THIS DOCUMENT IS A COPY OF THE FORM 10K FILED ON APRIL 1, 1999
PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-631
ROSE'S HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-2043000
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
150 East 52nd Street, 21st Floor
New York, New York
10022
(Address and zip code of principal executive offices)
212-813-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
As of December 31, 1998, of the 5,003,865 shares of common stock delivered
to First Union National Bank of North Carolina ("FUNB"), as Escrow Agent,
pursuant to the Modified and Restated First Amended Joint Plan of
Reorganization, 693,673 shares have been returned to the Company and canceled,
and 4,310,192 shares are outstanding. As of February 26, 1999, all disputed
Class 3 claims have been resolved and all shares held in escrow have reverted to
the Company and retired. Indicate the number of shares outstanding of each of
the registrant's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MARCH 29, 1999
Common Stock, par value $.001 4,229,224 Shares
<PAGE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business......................................................... 1
Item 2. Properties....................................................... 3
Item 3. Legal Proceedings................................................ 3
Item 4. Submission of Matters to a Vote of Security Holders.............. 3
PART II
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters............................. 4
Item 6. Selected Financial Data.......................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 6
Item 7A Quantitative and Qualitative Disclosures About Market Risk....... 8
Item 8. Financial Statements and Supplementary Data...................... 8
Item 9. Changes In and disagreements With Accountants
on Accounting and Financial Disclosure.......................... 8
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 9
Item 11 Executive Compensation...................................... 9
Item 12 Security Ownership of Certain Beneficial Owners
and Management............................................. 9
Item 13 Certain Relationships and Related Transactions.............. 9
PART IV
Item 14 Exhibits, Financial Statement Schedules,
and Report on Form 8-K..................................... 10
Signatures ............................................................ 11
<PAGE>
PART I
Item 1. Business
OVERVIEW
Rose's Holdings, Inc. (the "Company"), is a Delaware corporation,
incorporated in 1997 to act as a holding company for Rose's Stores, Inc., an
operator of general merchandise discount stores founded in 1927 in Henderson,
North Carolina ("Stores").
On September 5, 1993, Stores filed a voluntary petition for Relief under
Chapter 11, Title 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the Eastern District of North Carolina (the "Bankruptcy
Court"). Stores Modified and Restated First Amended Joint Plan of Reorganization
(the "Plan") was approved by Order of the Bankruptcy Court on April 24, 1995. On
April 28, 1995, the Plan became effective. Details of the bankruptcy proceedings
are discussed in Note 3 to the Company's Financial Statements included elsewhere
herein.
In August 1997, Stores was reorganized into a holding company structure and
became a wholly-owned subsidiary of the Company. On December 2, 1997, the
Company consummated the sale to Variety Wholesalers, Inc. ("Variety") of all of
the outstanding capital stock of Stores (the "Sale") pursuant to a Stock
Purchase Agreement, dated as of October 24, 1997, between the Company and
Variety (the "Stock Purchase Agreement"). The Sale constituted the disposition
by the Company of substantially all of its assets and was approved by the
holders of a majority of the outstanding shares of Common Stock at a special
meeting of the stockholders of the Company on December 2, 1997. The total
purchase price for the Sale was $19,200,000, including $1,920,000 which was
placed in escrow. The proceeds of the Sale, net of certain transaction, closing,
and other costs, were $15,331,000 (including the escrow). For further
information with respect to the Sale, the Stock Purchase Agreement, and related
matters, reference is made to the Company's definitive proxy statement, dated
November 10, 1997, as filed with the Securities and Exchange Commission.
On August 31, 1998, the Company, through Rose's International, Inc.
("International"), a newly formed, wholly-owned Delaware subsidiary, consummated
the acquisition of 90% of the outstanding common stock of WebBank Corporation, a
Utah industrial loan corporation ("WebBank"), pursuant to an assignment (the
"Assignment") from Praxis Investment Advisers, a Nevada limited liability
company ("PIA"), of a stock purchase agreement, dated January 20, 1998 (the
"Purchase Agreement"), between PIA and Block Financial Corporation ("Block"),
relating to the purchase by PIA of all of the issued and outstanding shares of
common stock of WebBank. Pursuant to the Assignment, the Company paid Block
$4,783,000 for the shares of WebBank's common stock to be purchased from Block
pursuant to the Purchase Agreements. In addition the Company paid $288,000 in
acquisition costs, for a total purchase price of $5,071,000.
Also on August 31, 1998, the Company formed Praxis Investment Advisers,
Inc., a Delaware corporation ("Praxis") which together with International and
Andrew Winokur, the holder of the 10% of Praxis not owned by the Company ("AW"),
has entered into a management agreement (the "Management Agreement") under which
Praxis has agreed to provide certain management services to AW and International
in connection with the ownership and operation of WebBank. The Management
Agreement provides that Praxis may make recommendations to and consult with, the
management and board of directors of WebBank with respect to the deployment of
WebBank's capital, the development of its business lines, its acquisition of
assets and its distributions to its stockholders.
<PAGE>
DESCRIPTION OF BUSINESS
The subsidiaries of the Company described above operate in the banking
environment. Following is a description of their recent activities and
structure. WebBank engages in commercial finance transactions, U.S. Government
credit enhancement and consumer specialty financing. WebBank is an FDIC insured
Utah industrial loan corporation which, although a state chartered institution,
possesses some characteristics of a national bank.
WebBank has three innovative approaches to its market:
1. Strategic Alliances--Many specialty finance, consumer and mortgage lending
companies operate inefficiently across state lines due to state specific
regulatory requirements. Through a strategic alliance with WebBank,
financial product originators can provide their products uniformly and
efficiently through WebBank's national charter. WebBank has the ability to
help companies originate their asset classes with financial provisions
allowable under Utah law. WebBank will be paid a fee and provide normal
processing protections to ensure full compliance with its regulatory
requirements. Currently WebBank has one program established and operating,
and has just reached agreement on a second national alliance.
2. Portfolio Development-- WebBank is currently utilizing a relationship with
a national bank that provides wholesale certificates of deposit to obtain
FDIC insured funds at a highly competitive rate. These funds in turn are
deployed in commercial credit enhancement programs administered by several
agencies of the U.S. government. The loan program is an example of the
synergy between the Company's subsidiaries emphasizing product and sourcing
relationship development (from Praxis) and underwriting, execution and
regulatory compliance (from WebBank). The emphasis inherent in this
function is to identify product (originated by others) and to selectively
identify loans where opportunity-pricing benefits can be obtained.
3. U.S. Government Credit Enhancement--The business development programs of
the federal government provide significant opportunity for lenders to
provide financing to higher risk creditors through the use of government
guarantees. Such loans can then be pooled and converted into marketable
securities. Currently, both U.S. Department of Agriculture programs and
those administered by the U.S. Small Business Administration are being
actively pursued.
Praxis, based in St. Helena, California, provides research and development
in creating financial products, followed by implementing practical realization
of those products. Following is a description of two current programs of Praxis:
1. Assignable Annuity Purchase and Securitization--Praxis will set up an
investment vehicle that will buy obligations of highly rated insurance
companies where the assignment process is perfect and irrevocable, and
these are the most senior obligations of the Company. In most cases other
senior obligations yield substantially higher than similar obligations and
so once critical mass is achieved these will be securitized.
2. Film Financing --Praxis will provide financing to the film industry, backed
by major well-rated insurance companies which will provide insurance that
the film is finished and certain minimum revenue streams are achieved.
<PAGE>
Item 2. Properties
As of March 31, 1998, the Company entered into a sub-lease for office space
with Gateway Industries, Inc. The rent is approximately $2,700 a month. This
lease runs through March 31, 2001, but may be terminated by either party with 90
days notice. Warren Lichtenstein, the Company's President, Chief Executive
Officer, and Chief Accounting Officer, is the Chief Executive Officer and the
principal stockholder for Gateway Industries, Inc.
Item 3. Legal Proceedings
The registrant is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote at the annual meeting of
stockholders of the Company, held on November 4, 1998 and continued on November
11, 1998:
1. Proposal to amend the Company 's Restated Certificate of Incorporation to
(i) changed the par value of the Company 's capital stock from no par value
to $.001 par value per share and (ii) deleted therefrom certain unnecessary
provisions relating to the bankruptcy of the Corporation's former operating
subsidiary; (FOR: 5,315,750; AGAINST: 17,617; ABSTAINED: 18,394)
2. Proposal to amend the Company 's Restated Certificate of Incorporation to
effect a reverse stock split followed by a forward stock split of the
Company 's common stock; (FOR: 6,568,355; AGAINST: 28,757; ABSTAINED:
27,262)
3. Proposal to amend the Company 's Restated Certificate of Incorporation to
(i) eliminate the Corporation's staggered Board of Directors and (ii)
reduce the required number of Board members; (FOR: 5,961,157; AGAINST:
112,668; ABSTAINED: 7,355)
4. Proposal to approve the performance bonus award to the president and chief
executive officer of a subsidiary of the Company to qualify such award
under Section 162(m) of the Internal Revenue Code of 1986, as amended;
(FOR: 5,145,773; AGAINST: 185,110; ABSTAINED: 24,878)
5. Proposal to approve the merger of the Company 's New Equity Compensation
Plan with the Long Term Stock Incentive Plan, together with certain
amendments to the Long Term Stock Incentive Plan; (FOR: 5,192,265; AGAINST:
137,926; ABSTAINED: 25,570)
6. Ratified the appointment of KPMG LLP, independent accountants, to audit the
books and accounts of the Company. (FOR: 6,614,080; AGAINST: 5,374;
ABSTAINED: 4,920)
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
The Common Stock was listed on the Nasdaq National Market System until March
11, 1998, at which time the Common Stock was delisted because the Company
had no commercial operations. Since such date, the Common Stock has traded
on the NASD OTC Bulletin Board (symbol "RSES"). The Company had 610 holders
of record of Common Stock on March 18, 1999. The Company paid no dividends
on its Common Stock in 1998 or 1997. High and low prices of the Common
Stock, as reported on the NASDAQ OTC Bulletin Board, are shown in the table
below:
<TABLE>
<CAPTION>
Eleven Months Ended Fiscal Year Ended
January 31, 1998 Decmber 31, 1998
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter 3 1/8 3 7/64 3 3/4 3 5/8
2nd Quarter 3 5/8 3 5/8 2 13/16 2 13/16
3rd Quarter 4 3/16 4 3 9/16 3 5/16
4th Quarter 6 5 27/32 3 3/16 3 1/32
</TABLE>
<PAGE>
Item 6. Selected Consolidated Financial Data
(Amounts in thousands except per share amounts.
Not covered by Report of Independent Public Accountants)
<TABLE>
<CAPTION>
Eleven Months
Ended December 31, Fiscal Years
1998 1997(a) 1996
<S> <C> <C> <C>
Revenue:
Total Revenue .......................................... $ -- $ -- $ --
Costs and Expenses:
Total costs and expenses ............................... 1,450 347 --
Other Income ................................................. 676 418 --
Earnings (Loss) from
continuing operations .................................. (774) 71 --
Discontinued Operations:
Earnings (loss) from
operation of discontinued
business ............................................. -- (3,163) 380
Loss from disposal of
discontinued operation ............................... -- (22,446) --
Earnings (loss) from
discontinued operation ............................... -- (25,609) 380
Net earnings (loss) before
minority interest ...................................... (774) (25,538) 380
Loss attributable to
minority interests ..................................... 59 -- --
Net earnings (loss) .......................................... $ (715) $ (25,538) $ 380
Net earnings (loss) per common
share-basic and diluted .............................. (0.17) (5.91) .09
Cash dividends ............................................... -- -- --
Total assets ................................................. 15,980 15,408 160,332
<FN>
- --------------
(a) On December 2, 1997, the Company sold all of the outstanding stock of Rose's
Stores, Inc. ("Stores") its sole operating entity. The operating results of
Stores prior to the consummation of the sale are shown as earnings or loss of
discontinued business. The loss resulting from the sale is show as loss from
disposal of discontinued operation.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
OVERVIEW
Rose's Holdings, Inc. (the "Company") was incorporated in August 1997 as a
holding company. In December 1997, the Company divested itself of Rose's Stores,
Inc., then its only operating subsidiary, and in August 1998, the Company
consummated a transaction in which it acquired a 90% interest in WebBank, a Utah
industrial loan corporation, and Praxis.
WebBank and Praxis operate in the banking environment. WebBank provides
commercial and consumer specialty finance transactions utilizing U.S. Government
credit enhancement. The benefits of WebBank's special charter allow it to
"export" Utah's regulatory environment (interest rates, late charges, and
prepayment fees, etc.) to forty-eight other states.
RESULTS OF OPERATIONS
Revenue--The Company reported gross revenue for the eleven months ended
December 31, 1998, of $676,000, as a result of interest income on an outstanding
loan receivable, securities available-for-sale, and cash and cash equivalents.
Costs and Expenses--Selling, general and administrative expenses ("SG&A")
for the consolidated Company totaled $1,450,000 for the eleven months ended
December 31, 1998 and consisted primarily of salary and benefits, facilities
rentals and professional fees. There are no comparable prior year figures for
SG&A as the discontinued operation was being liquidated and the new subsidiaries
were not yet acquired or formed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents totaled $8,681,000 at December 31,
1998. The Company's management believes that the Company's current cash flows
are adequate to meet its liquidity needs.
As of August 31, 1998 the Company purchased 90% of WebBank for $5,071,000
and formed Praxis with 90% ownership for $428,000 including a total of $288,000
for acquisition costs. With $8,681,000 cash available the Company is seeking
additional acquisitions and/or merger transactions in which to employ its cash.
No firm commitments have been realized and no letters of intent have been signed
at this time. There can be no assurance that the Company will be able to locate
or purchase a business, or that such business, if located and purchased, will be
profitable. In order to finance an acquisition, the Company may be required to
incur or assume indebtedness or issue securities.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE INDICATED BY FORWARD-LOOKING STATEMENTS MADE IN
THIS ANNUAL REPORT ON FORM 10-K AND PRESENTED ELSEWHERE BY MANAGEMENT. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. A NUMBER OF
UNCERTAINTIES EXIST THAT COULD AFFECT THE COMPANY'S FUTURE OPERATING RESULTS,
INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC CONDITIONS, CHANGES IN INTEREST
RATES, THE COMPANY'S ABILITY TO ATTRACT DEPOSITS, AND THE COMPANY'S ABILITY TO
CONTROL COSTS. BECAUSE OF THESE AND OTHER FACTORS, PAST FINANCIAL PERFORMANCE
SHOULD NOT BE CONSIDERED AN INDICATION OF FUTURE PERFORMANCE. THE COMPANY'S
FUTURE OPERATING RESULTS MAY VARY SIGNIFICANTLY. INVESTORS SHOULD NOT USE
HISTORICAL TRENDS TO ANTICIPATE FUTURE RESULTS AND SHOULD BE AWARE THAT THE
TRADING PRICE OF THE COMPANY'S COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS
IN RESPONSE TO QUARTERLY VARIATIONS IN OPERATING RESULTS AND OTHER FACTORS,
INCLUDING THOSE DISCUSSED ABOVE.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Any of the Company's
computer programs or other information systems that have time-sensitive software
or embedded microcontrollers may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations. During fiscal 1998, the
Company completed an initial review of its information and non-information
technology systems. This review included its existing and planned computer
software and hardware. The Company has made an initial determination, based on
its initial review, that the costs and/or consequences associated with the Year
2000 issue are not expected to have a material effect on its business,
operations or future financial condition. A second, more in-depth analysis was
also conducted, and included the testing of information systems. Based on these
reviews, the Company presently believes that the Year 2000 Issue will not pose
significant operational problems for its computer and other information systems.
If required, the Company will utilize both internal and external resources
to reprogram, or replace, and test the software and systems for Year 2000
modifications. If such modifications, conversions and/or replacements are not
made, are not completed timely, or if any of the Company's suppliers or
customers do not successfully deal with the Year 2000 Issue, the Year 2000 Issue
could have a material impact on the operations of the Company and/or its
subsidiaries. The severity of these possible problems would depend on the nature
of the problem and how quickly it could be corrected or an alternative
implemented, which is unknown at this time.
While management has not yet specifically determined the costs associated
with its Year 2000 readiness efforts, monitoring and managing the Year 2000
Issue will result in additional direct and indirect costs to the Company. Direct
costs include potential charges by third-party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. Such costs have not been material to date. Both
direct and indirect costs of addressing the Year 2000 Issue will be charged to
earnings as incurred.
After evaluating its internal compliance efforts as well as the compliance
of third parties as described above, the Company has developed appropriate
contingency plans to address situations in which various systems of the Company,
or of third parties with which the Company does business, are not year 2000
compliant. Some risks of the Year 2000 Issue, however, are beyond the control of
the Company and its suppliers and customers. For example, no preparations or
contingency plan will protect the Company from a downturn in economic activity
caused by the possible ripple effect throughout the entire economy caused by the
Year 2000 Issue.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which becomes effective on January 1, 2000 for calendar
year companies such as the Company. The new standard will significantly change
the accounting treatment of end-user derivative contracts. Depending on the
underlying risk management strategy, these accounting changes could affect
reported earnings, assets, liabilities, and stockholders' equity. As a result,
the Company will have to reconsider its risk management strategies, since the
new standard will not reflect the results of many of those strategies in the
same manner as current accounting practice. The Company is in the process of
evaluating the potential impact of the new accounting standard.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains an investment portfolio and participates in
commercial loans. Both of these activities are subject to specific policies that
are focused on preserving principal, maintaining proper liquidity to meet
operating needs, and maximizing yields.
The Company's operations may be subject to a variety of market risks, the
most material of which is the risk of changing interest rates. Most generally,
interest rate risk is the volatility in financial performance attributable to
changes in market interest rates, which may result in either fluctuation of net
interest income or changes to the economic value of the equity of the Company.
After a review of its investments and commercial loans as of December 31,
1998, the Company has determined that its current exposure to interest rate risk
would not result in a significant impact to the financial statements taken as a
whole.
Item 8. Financial Statements and Supplementary data
See the Company's Consolidated Financial Statements contained elsewhere
herein.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers
The information required by this item will be included under the captions
"ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS" of the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report and
is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be included under the caption
"Executive Compensation" in the Company's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year covered by this report and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included under the captions
"Principal Stockholders" and "Beneficial Ownership of Directors and Management"
in the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the Company's fiscal year
covered by this report and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is will be included under the caption
`Certain Relationships and Related Transactions' in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission within
120 days after the end of the Company's fiscal year covered by this report.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements
See index to consolidated financial statements immediately following the
exhibit index.
(b) Reports on Form 8-K filed during the fourth quarter of the period covered by
this report:
(i) Report on Form 8-K dated August 31, 1998, filed November 16, 1998,
containing pro forma financial information relating to the
Company's acquisition of 90% of the equity interest in WebBank
Corporation, originally reported in the Company's Quarterly Report
on Form 10-Q for the quarterly period ended August 1, 1998.
(c) Exhibits
See exhibit index immediately following the signature page.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ROSE'S HOLDINGS, INC.
By: /s/ Warren G. Lichtenstein_________________
Warren G. Lichtenstein
President, Chief Executive Officer
and Chief Accounting Officer
By: /s/ Jack L. Howard_______________________
Jack L. Howard
Vice President and Chief Financial Officer
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Jack L. Howard_______________________
Jack L. Howard, Director
/s/ Warren G. Lichtenstein_________________
Warren G. Lichtenstein, Director
/s/ Earle C. May_________________________
Earle C. May, Director
- --------------------------------------
Joseph L. Mullen, Director
/s/ Harold Smith_________________________
Harold Smith, Director
<PAGE>
EXHIBIT INDEX
10.1 Purchase Agreement incorporated by reference to exhibit 1 of the Company's
current report on form 10-Q for the period ended August 1, 1998.
10.2 Subscription and Stockholders Agreement incorporated by reference to
exhibit 2 of the Company's current report on form 10-Q for the period ended
August 1, 1998
10.3 Assignment, Transfer and Delegation Agreement incorporated by reference to
exhibit 3 of the Company's Current Report on Form 10-Q for the period ended
August 1, 1998
10.4 Employment Agreement incorporated by reference to exhibit 4 of the
Company's Current Report on Form 10-Q for the period ended August 1, 1998
10.5 Management Agreement incorporated by reference to exhibit 1 of the
Company's Current Report on Form 10-Q for the period ended August 1, 1998
23.1 Consent of Deloitte & Touche, LLP, Independent Auditors. incorporated by
reference to exhibit of the Company's Current Report on Form 8-K for the
period ended August 1, 1998
23.2 Consent of KPMG, LLP, Independent Auditors
27 Financial Data Schedule
<PAGE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS................................ F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS, KPMG LLP......................... F-2
Consolidated Balance Sheets - December 31, 1998 and January 31, 1998....... F-3
Consolidated Statements of Operations for the eleven months ended
December 31, 1998 and for the years ended January 31, 1998
and January 25, 1997....................................................... F-4
Consolidated Statements of Stockholders' Equity for the eleven months
ended December 31, 1998 and for the years ended January 31, 1998 and
January 25, 1997........................................................... F-5
Consolidated Statements of Cash Flows for the eleven months ended
December 31, 1998 and for the years ended January 31, 1998 and
January 25, 1997........................................................... F-6
Notes to Consolidated Financial Statements................................. F-8
<PAGE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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.
The responsibility of our independent auditors, KPMG LLP, is limited to an
expression of their opinion on the fairness of the consolidated 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 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.
By: /s/ Warren G. Lichtenstein_________________
Warren G. Lichtenstein
President, Chief Executive Officer
and Chief Accounting Officer
By: /s/ Jack L. Howard_______________________
Jack L. Howard
Vice President and Chief Financial Officer
<PAGE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rose's Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Rose's
Holdings, Inc. and its subsidiaries as of December 31, 1998 and January 31, 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the eleven months ended December 31, 1998 and the years ended
January 31, 1998 and January 25, 1997. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rose's
Holdings, Inc. as of December 31, 1998 and January 31, 1998 and the results of
its operations and its cash flows for the eleven months ended December 31, 1998
and the years ended January 31, 1998 and January 25, 1997 in conformity with
generally accepted accounting principles.
/s/KPMG LLP
Salt Lake City, Utah
February 12, 1999
<PAGE>
<TABLE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
<CAPTION>
December 31, January 31,
1998 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 8,681 $ 13,465
Cash restricted in escrow 2,018 1,920
Investment securities available for sale (note 5) 2,081 -
Prepaid expense 33 -
Commercial loans 1,081 -
Accrued interest receivable 41 -
Property and equipment, net (note 6) 116 -
Other assets 196 23
Goodwill, net of accumulated
amortization of $41 1,733 -
--------- ---------
$ 15,980 $ 15,408
========= =========
Liabilities
Demand deposits $ 105 $ -
Accounts payable and accrued expenses 326 6
Income taxes payable to subsidiary's former parent 309 -
--------- ---------
Total liabilities before minority interests 740 6
Minority interests 553 -
Stockholders' Equity
Preferred stock, 10,000,000 shares authorized, zero issued - -
Common stock, 50,000,000 shares authorized;
$.001 par value, 4,310,192 shares issued and outstanding at
December 31, 1998; no par value, 4,320,032 shares issued
and outstanding at January 31, 1998 4 35,000
Paid-in capital 36,155 1,159
Accumulated deficit (21,472) (20,757)
--------- ---------
Total stockholders' equity 14,687 15,402
--------- ---------
Commitments and contingencies (note 11)
$ 15,980 $ 15,408
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except share data)
<CAPTION>
Eleven months
ended Year ended Year ended
December 31, January 31, January 25,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and fees on loans $ 30 $ - $ -
Interest on cash equivalents 631 418 -
Interest on investment securities
available for sale 15 - -
--------- ---------- ----------
Total interest income 676 418 -
Selling, general and administrative 1,450 347 -
--------- ---------- ----------
Operating income (loss) (774) 71 -
Earnings (loss) from operation
of discontinued business - (3,163) 380
Loss from disposal of
discontinued business - (22,446) -
---------- ---------- ----------
Earnings (loss) before
minority interest (774) (25,538) 380
Loss attributable to
minority interests 59 - -
---------- --------- ---------
Net earnings (loss) $ (715) $ (25,538) $ 380
========== ========= =========
Basic and diluted
earnings (loss) per share $ (0.17) $ (5.91) $ 0.09
Weighted average number of common shares
and common share equivalents:
Basic and diluted 4,315,966 4,320,032 4,320,032
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Eleven Months Ended December 31, 1998 and Years Ended
January 31,1998 and January 25, 1997
(Amounts in thousands except share data)
<CAPTION>
Retained
earnings Total
Common stock Paid-in (accumulated stockholders'
Shares Amount capital (deficit) equity
<S> <C> <C> <C> <C> <C>
Balance at January 27, 1996 4,320,032 $ 35,000 $ 1,159 $ 4,401 $ 40,560
Net earnings 380 380
--------- -------- -------- -------- --------
- - -
Balance at January 25, 1997 4,320,032 35,000 1,159 4,781 40,940
Net loss (25,538) (25,538)
--------- -------- -------- -------- --------
- - -
Balance at January 31, 1998 4,320,032 35,000 1,159 (20,757) 15,402
Net loss - - - (715) (715)
Shares retired (9,840) - - - -
Assignment of par value to common
stock - (34,996) 34,996 - -
--------- -------- -------- -------- --------
Balance at December 31, 1998 4,310,192 $ 4 $ 36,155 $(21,472) $ 14,687
========= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Amounts in thousands)
<CAPTION>
Eleven
months ended Year ended Year ended
December 31, January 31, January 25,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Operating income (loss) after minority interest $ (715) $ 71 $ -
Adjustments to reconcile operating income (loss)
after minority interest to net cash provided by
(used in) operating activities:
Minority interest (59) - -
Depreciation and amortization 20 - -
Amortization of loan premiums 9 - -
Amortization of goodwill 41 - -
Amortization of premiums for available-for-sale securities 24 - -
Net change attributable to discontinued business - (45,445) 5,521
Net change in assets and liabilities:
Prepaid expense (33) - -
Accrued interest receivable (20) - -
Other assets (145) - -
Accounts payable and accrued expenses 312 - -
---------- ---------- ----------
Net cash provided by (used in) operating activities (566) (45,374) 5,521
Cash flows from investing activities:
Purchase of subsidiary (2,946) - -
Purchase of available-for-sale securities (1,649) - -
Purchase of loans (2,376) - -
Sales of loans 2,157 - -
Proceeds from principal payments received on loans 28 - -
Purchase of property and equipment (47) - -
Minority interest 612 - -
Net change attributable to discontinued business - 11,127 (3,608)
Funds transferred to escrow (98) - -
----------- ----------- ----------
Net cash provided by (used in) investing activities (4,319) 11,127 (3,608)
Cash flows from financing activities:
Net change attributable to discontinued business $ - $ 46,471 $ (1,265)
Net increase in deposits 101 - -
----------- ---------- ----------
Net cash provided by (used in)
financing activities 101 46,471 (1,265)
Net increase (decrease) in cash and cash equivalents (4,784) 12,224 648
Cash and cash equivalents at beginning of period 13,465 1,241 593
----------- ---------- ----------
Cash and cash equivalents at end of period $ 8,681 $ 13,465 $ 1,241
=========== ========== ==========
(continued)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<CAPTION>
Eleven
months ended Year ended Year ended
December 31, January 31, January 25,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of additional non-cash
activities:
Retirement of net book value of assets in
reserve for store closings $ - $ 30 $ -
Capital lease additions - 887 67
Conversion of loan receivable to investment
securities available for sale 216 - -
</TABLE>
During 1998 the Company acquired 90 percent of the outstanding stock of WebBank
Corporation (note 4). The following is a summary of the effect of this
transaction in the Company's consolidated balance sheet:
Assets acquired:
Investment securities available for sale $ (240)
Commercial loans (1,115)
Accrued interest receivable (21)
Property and equipment (89)
Other assets (28)
Goodwill (1,774)
Liabilities assumed:
Demand deposits 4
Accounts payable and accrued expenses 8
Income taxes payable to subsidiary's former parent 309
----------
Net cash used $ (2,946)
==========
See accompanying notes to consolidated financial statements.
<PAGE>
ROSE'S HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
Eleven Months Ended December 31, 1998 and Years Ended
January 31, 1998 and January 25, 1997
(Amounts in thousands except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--The consolidated financial statements include the financial
statements of Rose's Holdings, Inc. and its subsidiaries Rose's International,
Inc. (International), WebBank Corporation (WebBank) and Praxis Investment
Advisors, Inc. (Praxis), collectively referred to as the Company. WebBank is a
Utah-chartered industrial loan corporation, and is subject to comprehensive
regulation, examination, and supervision by the Federal Deposit Insurance
Corporation (FDIC), and the State of Utah Department of Financial Institutions.
WebBank provides commercial and consumer specialty finance transactions
utilizing US Government credit enhancement. Praxis operates primarily as an
investment advisor by providing research and development of financial products
and assistance in implementing those products. All significant intercompany
balances have been eliminated in consolidation.
Basis of Presentation--The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash Equivalents--The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. The
Company also considers investments in mutual funds where the underlying
investment is highly liquid to be cash equivalents. Cash equivalents are stated
at cost, which approximates market.
Earnings Per Share--Basic earnings (loss) per common share is calculated by
dividing net earnings (loss) by the weighted-average number of common shares
outstanding for the period. Diluted net earnings (loss) per common share
reflects the maximum dilutive effect of common stock issuable upon exercise of
stock options and stock warrants. Diluted net earnings (loss) per common share
is not shown in the accompanying consolidated statements of operations, as
common equivalent shares from stock options would have an anti-dilutive effect,
or results would not be materially different from basic earnings per share.
For the eleven months ended December 31, 1998 and the year ended January
31, 1998 there were antidilutive common stock equivalents of 503,534 and 48,939,
respectively. Accordingly, these common stock equivalents were not included in
the computation of diluted earnings (loss) per share for the years presented,
but may be dilutive to future basic and diluted earnings per share.
Investment Securities--The Company classifies its securities as either
available-for-sale securities or held-to-maturity securities. Held-to-maturity
securities are those securities which the Company has the ability and intent to
hold until maturity. All other securities not included in held-to-maturity are
classified as available-for-sale.
Available-for-sale securities are recorded at fair value with net unrealized
gains or losses (net of taxes) excluded from income and reported as a separate
component of stockholders' equity. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of premiums or
discounts. Transfers of securities between categories are recorded at fair value
at the date of transfer. Unrealized holding gains or losses associated with
transfers of securities from held-to-maturity to available-for-sale are recorded
as a separate component of stockholders' equity. The unrealized holding gains or
losses included in the separate component of stockholders' equity for securities
transferred from available-for-sale to held-to-maturity are maintained and
amortized into earnings over the remaining life of the security as an adjustment
to yield in a manner consistent with the amortization or accretion of premium or
discount on the associated security.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost for the security. Interest income
is recognized when earned. Realized gains and losses for securities classified
as available-for-sale or held-to-maturity are included in earnings and are
derived using the specific-identification method of determining the cost of
securities sold.
Loans--Loans receivable held by the Company are reported at the principal amount
outstanding, net of premiums and discounts. Premiums and discounts are
accreted/amortized over the life of the related loan under the interest-yield
method. Interest income is accrued daily as earned.
Allowance for Loan Losses--The allowance for loan losses is established through
a provision for loan losses charged to Company operations. Loan losses are
charged against the allowance when management believes that the collectibility
of the loan principal is unlikely. Recoveries on loans previously charged off
are credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses based on evaluations of collectibility and prior
loss experience. The evaluation takes into consideration such factors as changes
in the nature and volume of the portfolio, overall portfolio quality, specific
problem loans, and current and anticipated economic conditions that may affect
the borrowers' ability to pay. Management also obtains appraisals where
considered necessary.
At December 31, 1998, management has determined that no allowance for loan
losses is necessary. While management uses available information to recognize
losses on loans, changing economic conditions and the economic prospects of the
borrowers might necessitate future additions to the allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
Accrual of interest is discontinued on a loan when the loan is 90 days past
due or when management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of interest is doubtful. Interest income on nonaccrual
loans is credited to income only to the extent interest payments are received.
Loans are restored to accrual of interest when delinquent payments are received
in full. Additionally, the Company uses the cost recovery accounting method to
recognize interest income on impaired loans.
Property and Equipment--Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation of property and
equipment is computed by the straight-line method over estimated useful lives
from one to five years. Leasehold improvements are amortized over the terms of
the related leases or the estimated useful lives of the improvements, whichever
is shorter. Useful lives of leasehold improvements are between three and five
years.
Income Taxes--Deferred tax assets and deferred tax 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 and operating loss and tax credit carryforwards.
Deferred tax assets and deferred tax 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. The effect on deferred tax
assets and deferred tax liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Loans Held for Sale--The Company originates loans to customers under a United
States Department of Agriculture (USDA) program that generally provides for USDA
guarantees of 75 percent to 90 percent of each loan. Loans held for sale are
carried at the lower of cost or estimated market value in the aggregate. The
Company plans to sell the guaranteed portion of each loan to a third-party and
retain the unguaranteed portion in its own portfolio. The Company will allocate
basis of the loans sold and the retained portions based upon their relative fair
market value.
Stock Based Compensation--The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its stock option plans. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
Goodwill--The acquisition of WebBank was accounted for under purchase accounting
resulting in goodwill of $1,774 which is being amortized over 15 years.
Management estimates the recoverability of unamortized goodwill and its
remaining useful life based on WebBank's undiscounted future pre-tax income.
New Accounting Pronouncements-- In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, which becomes
effective on January 1, 2000 for calendar year companies. The new standard will
significantly change the accounting treatment of end-user derivative contracts.
Depending on the underlying risk management strategy, these accounting changes
could affect reported earnings, assets, liabilities, and stockholders' equity.
As a result, the Company will have to reconsider its risk management strategies,
since the new standard will not reflect the results of many of those strategies
in the same manner as current accounting practice. The Company is in the process
of evaluating the potential impact of the new accounting standard.
2. DISCONTINUED OPERATIONS
On August 7, 1997, pursuant to an agreement and plan of merger among Rose's
Stores, Inc. (Stores) and two newly created, wholly-owned subsidiaries of
Stores, Stores became a wholly-owned subsidiary the Company. As a result of such
merger, each share of common stock, no par value (Stores Common Stock), of
Stores was converted into common stock, no par value (Common Stock), of the
Company and each warrant, option, or other right entitling the holder thereof to
purchase or receive shares of Stores Common Stock was converted into a warrant,
option, or other right (as the case may be) entitling the holder thereof to
purchase or receive shares of Common Stock on identical terms. The powers,
rights and other provisions of the Common Stock were identical to the powers,
rights and other provisions of the Stores Common Stock. The transaction was
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. Certain prior period amounts have been
restated to reflect the effects of discontinued operations.
On December 2, 1997, the Company consummated the sale to Variety
Wholesalers, Inc. (Variety) of all the outstanding capital stock of Stores
pursuant to a stock purchase agreement, dated as of October 24, 1997, between
the Company and Variety (the Sale). The Sale constituted the disposition by the
Company of substantially all of its assets and was approved by the holders of a
majority of the outstanding shares of common stock of the Company at a special
meeting of the stockholders of the Company on December 2, 1997. The total
purchase price for the Sale was $19,200, including $1,920 that was placed in
escrow. The proceeds of the Sale, net of certain transactions, closing, and
other costs, were $15,331 (including the $1,920 in escrow). The loss resulting
from the Sale was $22,446.
3. REORGANIZATION AND EMERGENCE FROM CHAPTER 11
The Company filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code (Chapter 11) on September 5, 1993 (the Filing
Date). The Company's Modified and Restated First Amended Joint Plan of
Reorganization (the Plan) was consummated on April 28, 1995 (the Effective
Date).
The Plan provided for, among other things, the cash payment of $26,423 to
the Company's pre-petition secured lenders and amounts owing under the
debtor-in-possession revolving credit agreement and various administrative and
tax claims due at the Effective Date, and the distribution of common stock of
reorganized Rose's to be issued pursuant to the Plan to creditors. Additionally,
stockholders of record as of the Effective Date received their pro-rata share of
warrants and the shares of stock, stock options, and stock warrants of the
Company's Predecessor were canceled. In addition, RSI Trading, Inc., a wholly
owned subsidiary of the Company, was merged into the Company under the
provisions of the Plan. Also, a new board of directors was elected for the
Successor. Upon consummation of the Plan, the Company obtained $125,000 of
post-emergence financing.
Under Chapter 11, the Company elected to assume or reject real estate
leases, employment contracts, and unexpired executory pre-petition contracts.
4. ACQUISITION AND FORMATION OF SUBSIDIARIES
On August 31, 1998, International, a newly formed, wholly-owned Delaware
subsidiary of the Company, consummated the acquisition of 90 percent of the
outstanding common stock (Bank Common Stock) of WebBank, pursuant to an
assignment (the Assignment) from Praxis Investment Advisers, a Nevada limited
liability company (PIA), of a stock purchase agreement, dated January 20, 1998
(the Purchase Agreement), between PIA and Block Financial Corporation (Block),
relating to the purchase by PIA of all of the issued and outstanding shares of
Bank Common Stock. Pursuant to the Assignment, the Company paid Block $4,783 for
the shares of Bank Common Stock to be purchased by Block pursuant to the
Purchase Agreement. In addition, the Company paid $288 in acquisition costs, for
a total purchase price of $5,071. The acquisition was accounted for under
purchase accounting, resulting in goodwill of $1,744. On August 31, 1998, Praxis
was formed by a cash contribution from the Company of $428 for a 90 percent
ownership of newly issued stock.
In connection with the purchase of Bank Common Stock, International entered
into a subscription and stockholders agreement, dated as of August 31, 1998 (the
Stockholders Agreement) with Andrew Winokur (AW), the owner of the 10 percent of
the outstanding shares of Bank Common Stock not purchased by International.
Pursuant to the Stockholders Agreement, International agreed to purchase 90
percent, and AW agreed to purchase 10 percent, of the common stock (Praxis
Common Stock) of Praxis. The Stockholders Agreement also provides for certain
restrictions on the disposition by AW of his Bank Common Stock and Praxis Common
Stock and certain rights and obligations of International and the Company to
purchase the shares of Bank Common Stock and Praxis Common Stock owned by AW.
International, AW and Praxis have entered into a management agreement (the
Management Agreement) under which Praxis has agreed to provide certain
management services to AW and International in connection with the ownership and
operation of WebBank. The Management Agreement provides that Praxis may make
recommendations to and consult with the management and Board of Directors of
WebBank with respect to the deployment of WebBank's capital, the development of
the WebBank's business lines, the acquisition of assets by WebBank, and
distributions to WebBank's stockholders.
Praxis and AW have also entered into an employment agreement (the
Employment Agreement), providing for the employment of AW by Praxis. Under the
Employment Agreement, AW agrees to serve as president and chief executive
officer of Praxis for a term of five years (which may be extended for one or
more years with the written agreement of the parties). Under the Employment
Agreement, AW is granted the authority to formulate the recommendations to
WebBank on behalf of Praxis pursuant to the Management Agreement.
<PAGE>
5. INVESTMENT SECURITIES
Investment securities available for sale as of December 31, 1998, at cost
which approximates market, are summarized as follows:
Collateralized mortgage-backed securities $ 1,649
Interest-only strips 432
=========
$ 2,081
=========
All investment securities mature between one and twenty years. Expected
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without prepayment penalties.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998, are summarized as follows:
Leasehold improvements $ 43
Furniture and equipment 93
---------
136
Less accumulated depreciation and amortization 20
=========
$ 116
=========
7. STOCKHOLDERS' EQUITY
On November 4, 1998, at the annual meeting of stockholders of the Company,
the stockholders approved a one-for-two reverse split of its common stock (the
Reverse Split). Pursuant to the Reverse Split, which became effective on
November 20, 1998 (the Effective Date), every two shares of common stock held by
stockholders owning of record 500 or more shares of common stock on the
Effective Date were converted into one share of common stock, and all shares
held by stockholders owning of record fewer than 500 shares of common stock on
the Effective Date were converted into the right to receive a cash payment in
the amount of $2.0375 per share. The net effect of the Reverse Split was to
reduce the number of shares of common stock outstanding as of the Effective Date
from 8,620,383 shares to 4,310,192 shares. All references to the number of
common shares and per common share amounts have been restated to reflect the
Reverse Split.
8. STOCK OPTIONS (all shares in thousands)
The Company's New Equity Compensation Plan was adopted on February 14,
1995, and was designed for the benefit of the executives and key employees of
the Company by allowing the grant of a variety of different types of
equity-based compensation to eligible participants. The Plan provided for the
granting of a maximum of 350 shares of stock. The price of the options granted
was not less than 100 percent of the fair market value of the shares on the date
of grant. The options vested immediately with the Sale of Stores. At that time,
all options were canceled 60 days later.
On April 24, 1997, the Company adopted a Long Term Stock Incentive Plan
which provides for the granting to employees and directors of, and consultants
to, the Company of certain stock-based incentives and other equity interests in
the Company. A maximum of 250 shares may be issued under the Plan. The options
are fully vested and exercisable when issued and expire five years from the date
of issuance.
The Board of Directors of the Company, at its meeting on September 2, 1998,
approved the merger of the New Equity Compensation Plan into the Long Term Stock
Incentive Plan and certain amendments to the Long Term Stock Incentive Plan. At
the annual meeting held November 4, 1998, the shareholders approved the merger
and certain amendments to the new plan. Approved were the grants of certain
stock-based incentives and other equity interests to employees, directors, and
consultants. A maximum of 1,000 shares may be issued under the new merged plan.
The options are fully vested and exercisable when issued and expire five years
from the date of issuance. The following table summarizes stock option activity:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 January 31, 1998 January 25, 1997
----------------------------- ---------------------------- --------------------------
Weighted- Weighted- Weighted-
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
----------------------------- ---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 49 $ 3.40 159 $ 7.78 $ 8.62
194
Plus options granted 455
3.75 59 3.41 28 3.70
Less options exercised/
expired/canceled - - (169)
---------- ---------- ----------
7.46 (63) 8.62
Options outstanding at
end of year 504 $ 3.71 49 $ 3.40 159 $ 7.78
========== ========== ==========
Weighted-average fair
value of options granted
during the year $ 1.73 $ 1.46 $ 1.40
</TABLE>
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding and Weighted-average
Range of exercisable at remaining Weighted-average
exercise prices December 31, 1998 contractual life exercise price
--------------- ----------------- ---------------- --------------
<S> <C> <C> <C>
$ 2.88 - 4.68 504 4.39 years $ 3.71
</TABLE>
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been changed to the following pro forma amounts:
<TABLE>
<CAPTION>
Eleven months
ended Year ended Year ended
December 31, January 31, January 25,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) As reported $ (715) $(25,538) $ 308
Pro forma (1,503) (25,609) 308
Basic and diluted
earnings (loss) per
share As reported (.17) (5.91) .09
Pro forma (.34) (5.92) .09
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for the eleven months ended December 31, 1998 and the years ended
January 31, 1998 and January 25, 1997: risk-free interest rates of 4.7 percent,
5.4 percent, and 5.4 percent, respectively; expected dividend yields of 0
percent for all years; expected lives of 5 years for all years; and expected
volatility of 46 percent, 39 percent, and 28 percent, respectively.
9. EMPLOYEE BENEFIT PLAN AND INCENTIVE PROGRAM
WebBank has a 401(k) profit sharing plan covering employees who meet age
and service requirements. Plan participants are fully vested after five years of
service. WebBank matches employee contributions up to five percent of covered
compensation at two hundred percent of the employee's contribution.
Contributions to the plan amounted to approximately $8 for the eleven months
ended December 31, 1998.
10. INCOME TAXES
The Company reported no income tax expense or benefit for the eleven months
ended December 31, 1998. The difference between the expected tax benefit and
actual tax benefit is primarily attributable to the effect of the net operating
losses, offset by an increase in the Company's valuation allowance. The tax
effects of temporary differences since the Effective Date that give rise to
significant portions of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, January 31,
1998 1998
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 12,647 $ 13,743
Deferred income 19 -
Accrued bonuses 14 -
--------- ---------
Total deferred tax assets 12,680 13,743
Less valuation allowance (12,680) (13,743)
--------- ---------
Net deferred tax assets $ - $ -
========= =========
</TABLE>
The net changes in the total valuation allowance for the eleven months
ended December 31, 1998 and the year ended January 31, 1998, were a decrease of
$1,063 and an increase of $7,927, respectively.
At December 31, 1998, the Company had certain net operating loss carry
forwards of approximately $37,000 which are scheduled to expire during the years
ending 2010 through 2018. The Company has treated net operating losses incurred
prior to the Effective Date in accordance with Section 382(l)(5) of the Internal
Revenue Code. As a result, there is approximately $27,000 in net operating
losses incurred prior to the Effective Date as well as $10,000 incurred
subsequent to the Effective Date available as carryovers. All net operating
losses may be subject to certain limitations on utilization.
11. DISCLOSURES ABOUT THE FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying value for short-term financial instruments that mature or
reprice frequently at market rates approximates fair value. Such financial
instruments include: cash and cash equivalents, cash restricted in escrow,
accrued interest receivable, demand deposits, accounts payable and accrued
expenses, and income taxes payable to subsidiary's former parent. The difference
between the fair market value and the carrying value for commercial loans and
investment securities available for sale is not considered significant to the
financial statements.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating lease agreements. The
schedule of future minimum lease payments under noncancelable operating leases
as of December 31, 1998, are summarized as follows:
1999 $ 76
2000 80
2001 77
==========
$ 233
==========
Rental expense for noncancelable operating leases amounted to approximately
$28 for the eleven months ended December 31, 1998. On March 31, 1998 the Company
entered into a sub-lease for office space with Gateway Industries, Inc., a
related party in which the Company's President is the principal stockholder.
Rent under the lease is approximately $2.7 per month, and may be terminated by
either party.
WebBank is a party to financial instruments with off-balance sheet risk. In
the normal course of business, these financial instruments include commitments
to extend credit in the form of loans. At December 31, 1998, WebBank's
undisbursed commercial loan commitments totaled approximately $4,600.
As a result of the Sale on December 2, 1997 to Variety of all of the
outstanding capital stock of the Company's wholly owned subsidiary and then sole
operating entity, Stores, the Company was relieved of liability for claims
against Stores except to the extent of its indemnification obligation with
respect to certain claims, as set forth in the Stock Purchase Agreement.
Pursuant to the Stock Purchase Agreement, ten percent ($1,920) of the purchase
price for the sale of stock to Variety was placed in escrow for payment of
indemnified losses to Variety. On February 26, 1999 all contingencies associated
with aggregate cumulative indemnifiable losses claimed against escrowed funds
were satisfactorily resolved in favor of the Company and escrowed funds,
including accumulated interest, were released to the Company.
13. REGULATORY REQUIREMENTS
WebBank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain actions by regulators that, if undertaken, could have a
direct material effect on WebBank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, WebBank
must meet specific capital guidelines that involved quantitative measures of
WebBank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. WebBank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require WebBank to maintain minimum amounts and ratios of Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average quarterly assets (as defined).
Management believes, as of December 31, 1998, that WebBank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC
categorized WebBank as "well capitalized" under the regulatory framework. To be
categorized as "well capitalized" WebBank must maintain certain Total and Tier I
capital to risk-weighted assets and Tier I capital to average quarterly assets
ratios. There are no conditions or events since that notification that
management believes have changed WebBank's category.
Capital amounts and ratios are summarized as follows:
<TABLE>
<CAPTION>
Well capitalized Minimum capital
Actual requirement requirement
------------------------ ------------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of
December 31, 1998:
Total Capital (Tier 1
+ Tier 2) to risk
weighted assets $ 3,455 126.65% $ 272 10.00% $ 218 8.00%
Tier I Capital to
risk weighted assets
3,455 126.65% 164 6.00% 109 4.00%
Tier I capital to
average assets
(Leverage Ratio) 3,455 80.01% 216 5.00% 173 4.00%
</TABLE>
14. SUBSEQUENT EVENTS
The Company applied to the Internal Revenue Service to change its fiscal
year end to a calendar year end, resulting in an eleven-month reporting period
this year. The Internal Revenue Service granted approval of the Company's
request in February 1999.
In January of 1999 the Depository Trust Company made a final determination
of 80,968 shares to be treated as representing positions of holders of less than
250 shares (on a post-split basis). Accordingly, the Company deposited in an
escrow account with First Union National Bank $331 for the purpose of paying
cash to holders of less than 250 shares.
On January 29, 1999, WebBank entered into a Certificates of Deposit
Brokerage Agreement with LaSalle National Bank (LaSalle), a national bank.
WebBank proposes to offer Certificates of Deposits (CD), representing
transferable individual time deposit accounts which are insured by the Bank
Insurance Fund administered by the FDIC, from time to time through LaSalle. Each
CD offered and sold shall be in the principal or face amount of $1. The
agreement may be terminated by either WebBank or LaSalle on two business days
prior written notice. On February 17, 1999, WebBank sold $2,000 in CD's with
maturity dates ranging from six months to one year.
15. YEAR 2000 ISSUE
Many information technology and process control systems used in the current
business environment were designed to use only two digits in the date field and
thus may not function properly in the Year 2000 and after. This could result in
system failures or in miscalculations causing disruption of operations
including, but not limited to, an ability to process transactions, to send and
receive electronic data, or to engage in routing business activities and
operations.
The Company intends to make the necessary modifications to mitigate the
risk of disruption to its operations. The costs of this project and its timely
completion are dependent upon numerous assumptions about future events,
including availability of certain resources, third party remediation plans, and
other factors, many of which are beyond the Company's control. If such
modifications are not completed timely, or if any of the Company's customers and
suppliers do not successfully deal with the Year 2000 issue, the Year 2000 issue
could have a material adverse impact on the operations of the Company.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Rose's Holdings, Inc.:
We consent to incorporation by reference in Registration Statement No.
333-38851 on Form S-8 of Rose's Holdings, Inc. of our report dated February 12,
1999, relating to the balance sheets of Rose's Holdings, Inc. as of December 31,
1998 and January 31, 1998, and the related statements of operations,
stockholder's equity, and cash flows, for the eleven months ended December 31,
1998 and the years ended January 31, 1998 and January 25, 1997, which report
appears in this Form 10-K of Rose's Holdings, Inc.
/s/KPMG LLP
Salt Lake City, Utah
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000085149
<NAME> ROSE'S HOLDINGS, INC.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-1-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 10,699
<SECURITIES> 2,081
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,935
<PP&E> 136
<DEPRECIATION> (20)
<TOTAL-ASSETS> 15,980
<CURRENT-LIABILITIES> 740
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 14,683
<TOTAL-LIABILITY-AND-EQUITY> 15,980
<SALES> 0
<TOTAL-REVENUES> 676
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (715)
<EPS-PRIMARY> (.17)<F1>
<EPS-DILUTED> (.17)
<FN>
<F1> As it relates to this schedule, primary means basic.
</FN>
</TABLE>
