors. The actual value realized from the options could be substantially higher or lower than the values reported above, depending upon the future appreciation or depreciation of the Common Stock during the option period and the timing of exercise of the options.
Stock Options Exercised During Fiscal Year and Year End Values of Unexercised Options
The following table sets forth information about unexercised stock options and stock appreciation rights by the named executive officers of the Registrant during fiscal year 1993. No stock options or stock appreciation rights were exercised by the named executive officers during fiscal year 1993.
____________ (1) All options were out of the money at fiscal year end.
Employment Contracts, Termination Of Employment And Change-In-Control Arrangements
The Registrant has an employment contract with George L. Jones which provides for his active employment for three years, through July 24, 1994. This contract was negotiated with Mr. Jones prior to his initial employment by the Registrant and became effective on July 25, 1991. All sums required to be paid under the contract are shown on a prorated basis per year in the summary compensation table above for the years to date. The bonus amount, shown on a prorated annual basis in column (d) of the summary compensation table, is payable upon the first to occur of (i) the third anniversary of the effective date of the agreement, (ii) the date on which the price of the Registrant's Non-Voting Class B Stock is quoted at a price per share of $15.50 on the NASDAQ system, or (iii) termination of employment by reason of death, permanent disability, discharge without cause, liquidation of substantially all of the assets of the Registrant, resignation resulting from default by the Registrant in its covenants under the agreement, or a change in control of the Registrant as defined in the agreement. In lieu of the bonus, or any part thereof, Mr. Jones has the option under the employment agreement and a Tandem Stock Option Agreement to purchase up to 200,000 shares of the Class B Non-Voting Stock of the Registrant at a price of $3.00 per share exercisable upon the first to occur of the bonus vesting events listed above.
The Registrant maintains a severance program authorized by the Bankruptcy Court on April 1, 1994, replacing prior individual agreements with each of Messrs. Freeman, Anderson and Gruen providing for the payment of certain benefits upon the cessation of employment of each such officer. Under this program, these officers would be eligible to receive up to 18 months base salary, up to one-half of such amount being paid in installments which would cease upon re-
employment. Each such officer would also be entitled to (i) reimbursement for reasonable expenses incurred to obtain re-employment, not to exceed ten thousand dollars ($10,000) and (ii) continued medical, dental and disability coverage under existing Company plans for a period of three months following cessation of employment. Benefits under the program would be payable for cessation of employment by reason of: elimination of the employee's position unless offered a comparable or better position with the Company, termination of employment other than for misconduct as defined in the program, or constructive or voluntary termination due to a material reduction in salary or due to a material change in job responsibilities, termination on account of permanent disability, or termination due to liquidation of the Company. As of the date hereof no severance programs or agreements have been authorized by the Bankruptcy Court with respect to Messrs. Harvin or Jones.
Other senior vice presidents of the Company are eligible for the same benefits as those described for Messrs. Freeman, Anderson and Gruen. Other executive officers of the Company are eligible for up to twelve (12) months base salary, a maximum of $7,500 for re-employment expense reimbursement and three months continued coverage under medical, dental and disability plans.
Compensation of Directors
Directors who are officers of the Registrant receive no additional compensation for service on the Board of Directors or committees. Directors who are not officers are paid $8,000.00 per year as retainer, plus $1,000.00 for each meeting of the Directors attended and for each committee meeting held on a day other than the date of a meeting of the Board of Directors, and reimbursement for their actual travel expenses. Directors who are not officers are paid $500.00 a day for each committee meeting held on the same day as a meeting of the Board of Directors and $250.00 for each telephone conference meeting. Committee members are reimbursed for their actual travel expenses. In addition, outside directors receive options to purchase 5,000 shares of the Non-Voting Class B Stock of the Registrant at a purchase price of the greater fair market value on the date of award or $5.00 on award dates occurring every two years up to a maximum of 15,000 shares per outside director.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Registrant during the fiscal year ended January 29, 1994 was composed of Messrs. Busbee (Chairman), Allbright, Maynard, and Montgomery. None of the members of the Compensation Committee were officers or employees of the Registrant during the last fiscal year or in prior fiscal years. Mr. Maynard is Chairman of the Golden Corral Corporation ("Golden Corral"). Golden Corral leases certain restaurant facilities from The Rosemyr Corporation and from Emrose Corporation, two corporations affiliated with certain directors and executive officers of the Registrant. See Item 13 "Certain Relationships and Related Transactions" below. Golden Corral paid said corporations a total of $234,832 under these leases during the past fiscal year of the Registrant.
Until April 16, 1993, Lucius H. Harvin, III, Chairman of the Board of the Registrant, served as a director of Wachovia Corporation of North Carolina and Wachovia Bank of North Carolina, N.A. (collectively "Wachovia"). No executive officer of Wachovia served on the Compensation Committee or the Board of Directors of the Registrant during the last fiscal year. Except for Mr. Harvin's service as a director of Wachovia, none of the executive officers of the Registrant served as a member of the board of directors or as a member of the compensation committee of another entity during the last fiscal year. Consequently, there are no interlocking relationships between the Registrant and other entities that might affect the determination of the compensation of the Directors and executive officers of the Registrant.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the only stockholders known to the Registrant to be the beneficial owners, as of January 29, 1994, of more than five percent (5%) of the Voting Common Stock of the Registrant:
Amount and Nature of Beneficial Ownership Name and Address (1) Percent of Class
Emma H. Currigan P.O. Drawer 947 254,000 (D) 3.1% Henderson, NC 27536 173,836 (B) 2.1%
George M. Harvin P.O. Drawer 947 473,562 (D) 5.7% Henderson, NC 27536 176,618 (B) 2.1%
Lucius H. Harvin, III P.O. Drawer 947 437,224 (D) 5.3% Henderson, NC 27536 174,324 (B) 2.1%
Rose Harvin P.O. Drawer 947 279,784 (D) 3.4% Henderson, NC 27536 173,836 (B) 2.1% _____________________ Footnotes:
(D) Shares held by direct ownership (B) Shares which may be deemed by the SEC to be beneficially owned but as to which the listed person may have disclaimed beneficial ownership. (1) Includes 695,344 (8.4%) shares of Voting Common Stock beneficially attributed in the table to Emma H. Currigan, George M. Harvin, Lucius H. Harvin, III and Rose Harvin (173,836 shares of Voting Common Stock respectively to each person) who exercise sole voting control and shared investment power to such shares, but does not separately attribute such shares to Mrs. L. H. Harvin, Jr. who shares investment power as to all such shares.
The table below gives the indicated information as to both classes of equity securities of the Registrant beneficially owned by each director, nominee, the chief executive officer and the four other most highly compensated executive officers, and, as a group, by such person and other executive officers:
_______________________
Footnotes: * Less than 1% of outstanding shares. (a) The following shares are not included in the figures for beneficial ownership by individual directors and executive officers but are included in the total figure for all directors, nominees and executive officers as a group: 229,626 shares of Non-Voting Class B Stock held in the Registrant's Variable Investment Plan; the 579,024 shares of Voting Common Stock shown in the table of principal holders of voting securities of the Registrant which are beneficially attributed as a group to John T. Church, Sr., Lucius H. Harvin, III and George T. Blackburn, II, Trustees and 409,302 shares of Non-Voting Class B Stock attributable to the same persons as trustees.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John T. Church, Sr. retired as a full-time employee of the Registrant on December 31, 1982. The Registrant entered into a Consultation Agreement with Mr. Church at that time. Under an extension of the agreement, Mr. Church was paid $52,500 during the fiscal year which ended January 29, 1994.
Pursuant to existing leases, during the past fiscal year the Registrant paid The Rosemyr Corporation ("Rosemyr") $213,809 as rent for its store building in Morganton Shopping Center, Morganton, N.C.; $312,779 for its store building in Newmarket Plaza Shopping Center, Newport News, Va. (Rosemyr owns a 31.5% interest); $4,838 in rent for office space in Henderson, N.C.; and $11,700 for parking facilities in Henderson, N.C. The Registrant leases a store in Nags Head, N.C. (Rosemyr owns a 95% interest). Rental under the lease during the past fiscal year was $151,875. The Registrant leased a store in Tryon Hills Shopping Center, Raleigh, N.C. in which Rosemyr owns a 36/60ths interest. Rental under the lease during the past fiscal year was $21,000. Eighty percent (80%) of the stock of Rosemyr is owned by Mrs. L.H. Harvin, Jr. and her children and by the Estate and trusts of the late Emma Rose Church, whose beneficiaries are Mr. John T. Church, Sr. (Director of the Registrant), Mrs. E.C. Bacon and Mr. John T. Church, Jr. During the past fiscal year, the Registrant paid Emrose Corporation ("Emrose") under pre-existing leases $24,828 in rent for office space in Henderson, N.C. and $12,014 for lease of storage facilities. Also during the past fiscal year, the Registrant paid Arrowhead Plaza Limited Partnership (a partnership in which Emrose owns a 51% interest) $12,487 in rent for a store in Arrowhead Plaza Shopping Center in Norfolk, Virginia. Emrose is owned by Mrs. L.H. Harvin, Jr. and Mr. John T. Church, Sr., Mrs. E.C. Bacon and Mr. John T. Church, Jr. Messrs. John T. Church, Sr. and George M. Harvin, who are directors of the Registrant, are executive officers of Rosemyr and Emrose. The Registrant also paid H.H.C. Co., Inc. ("H.H.C.") $142,298 in rent during the past fiscal year for a store building in High Point, N.C. Mrs. L.H. Harvin, Jr. and Mr. John T. Church, Sr. own 61% of the stock of H.H.C. Golden Corral Corporation ("Golden Corral") leases certain restaurant facilities from Rosemyr and from Emrose. Golden Corral paid said corporations a total of $234,832 under these leases. James H. Maynard (a Director of the Corporation) is Chairman of Golden Corral.
In the opinion of Management, all of the foregoing leases and other transactions are competitive, and the rents paid approximate the rate of rent paid by the Registrant to independent landlords under leases for comparable property negotiated at comparable times, and represent the fair market value for comparable transactions.
PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Statements of Operations for the years ended January 29, 1994; January 30, 1993 and January 25, 1992
Consolidated Balance Sheets - January 29, 1994 and January 30, 1993
Consolidated Statements of Stockholders' Equity for the years ended January 29, 1994; January 30, 1993 and January 25, 1992
Consolidated Statements of Cash Flows for the years ended January 29, 1994; January 30, 1993 and January 25, 1992
Notes to the Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
Schedule X - Supplementary Income Statement Information
All other schedules are omitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit No. Page
10.1 The Registrant's Equity Compensation Plan Incorporated (incorporated by reference to the identified by reference exhibit under the Registrant's Quarterly Report on Form 10-Q for its fiscal quarter ended October 26, 1991)
10.2 First Amendment to Equity Compensation Plan Incorporated (incorporated by reference to the identified by reference exhibit under the Registrant's Annual Report on Form 10-K for its fiscal year ended January 30, 1993)
10.3 Second Amendment to Equity Compensation Plan Incorporated (incorporated by reference to the identified by reference exhibit under the Registrant's Annual Report on Form 10-K for its fiscal year ended January 30, 1993)
10.4 The Registrant's Variable Investment Plan P (the "Plan"), as amended and restated effective January 1, 1989.
10.5 The Registrant's Employment Agreement with Incorporated George L. Jones (incorporated by reference by reference to Exhibit 19 to Registrant's Quarterly Report on Form 10-Q for the Quarter Ended October 26, 1991 dated December 9, 1991).
10.6 Loan Agreement dated September 20, 1993 Incorporated between the Registrant and General by reference Electric Capital Corporation (Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 10-K dated September 20, 1993).
10.7 The Registrant's Severance Program, as P adopted effective March 24, 1994 pursuant to order of the Bankruptcy Court presiding over the Registrant's proceeding under chapter 11 of Title 11 of the United States Code (the "Court")
10.8 The Registrant's obligations with respect to P the compensation of its officers and directors as specified in the following orders of the Court:
(a) Order Authorizing Compensation of Senior Vice Presidents (dated November 18, 1993)
(b) Order Authorizing Compensation of Executive Vice Presidents (dated November 18, 1993)
(c) Order Authorizing Compensation of Vice Presidents and Treasurer (dated November 18, 1993)
(d) Order Authorizing Compensation of George L. Jones (dated November 18, 1993)
(e) Order Continuing Compensation of Chairman of the Board of Directors Pending Hearing (dated November 18, 1993)
(f) Order Authorizing Payment of Compensation to Directors (dated November 18, 1993)
23. Consent of Independent Certified Public Accountants P
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by registrant during the last quarter of the period covered by this report.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors Rose's Stores, Inc.:
Under date of April 4, 1994, we reported on the consolidated balance sheets of Rose's Stores, Inc., Debtor-in-Possession (the Company), as of January 29, 1994 and January 30, 1993 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended January 29, 1994, contained elsewhere herein. Our report included an explanatory paragraph discussing the Company's voluntary filing for reorganization under Chapter 11 of the United States Bankruptcy Code. Our report also included an additional explanatory paragraph indicating that the Company adopted Statement of Financial Accounting Standards No. 106 in 1992 and changed its method of determining retail price indices used in the valuation of LIFO inventories in 1991. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Raleigh, North Carolina KPMG Peat Marwick April 4, 1994
ROSE'S STORES, INC.
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Column A Column B Item Charged to Costs and Expenses, Years Ended:
1-29-94 1-30-93 1-25-92
Maintenance and Repairs $ 9,074,590 10,099,509 8,956,703 Taxes, Other than Payroll and Income Taxes 5,995,125 6,149,938 6,235,483 Advertising Costs 30,870,842 32,022,144 34,084,177
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
January 29, 1994
The consolidated 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 statements are prevented or would be detected within a timely period by Company personnel in the normal course of performing their assigned functions. The concept of reasonable assurance is based on the recognition that the cost of controls should not exceed the expected benefits. Management maintains an internal audit function and an internal control function which are responsible for evaluating 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, 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.
George L. Jones President and Chief Executive Officer
R. Edward Anderson Executive Vice President, Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors Rose's Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Rose's Stores, Inc., Debtor-in-Possession (the Company), as of January 29, 1994 and January 30, 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended January 29, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rose's Stores, Inc., Debtor-in-Possession, at January 29, 1994 and January 30, 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended January 29, 1994, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court (Bankruptcy Court) on September 5, 1993. The Chapter 11 filing, the Company's leveraged financial structure, and recurring net losses resulting in the substantial elimination of stockholders' equity, raise substantial doubt about the Company's ability to continue as a going concern. Additionally, as discussed in Note 17 to the consolidated financial statements, on April 4, 1994 the Company announced a first quarter charge aggregating approximately $55 million relating to its plans to close approximately 58 stores during 1994. The Company is currently operating its business as debtor-in-possession under the jurisdiction of the Bankruptcy Court. The continuation of the Company as a going concern is contingent upon, among other things, its ability to (1) formulate a plan of reorganization that will be confirmed by the Bankruptcy Court, (2) achieve satisfactory levels of future profitable operations, (3) maintain adequate financing, and (4) generate sufficient cash from operations to meet future obligations. The consolidated financial statements as of and for the year ended January 29, 1994 do not include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 15 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1992. As discussed in Note 4 to the consolidated financial statements, the Company changed its method of determining retail price indices used in the valuation of LIFO inventories in 1991.
KPMG Peat Marwick Raleigh, North Carolina April 4, 1994
CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts)
(a) In 1991, the Company changed its method of accounting for LIFO inventories from the use of the inflation index provided by the Bureau of Labor Statistics to an internally generated price index to measure inflation in the retail prices of its merchandise inventories. This change decreased 1991 cost of sales by $21,428 (or $1.15 per share). Net loss would have been $44,732 in 1991 if the change in accounting method had not been made. (b) The 1991 provision for future store closings and remerchandising represents the anticipated costs of closing approximately 15 stores during fiscal 1992 and costs incurred during fiscal 1992 in the remerchandising of the remaining stores. (c) 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 consolidated financial Statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern and do not purport to reflect or to provide for all the consequences of the ongoing Chapter 11 reorganization. Included in the reorganization expense is a provision of $39,500 for the costs of closing 43 stores in January 1994, as well as the DIP fee amortization and expenses, professional fees and other reorganization costs. Offsetting these expenses is a reversal of prior reserves for closings due to the anticipated rejection of closed store leases. (d) In 1992, the Company adopted SFAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires 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.
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS (Amounts in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands)
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 29, 1994; January 30, 1993; and January 25, 1992
(Amounts in thousands except per share amounts)
1 PROCEEDINGS UNDER CHAPTER 11
On September 5, 1993 (the "Petition Date"), the Company filed a voluntary petition for Relief under Chapter 11, Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Eastern District of North Carolina (the Bankruptcy Court). The Company is in possession of its property and is maintaining and operating its property as a debtor-in-possession pursuant to the provisions of Sections 1107 and 1108 of the Bankruptcy Code.
The accompanying consolidated financial statements have been prepared on a going concern basis assuming the realization of assets and liquidation of liabilities in the ordinary course of business. However, under Chapter 11, actions to enforce certain claims against the Company are stayed if such claims arose, or are based on events that occurred, before the Petition Date. The terms of the ultimate settlement of these liabilities will be determined based upon a plan of reorganization to be confirmed by the Bankruptcy Court. Such liabilities are reflected in the Consolidated Balance Sheets as liabilities subject to settlement under reorganization proceedings. Additional liabilities subject to settlement may arise subsequent to the Petition Date as a result of claims filed by parties affected by the Company's rejection of executory contracts, including leases, and from the Bankruptcy Court's resolution of allowed rejection of executory contracts, including leases, and from the Bankruptcy Court's resolution of allowed claims for contingencies and other disputed amounts. During 1993, the Company endeavored to notify all known potential creditors of the filing for the purpose of identifying all pre- petition date claims. Generally, creditors had until the January 13, 1994 "Bar Date" to file claims. The Company is actively negotiating with creditors to reconcile and resolve the balance of disputed claims totaling approximately $150,000. A significant portion of this amount is comprised of disputed claims that, in the opinion of management, will not result in additional liability to the Company.
Under Section 1121 of the Bankruptcy Code, for 120 days after the date of the filing of a voluntary petition for relief under Chapter 11, only the debtor-in-possession has the right to propose and file a plan of reorganization with the Bankruptcy Court. If a debtor-in-possession files a plan of reorganization during the 120-day exclusivity period, no other party may file a plan of reorganization until 180 days after the date of filing of the Chapter 11 petition, during which period the debtor-in-possession has the exclusive right to solicit acceptances of the plan. If a debtor-in-possession fails to file a plan during the 120-day exclusivity period or such additional period as may be ordered by the Bankruptcy Court or, after such plan has been filed, fails to obtain acceptance of such plan from impaired classes of creditors and equity security holders during the exclusive solicitation period, any party in interest, including a creditors' committee, an equity security holders' committee, a creditor, an equity security holder, or any indenture trustee may file a plan of reorganization for such debtor. Additionally, if the Bankruptcy Court were to appoint a trustee, the exclusivity period, if not previously terminated, would terminate.
The Company has not yet filed a plan of reorganization with the Bankruptcy Court and has obtained from the Bankruptcy Court an extension of the exclusivity period to May 31, 1994. The Company intends to file a plan of reorganization prior to May 31, 1994.
After a plan of reorganization has been filed with the Bankruptcy Court, it will be sent, together with a disclosure statement approved by the Bankruptcy Court following a hearing, to members of all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of any plan by impaired classes of creditors and equity security holders, the Bankruptcy Court after notice and a hearing would consider whether to confirm the plan. Among other things, to confirm a plan the Bankruptcy Court is required to find (i) with respect to each impaired class of creditors and equity security holders, that each holder of a claim or interest of such class either (a) will, pursuant to the plan, receive or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retain property of a value, as of the effective date of the plan, that is at least as much as such holder would have received in a liquidation on such date of the Company, or (b) has accepted the plan, (ii) with respect to each class of claims or equity security holders, that such class has accepted the plan or such class is not impaired under the plan and (iii) confirmation of the plan is not likely to be followed by the liquidation or need for further financial reorganization of the Company or any successors unless such liquidation or reorganization is proposed in the plan.
Under the Bankruptcy Code, the rights of stockholders and pre-petition creditors may be substantially altered by the plan of reorganization, either voluntarily or by order of the Bankruptcy Court. The Company's objective is a plan of reorganization that will permit the Company to fund its current operations and meet its obligations to creditors (as they may be restructured under the plan) out of the cash flow generated by the Company after approval and confirmation of the plan. The Company's objective is subject to a number of factors, some of which are within the ability of the Company to control and others of which are not. At this time it is not possible to predict whether the Company will achieve its objective or the effect of the plan of reorganization on the rights of creditors and stockholders of the Company.
On confirmation of a plan of reorganization, the Company expects to utilize "Fresh Start Accounting" in accordance with the guidelines for accounting for emergence from bankruptcy. Fresh Start Accounting is expected to result in a restatement of Company assets to reflect current values.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern Basis The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business, in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities Under the Bankruptcy Code." Substantially all current and long-term liabilities existing at the time the petition for reorganization under Chapter 11 was filed have been reclassified as liabilities subject to settlement under reorganization proceedings. The financial statements do not include any adjustments or reclassifications that might be necessary should the Company be unable to continue in existence.
Consolidated Financial Statements The Company's consolidated financial statements include the accounts of a wholly-owned subsidiary. Intercompany accounts and transactions are eliminated.
Fiscal Year Fiscal years 1993, 1992 and 1991 ended on January 29, 1994; January 30, 1993; and January 25, 1992, respectively. Fiscal year 1993 contained 52 weeks; fiscal year 1992 contained 53 weeks and fiscal year 1991 contained 52 weeks.
Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Interest-bearing cash equivalents are carried at cost, which approximates market. Bank drafts outstanding have been reported as a current liability.
Inventories Substantially all merchandise inventories are valued on a last-in, first-out (LIFO) cost basis.
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 it 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and Amortization The provision for depreciation and amortization is based upon the estimated useful lives of the individual assets and is computed principally by the declining balance and straight-line methods. The principal lives for depreciation purposes are 40 to 45 years for buildings and 5 to 10 years for furniture, fixtures, and equipment. Improvements to leased premises are amortized by the straight-line method over the term of the lease or the useful lives of the improvements, whichever is shorter. Capitalized leases are generally amortized on a straight-line basis over the lease term.
Store Pre-Opening Expenses Pre-opening expenses associated with the opening of new stores are charged to expense as incurred.
Profit-Sharing Plan The Company has a noncontributory trusteed profit-sharing plan for eligible associates. The amount of the contribution is determined by a formula plus additional amounts authorized by the Board of Directors, but may not exceed the maximum allowable deduction for income tax purposes. The plan may be terminated at any time, and if terminated, the Company will not be required to make any further contributions to the trust.
Income Taxes In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Effective January 31, 1993, the Company adopted Statement 109 and reported that the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of operations is immaterial.
Pursuant to the deferred method under APB Opinion 11, which was applied in 1992 and prior years, deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes using the tax rate applicable for the year of the calculation. Under the deferred method, deferred taxes are not adjusted for subsequent changes in tax rates.
Reclassifications Certain reclassifications were made to 1992 balances to conform to the 1993 presentation. These reclassifications have no effect on stockholders' equity as previously reported.
Earnings (Loss) Per Share Earnings (loss) per share is computed on the weighted average number of shares outstanding during the year. The average number of shares used to compute earnings (loss) per share was 18,740 shares in 1993; 18,638 shares in 1992; and 18,593 shares in 1991. The exercise of outstanding stock options and warrants would result in an anti-dilutive effect on earnings (loss) per share and are excluded from the calculation.
Postretirement Health Insurance Benefits The Company provides health insurance benefits for retirees who meet minimum age and service requirements and are covered by the medical plan at retirement. Beginning in 1992, the Company recognizes the cost of retiree health insurance benefits over the associates' period of service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 ACCOUNTS RECEIVABLE
Accounts Receivable are comprised of layaway receivables ($3,262 and $4,574 in 1993 and 1992, respectively) and other receivables ($11,795 and $8,710 in 1993 and 1992, respectively). Other receivables consist primarily of amounts due from vendors for returns, co-op advertising, shoe department income, and coupons.
The Company does not provide for an allowance for doubtful accounts for layaways because the Company holds the merchandise or for other receivables because the Company expects uncollectible amounts to be immaterial as deductions can be taken against future amounts due to vendors.
4 INVENTORIES
A summary of inventories as of January 29, 1994 and January 30, 1993 is as follows:
Fiscal Years 1993 1992 Inventories valued at FIFO cost $ 237,579 268,638 LIFO reserve (34,429) (35,596) Inventories substantially valued at LIFO cost $ 203,150 233,042
In the fourth quarter of 1991, the Company changed its method of accounting for LIFO inventories. Prior to 1991, the Company used the inflation index provided by the Bureau of Labor Statistics to measure inflation in retail prices. In 1991, the Company developed and used internal price indices to measure inflation in the retail prices of its merchandise inventories. The Company believes the use of internal indices results in a more accurate measurement of the impact of inflation in the prices of merchandise sold in its stores. This change resulted in a LIFO credit of $10,323 compared to a charge of $11,105 that would have been recorded if the accounting change had not been made; therefore, the accounting change had the effect of decreasing cost of sales by $21,428 (or $1.15 per share) in 1991.
During 1993 and 1992, inventories were reduced, resulting in the liquidation of LIFO inventory layers. The effect of this inventory liquidation was a reduction in the costs related to closed stores of approximately $1,347 in 1993, and an increase in cost of sales by approximately $3,564 in 1992.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5 PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
6 DEBT
Debt outstanding was as follows:
As a result of the Company's Chapter 11 filing on September 5, 1993 (See Note 1), debt and accrued interest at the time of filing totaling $91,861 have been reclassified as "Liabilities Subject to Settlement Under Reorganization Proceedings" (See Note 7). The Company wrote-off the unamortized balance of deferred financing costs of $4,528 associated with the long-term debt as it was determined no future benefit would be realized from these costs. The write-off is included in reorganization costs for the year ended January 29, 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, under the Bankruptcy Code, interest on pre- petition claims ceases accruing upon the filing of a petition; however, if the claims are collateralized by an interest in property with value (less the cost of preserving such property) exceeding the amount of the debt, post- petition interest may be payable. No determination has yet been made regarding the value of the property which allegedly collateralizes various creditors' claims. While there can be no certainty that post-petition interest will be payable or paid, interest may be paid pursuant to an order of the Bankruptcy Court. In the absence of such an order, no principal or interest payments will be made until a plan of reorganization defining such repayment terms is confirmed. The Bankruptcy Court has ordered the Company to make adequate protection payments to various creditors. Although payments have been made without prejudice to any such future determination of payment classification, certain monthly payments made since September 5, 1993 have been booked as interest expense. Additional adequate protection payments were made to various creditors in January 1994 as described more fully below.
On May 29, 1992 the Company signed an agreement with its long-term lenders to restructure the principal payments of its long-term debt. The agreement resulted in a six and one-half year amortization of the then outstanding long-term notes of $102,500. The restructuring of the term note required a fee payment. The agreement with some of the long-term lenders granted them warrants exercisable into the Company's Non-Voting Class B stock at an option price of $5 per share. Also on May 29, 1992, the Company signed an agreement with its banks to provide revolving credit facilities through May 31, 1994, including an amount designated for letters of credit related to imports. The Company pledged inventories located in approximately 50% (currently 64% of remaining stores) of its stores and a collateral pool of $26,500 to its long- term lenders and banks. The $26,500 collateral pool consisted of the Company's Distribution Center and, to the extent necessary, the inventory located in the Distribution Center. In addition, all other property and equipment were pledged as collateral. The Company also pledged approximately $3,000 of inventory to a long-term lender to collateralize the lender's deferral of previously scheduled payments.
At the time of the Company's filing on September 5, 1993, debt and accrued interest totaling $92,762 were outstanding under its long-term notes and debt and accrued interest totaling $15,617 were outstanding under its revolving credit facilities. The Bankruptcy Court ordered the Company to make certain adequate protection payments relating to cash collateral and proceeds resulting from the stores closed in January 1994 that were pledged to its lenders and banks. In January 1994, the Company made adequate protection payments totaling $16,518 to its lenders in accordance with the related Bankruptcy Court orders. Although the payments were made without prejudice to any such future determination of payment classification, the payments were applied against debt and accrued interest outstanding as of September 5, 1993, in accordance with the applicable loan documents. The Company entered into a Debtor-in-Possession Revolving Credit Agreement dated as of September 20, 1993, (the "DIP Facility") with G. E. Capital Corporation, as lender, under which the Company is allowed to borrow or issue letters of credit up to $125,000 for general corporate purposes, subject to certain restrictions defined in the DIP Facility. The term of the DIP Facility is for twenty-four months unless extended by the lender and the Bankruptcy Court upon request by the Company. On October 14, 1993, a motion was entered in Bankruptcy Court authorizing the Debtor-in-Possession to borrow funds with priority over administrative expenses and secured by liens on property of the Company, subject to certain defined restrictions as further amended on January 31, 1994. The DIP Facility included limitations on capital expenditures, limitations on the incurrence of additional liens and indebtedness, limitations on the sale of assets, limitations on adequate protection payments, and a prohibition on paying dividends. The DIP Facility also includes financial covenants pertaining to EBITDA (earnings before interest, taxes, depreciation, and amortization) and net cash flows. The DIP Lender has a super-priority claim against the property of the Company, other than real property.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The DIP Facility has a sub-limit of $35,000 for the issuance of letters of credit. As of January 29, 1994, approximately $19,316 in letters of credit were outstanding.
At the Company's option, the Company may borrow at an index rate, which is the highest prime or base rates of interest quoted by specified banks or the latest annualized yield on 90 day commercial paper, plus 1.25% or at the LIBOR rate plus 2.25%. Although there are no compensating balance requirements, the Company is required to pay a fee of .5% per annum of the average unused portion of the DIP Facility.
At January 29, 1994, no borrowings were outstanding under the DIP Facility. The average borrowings amount under the facility was $27,781 with a daily weighted average annual interest rate of 5.9%. The maximum amount of borrowings outstanding under the DIP Facility at any period end was $33,930.
The average amount of short-term borrowings under the Company's revolving credit facilities prior to September 5, 1993, was $6,767 with a daily weighted average annual interest rate of 9.0%. The maximum amount of short-term borrowings at any period-end under the Company's revolving credit facilities prior to September 5, 1993, was $15,500.
No short-term borrowings were outstanding at January 30, 1993 and January 25, 1992. The average amount of short-term debt outstanding was $10,849 for 1992 and $30,145 for 1991 with daily weighted average interest rates of 9.3% and 8.9%, respectively. The maximum amount of short-term debt outstanding at any period-end was $40,500 in 1992 and $58,000 in 1991.
7 LIABILITIES SUBJECT TO SETTLEMENT UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to settlement under the reorganization proceedings have been separately classified and consist of the following:
Fiscal
Pre-petition debt and interest $ 91,861
Accounts payable 85,057
Lease rejection claims 21,314
Accrued liabilities 9,224
$207,456
Included in current liabilities is $4,000 related to estimated vendor reclamation claims for merchandise received immediately prior to the filing date. Under the terms of the bankruptcy, once court approval is obtained, such claims may be settled in full currently for 60% of their agreed upon value or partially with 42% being paid currently and the remaining portion settled with other administrative claims.
Actions to enforce liabilities subject to settlement are stayed while the Company is under the protection of the Bankruptcy Code. As part of the Chapter 11 reorganization process, the Company has endeavored to notify all known or potential creditors of the Filing for the purpose of identifying all pre-petition claims against the Company. Generally, creditors whose claims arose prior to the Petition Date had until the January 13, 1994 "Bar Date" to file claims or be barred from asserting claims in the future, except in instances of claims arising from the subsequent rejection of executory contracts by the Company, the Company's subsequent recovery of property transferred to claimants prior to September 5, 1993, and for claims related to certain other items including income taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is actively negotiating with creditors to reconcile and resolve the balance of disputed claims totaling approximately $150,000. A significant portion of this amount is comprised of disputed claims that, in the opinion of management, will not result in additional liability to the Company. The additional liability, if any, relating to the remainder of outstanding disputed claims is not subject to reasonable estimation. As a result, no provision has been recorded for these claims. The Company will recognize the additional liability, if any, as these amounts become subject to reasonable estimation.
Additional bankruptcy claims and pre-petition liabilities may arise from the termination of other contractual obligations and the settlement of disputed claims. Consequently, the amount included in the consolidated balance sheet as liabilities subject to settlement under reorganization proceedings may be subject to further adjustment.
8 INTEREST EXPENSE
Interest expense consisted of the following:
Fiscal Years 1993 1992 1991 Long-term debt $ 9,629 10,559 9,423 Short-term debt 917 1,004 2,647 Capital leases 579 794 1,100 Other 929 1,524 754 Interest expense $12,054 13,881 13,924
The Company paid interest of $10,747 in 1993, including $299 related to the DIP facility classified as reorganization expense, $17,235 in 1992 and $15,325 in 1991.
9 RESERVE FOR FUTURE STORE CLOSINGS AND REMERCHANDISING
Negatively impacting the results of 1991 was a $33,891 provision for future store closings and remerchandising. $24,891 of this charge provided for the closing expenses of approximately 15 stores closed in 1992 including expected losses on dispositions of related store fixtures and the present value of anticipated future rental payments on these stores. The remaining $9,000 of the provision related to the payroll costs and inventory reductions that were incurred in 1992 in order to make a significant change in the Company's merchandise mix.
The closed store reserve was increased by $39,500 in 1993 to provide for the effect of 43 stores closed in January 1994. This expense was offset by $13,026 relating to the rejection of certain closed store leases during the reorganization process. Included under liabilities subject to settlement under reorganization proceedings is $21,314 related to closed store lease rejection claims.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The closed store reserve has decreased by $8,153 in 1993 and $24,944 in 1992. Following are the cash and noncash items charged to the reserves in 1993 and 1992:
The cash expenses include the operating results until closing, rental payments and costs of removing fixtures from closed stores, and the payroll costs and inventory reductions associated with the remerchandising.
10 STOCKHOLDERS' EQUITY
There are 30,000 shares (with no par value per share) each of Voting Common and Non-Voting Class B Stock authorized. The number of shares issued and outstanding was as follows:
Fiscal Years
1993 1992 Voting Common Stock 8,262 8,262 Non-Voting Class B Stock 10,496 10,422 Total 18,758 18,684
On January 24, 1991, the Board of Directors adopted a resolution suspending the payment of dividends until future operating profits warrant reinstatement. Among other things, the Company's DIP Facility includes restrictions on the payment of cash dividends and the repurchase of stock. At January 29, 1994, such restrictions preclude the payment of dividends or the repurchase of stock. In addition, the Company is precluded from paying dividends while the Chapter 11 case is pending and the Registrant does not believe it is likely that it will pay dividends for the foreseeable future following termination of the Chapter 11 case.
11 STOCK OPTIONS
The Company's Equity Compensation Plan, which was approved by the stockholders on May 22, 1991, is designed to benefit 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 1,500 shares of Non-Voting Class B Stock. One half of the options are exercisable one year after the date of grant with the balance exercisable two years after grant date. The option price per share is equal to the fair market value on the date of grant for all options granted prior to June 1992. Effective June 1992, the option price per share is equal to the greater of $5 or the fair market value on the date of grant.
On October 19, 1992, the Board of Directors approved the Adjunct Stock Plan for officers of the Company for issuance as of November 2, 1992, and authorized 842 shares of the Non-Voting Class B Stock currently held as treasury shares to be made available for issuance under the Equity Compensation Plan. This plan was approved by stockholders on May 26, 1993. The stock options granted to the officers are contingent on a stock price of $15 being attained during the three-year period beginning November 2, 1992 and the stock price remaining above $12 for at
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
least 30 days thereafter. The option price is $5.
On May 26, 1993, the stockholders approved a provision for nondiscretionary grants of stock options to Outside Directors with an initial grant dated January 1, 1993. The stock options granted to Outside Directors consist of an option to purchase 5 shares of Non-Voting Class B Stock. Each Outside Director is entitled to receive a maximum of three such awards. The exercise price per share for each Outside Director is the greater of the fair market value as of each option grant date or $5. Each award of a nondiscretionary stock option to Outside Directors is fully vested and may be exercised in full or in part. These options cease to be exercisable three months after the optionee ceases to be an Outside Director, unless attributable to death or disability, in which case such option expires one year thereafter. The Company has granted 55 shares to Outside Directors year- to-date at an exercise price of $5 per share.
Information regarding the Company's stock option plan is summarized below:
Price Number of Range Shares
Outstanding, January 25, 1992 $2.50 - 7.00 1,379 Granted 3.63 - 6.22 275 Exercised 2.50 - 3.88 (101) Canceled 2.50 - 6.38 (212) Outstanding, January 30, 1993 2.50 - 7.00 1,341 Granted 5.00 - 6.31 687 Exercised 2.50 - 4.75 (74) Canceled 2.50 - 6.69 (224) Outstanding, January 29, 1994 2.50 - 7.00 1,730 Exercisable, January 29, 1994 2.50 - 7.00 1,274
12 REORGANIZATION COSTS
Professional fees and expenditures directly related to the filing have been segregated from normal operations and are disclosed separately. The major components of these costs for fiscal 1993 are as follows:
Closed store provision $ 39,500
Closed store lease rejections (13,026)
DIP financing fees and expense
amortization 1,238
Write-off of pre-petition debt
issue costs 4,528
Professional fees and other bankruptcy related expenses 6,898
Total reorganization costs $ 39,138
The store closing provision covers both the costs incurred in closing 43 stores in January, 1994, together with penalties to be incurred upon the rejection of related building and personal property leases. Offsetting these expenses is a reversal of prior reserves for closings due to the rejection of closed store leases.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13 INCOME TAXES
Effective January 31, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As permitted under the new rule, prior years' financial statements have not been restated. The cumulative effect of adopting this Statement as of January 31, 1993 was immaterial to net earnings.
The components of income taxes (benefits) were as follows:
Fiscal Years 1993 1992 1991 Taxes currently payable (receivable): Federal $ - (7,578) (4,930) State - (21) (395)
- (7,599) (5,325) Deferred: Federal - 6,650 10,095 State - - 9 - 6,650 10,104 $ - (949) 4,779
A reconciliation of income taxes (benefits) from federal
statutory rates to actual tax rates follows:
As discussed above, the company changed its method of accounting for income taxes from the deferred method to the liability method. The objective of the liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled.
The significant components of deferred income tax expense for the year ended January 29, 1994 are as follows:
Deferred tax expense (exclusive of the effects of other components listed below) $(22,674) Increase in beginning-of-the-year balance of the valuation allowance for deferred tax assets 22,674 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at January 29, 1994 are presented below:
Deferred Deferred Tax Tax Assets Liabilities Depreciation $ - 2,579 Vacation pay accrual 1,300 - Self insurance 2,454 - Accrued store closing costs 17,131 2,295 LIFO - 6,444 Postretirement health insurance 2,395 - Net operating loss carryovers 36,984 - TJTC carryforwards 738 - Altmin credit carryforwards 427 - Other 3,441 560
64,870 11,878 Valuation allowance (52,992) - Total $11,878 11,878
Deferred income taxes prior to January 31, 1994 generally resulted from timing differences in the recognition of income and expense for tax and financial statement purposes. Such timing differences related primarily to closed stores, depreciation, and the remerchandising reserve. For 1991, $8,970 of deferred tax assets were written off as having no realizable value. The deferred tax assets that were written off represented the deferred taxes primarily resulting from the 1990 and 1991 accruals of closed store expenses. The write-down of deferred tax assets in 1991 was necessary because 1991 year-end deferred tax assets would have exceeded the potential Federal and State carrybacks that remained after the carryback of the 1991 NOL. Additional tax losses incurred during 1992 consumed the remaining deferred tax assets with the resulting NOL, thus eliminating the need for an additional write-off.
For the years ended January 30, 1993 and January 25, 1992, deferred income tax expense of $6,650 and $10,104, respectively, results from timing differences in the recognition of income and expense for income tax and financial reporting purposes.
The changes to deferred taxes were as follows:
Fiscal Years 1992 1991
Write-down of excess deferred tax assets $ - 8,970 LIFO (249) 8,850 Remerchandising reserve 2,383 (3 717) Closed stores 3,998 (3,672) Depreciation (551) (842) Deferred income 372 533 Insurance 633 (357) Compensation (31) (152) Capitalized inventory costs 145 117 Other (50) 374 $6,650 10,104
The Company has federal net operating loss income tax carryforwards totaling $108,776. These carryforwards consist of $63,434 from 1992 and $45,342 from 1993 that expire in January, 2008 and 2009, respectively, and will be available to reduce future federal income tax liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14 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 may renegotiate or reject leases that it may otherwise have retained had no filing been made.
At January 29, 1994, minimum rental payments due under the above leases are as follows:
Executory costs, such as real estate taxes, insurance, and maintenance, are generally the obligation of the lessor.
Amortization of capitalized leases was approximately $2,191 in 1993, $2,345 in 1992, and $3,402 in 1991.
Total rental expense for the three years ended January 29, 1994 was as follows:
Fiscal Years 1993 1992 1991 Operating Leases: Minimum rentals $40,842 42,652 45,537 Contingent rentals 5,205 10,254 10,050 $46,047 52,906 55,587
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.
The Company is a guarantor on leases of property which have been re-leased to other parties. The amount of the outstanding minimum rentals over the next one to five years under those leases was $3,637 at January 29, 1994.
Included in rent expense was $908 for 1993, $1,071 for 1992, and $974 for 1991, paid to lessors controlled by or affiliated with certain current directors of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15 POSTRETIREMENT HEALTH INSURANCE BENEFITS
The Company provides health insurance benefits for retirees who meet minimum age and service requirements. In addition, the associate must be covered under the active medical plan at the time of retirement to be eligible for postretirement benefits and must agree to contribute a portion of the cost. The Company has the right to modify or terminate these benefits, including the retiree contribution. The plan is not funded.
In 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (SFAS 106), retroactive to January 26, 1992. SFAS 106 requires the Company to recognize the cost of retiree health insurance benefits over the associates' period of service. The cumulative effect of adopting SFAS 106 was a one-time charge to net earnings of $5,031.
The periodic postretirement benefit cost under SFAS 106 was as follows:
Net Periodic Postretirement Benefit Costs: Fiscal Years 1993 1992 Service costs $ 203 181 Interest costs 451 426 Other 12 - $ 666 607
The present value of accumulated postretirement benefit obligations
and the amount recognized in the consolidated balance sheets were as follows:
Accumulated Postretirement Benefit Obligations: Fiscal Years 1993 1992 Retirees $1,730 1,710 Fully eligible active plan participants 1,577 1,251 Other active plan participants 3,738 3,054 7,045 6,015 Unrecognized Loss (1,431) (719) Total accumulated postretirement benefit obligations $5,614 5,296
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% for 1993 and 8.5% for 1992.
An increase in the cost of health insurance benefits of 9% was assumed for fiscal year 1994. The rate is assumed to decline gradually to 5% in 2001, and remain at that level thereafter. A 1% increase in the health-care cost trend rate would increase the accumulated postretirement benefit obligation at January 29, 1994, by $605 and the 1993 annual expense by $67.
16 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17 SUBSEQUENT EVENTS
On April 4, 1994, the Company announced plans to close approximately 58 additional stores. An additional reorganization expense of approximately $55,000 will be included in the first quarter of 1994 to provide for these closings. The following reflects, on a proforma basis, the impact of these store closings on the consolidated balance sheet as of January 29, 1994:
18 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations during the years ended January 29, 1994 and January 30, 1993:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Included in the fourth quarter of 1993 reorganization cost is a $5,000 reduction of a $44,500 third quarter charge taken for the estimated costs of closing 43 stores in January 1994. Included in 1993 reorganization costs, in addition to the costs of closing the 43 stores, are DIP fee amortization and expenses, professional fees and other reorganization costs. Offsetting these expenses is a reversal of prior provisions for closings due to the anticipated rejections of closed store leases.
(b) In 1992, the Company adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires 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.