Filed pursuant to Rule 424(b)(3)
File No. 333-16425
PROSPECTUS
HEILIG-MEYERS COMPANY
COMMON STOCK
(PAR VALUE $2.00 PER SHARE)
PROXY STATEMENT
RHODES, INC.
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 23, 1996
This Proxy Statement/Prospectus is being furnished to holders of common
stock, no par value ("Rhodes Common Stock"), of Rhodes, Inc., a Georgia
corporation ("Rhodes"), in connection with the solicitation of proxies by the
Rhodes Board of Directors for use at a special meeting of shareholders to be
held at 10:00 a.m., local time, on December 23, 1996, at 4370 Peachtree Road,
Atlanta, Georgia 30319, and at any adjournments or postponements thereof (the
"Rhodes Special Meeting"). The purpose of the Rhodes Special Meeting is to
consider and vote upon a proposal to approve the Agreement and Plan of Merger,
dated as of September 17, 1996 (the "Merger Agreement"), by and among Rhodes,
Heilig-Meyers Company ("Heilig-Meyers"), and HM Merger Subsidiary, Inc., a
wholly owned subsidiary of Heilig-Meyers ("Sub"), which provides for, among
other things, the merger of Sub with and into Rhodes (the "Merger"), with Rhodes
becoming a wholly owned subsidiary of Heilig-Meyers. Upon consummation of the
Merger, each outstanding share of Rhodes Common Stock (excluding shares held by
Rhodes, Heilig-Meyers or any of their respective subsidiaries) shall cease to be
outstanding and shall be converted into the right to receive 0.50 (the "Exchange
Ratio") shares of Heilig-Meyers common stock, $2.00 par value ("Heilig-Meyers
Common Stock"), at the effective time of the Merger.
WPS Investors, L.P. and Green Capital Investors, L.P., which are controlled
by Holcombe T. Green, Jr., Chairman of the Executive Committee of the Rhodes
Board of Directors, and which collectively own approximately 31.7% of the
outstanding shares of Rhodes Common Stock, have entered into a voting agreement
(the "Voting Agreement") with Heilig-Meyers pursuant to which they have agreed
to vote their respective shares of Rhodes Common Stock in favor of approval of
the Merger Agreement.
This Proxy Statement/Prospectus also constitutes the prospectus of
Heilig-Meyers relating to up to 4,927,053 shares of Heilig-Meyers Common Stock
issuable to Rhodes shareholders in the Merger. See "CERTAIN DIFFERENCES IN THE
RIGHTS OF HEILIG-MEYERS AND RHODES SHAREHOLDERS."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Proxy Statement/Prospectus is November 22, 1996, and it is
first being mailed or otherwise delivered to Rhodes shareholders on or about
November 22, 1996.
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AVAILABLE INFORMATION
Heilig-Meyers and Rhodes are each subject to the reporting and
informational requirements of the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by Heilig-Meyers and Rhodes with the
Commission may be inspected and copied at the principal office of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and should be available at the Commission's Regional Offices at 7 World Trade
Center, New York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition,
the Commission maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Reports,
proxy statements and other information concerning Rhodes and Heilig-Meyers may
also be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005.
This Proxy Statement/Prospectus constitutes a part of a Registration
Statement on Form S-4 (together with any amendments thereto, the "Registration
Statement"), which has been filed by Heilig-Meyers with the Commission under the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act"). This Proxy Statement/Prospectus omits certain
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and to the exhibits thereto for further
information with respect to Heilig-Meyers and Rhodes and the securities to which
this Proxy Statement/Prospectus relates. Statements contained in this Proxy
Statement/Prospectus concerning the provisions of certain documents filed as
exhibits to the Registration Statement are necessarily brief descriptions
thereof, and are not necessarily complete, and each such statement is qualified
in its entirety by reference to the full text of such document.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE OF
HEILIG-MEYERS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS ARE AVAILABLE WITHOUT CHARGE UPON REQUEST FROM HEILIG-MEYERS COMPANY,
2235 STAPLES MILL ROAD, RICHMOND, VIRGINIA 23230, ATTN: SECRETARY (804)
359-9171. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE AT LEAST FIVE BUSINESS DAYS PRIOR TO THE DATE OF THE SPECIAL
MEETING.
All information contained herein with respect to Heilig-Meyers and its
subsidiaries has been supplied by Heilig-Meyers, and all information with
respect to Rhodes and its subsidiary has been supplied by Rhodes.
No person has been authorized to give any information or to make any
representation other than those contained in this Proxy Statement/Prospectus,
and, if given or made, such information or representation should not be relied
upon as having been authorized by Heilig-Meyers or Rhodes. Neither the delivery
of this Proxy Statement/Prospectus nor any distribution of the securities to
which this Proxy Statement/Prospectus relates shall, under any circumstances,
create any implication that there has been no change in the affairs of
Heilig-Meyers, Rhodes, or any of their respective subsidiaries since the date
hereof or that the information contained herein is correct as of any time
subsequent to its date. This Proxy Statement/Prospectus does not constitute an
offer to sell, or a solicitation of an offer to purchase, any securities other
than the securities to which it relates, or any offer to sell or a solicitation
of an offer to purchase the securities offered by this Proxy
Statement/Prospectus in any jurisdiction in which such an offer or solicitation
is not lawful.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the Commission by Heilig-Meyers
(Commission File No. 001-08484) under Section 13(a) or 15(d) of the Exchange Act
are hereby incorporated by reference in this Proxy Statement/Prospectus:
(i) Annual Report on Form 10-K for the year ended February 29, 1996;
(ii) Quarterly Report on Form 10-Q for the quarter ended May 31,
1996;
(iii) Quarterly Report on Form 10-Q for the quarter ended August 31,
1996; and
(iv) The description of Heilig-Meyers Common Stock and Rights set
forth in Heilig-Meyers' registration statements filed with the Commission
pursuant to Section 12 of the Exchange Act, and any amendment or report
filed for the purpose of updating any such description.
All documents filed by Heilig-Meyers pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Rhodes Special Meeting are
hereby incorporated by reference in this Proxy Statement/Prospectus and shall be
deemed to be a part hereof from the date of filing of such documents.
Any statement contained herein, in any amendment or supplement hereto, or
in a document incorporated or deemed to be incorporated by reference herein,
shall be deemed to be modified or superseded for purposes of the Registration
Statement and this Proxy Statement/Prospectus to the extent that a statement
contained herein, in any amendment or supplement thereto, or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement, this Proxy
Statement/Prospectus, or any amendment or supplement hereto.
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FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS MADE AND INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT ARE NOT BASED ON HISTORICAL FACTS, BUT ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," OR "ANTICIPATES" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY
DISCUSSIONS OF STRATEGY. SEE, E.G., "REASONS FOR THE MERGER" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THESE
STATEMENTS REFLECT RHODES' AND HEILIG-MEYERS' REASONABLE JUDGMENTS WITH RESPECT
TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THE
CUSTOMER'S WILLINGNESS, NEED AND FINANCIAL ABILITY TO PURCHASE HOME FURNISHINGS
AND RELATED ITEMS, THE ABILITY TO EXTEND CREDIT TO CUSTOMERS, THE COSTS AND
EFFECTIVENESS OF PROMOTIONAL ACTIVITIES AS WELL AS ACCESS TO, AND COST OF,
CAPITAL. OTHER FACTORS SUCH AS CHANGES IN TAX LAWS, RECESSIONARY OR EXPANSIVE
TRENDS IN RELEVANT MARKETS, INFLATION RATES AND REGULATIONS AND LAWS WHICH
AFFECT THE ABILITY TO DO BUSINESS IN RELEVANT MARKETS MAY ALSO IMPACT THE
OUTCOME OF FORWARD-LOOKING STATEMENTS.
IN ADDITION, FACTORS THAT COULD CAUSE ACTUAL RESULTS OF HEILIG-MEYERS
(ASSUMING CONSUMMATION OF THE MERGER) TO DIFFER MATERIALLY FROM THOSE
CONTEMPLATED BY FORWARD-LOOKING STATEMENTS RELATING TO THE RESULTS OF OPERATIONS
AND BUSINESS OF HEILIG-MEYERS FOLLOWING THE MERGER, INCLUDE (A) THE COST SAVINGS
THAT WILL BE REALIZED FROM THE MERGER, AND (B) THE RETURN TO PROFITABILITY OF
RHODES. THERE CAN BE NO ASSURANCE THAT THE ANTICIPATED BENEFITS OF THE MERGER
WILL BE REALIZED OR THAT THE MERGER WILL NOT ADVERSELY AFFECT THE FUTURE
OPERATING RESULTS OF HEILIG-MEYERS.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION............................................................................................... ii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE................................................................... iii
FORWARD LOOKING STATEMENTS.......................................................................................... iv
SUMMARY............................................................................................................. 1
Parties to the Merger............................................................................................. 1
Rhodes Special Meeting; Record Date; Vote Required; Recommendation................................................ 2
The Merger........................................................................................................ 2
Market Prices and Dividends....................................................................................... 6
Comparison of Certain Unaudited Share Data........................................................................ 7
Selected Financial Data........................................................................................... 8
RHODES SPECIAL MEETING.............................................................................................. 12
THE MERGER.......................................................................................................... 13
General........................................................................................................... 13
Effective Time.................................................................................................... 13
Background of the Merger.......................................................................................... 13
Reasons for the Merger............................................................................................ 15
Opinion of Financial Advisor...................................................................................... 16
Manner and Basis of Converting Securities in the Merger........................................................... 19
Fractional Shares................................................................................................. 21
Operations After the Merger....................................................................................... 21
Interests of Certain Persons in the Merger........................................................................ 21
Conditions to Consummation........................................................................................ 22
Regulatory Approvals.............................................................................................. 23
Conduct of Business Pending the Merger............................................................................ 23
Amendment, Waiver and Termination................................................................................. 24
Expenses and Fees................................................................................................. 25
Indemnification Provision......................................................................................... 25
Other Offers...................................................................................................... 26
Certain Federal Income Tax Consequences........................................................................... 26
Accounting Treatment.............................................................................................. 27
Voting Agreement.................................................................................................. 27
Certain Lock-Up Agreements........................................................................................ 27
Appraisal Rights.................................................................................................. 28
Resales of Heilig-Meyers Common Stock............................................................................. 28
PRO FORMA COMBINED FINANCIAL DATA................................................................................... 29
INFORMATION ABOUT RHODES............................................................................................ 35
Business.......................................................................................................... 35
Properties........................................................................................................ 38
Legal Proceedings................................................................................................. 39
Rhodes Common Stock Ownership by Management and Principal Shareholders............................................ 39
Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 42
INFORMATION ABOUT HEILIG-MEYERS..................................................................................... 46
CERTAIN DIFFERENCES IN THE RIGHTS OF RHODES AND
HEILIG-MEYERS SHAREHOLDERS........................................................................................ 52
Authorized Capital Stock.......................................................................................... 52
Shareholder Preemptive Rights..................................................................................... 52
Shareholders' Rights Plan......................................................................................... 52
Directors; Vacancies.............................................................................................. 53
Removal of Directors.............................................................................................. 53
</TABLE>
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<TABLE>
<S> <C>
Voting Rights..................................................................................................... 53
Shareholder Meetings.............................................................................................. 54
Nomination of Directors by Shareholders........................................................................... 54
Amendment of Certificate or Articles and Bylaws................................................................... 54
Director Exculpation and Indemnification.......................................................................... 55
Actions by Shareholders Without a Meeting......................................................................... 56
Payment of Dividends.............................................................................................. 56
Dissolution and Liquidation....................................................................................... 57
Merger, Consolidation, and Sale of Assets......................................................................... 57
Business Combinations and Transactions with Certain Persons....................................................... 58
Control Share Acquisitions........................................................................................ 59
Dissenters' Rights of Appraisal................................................................................... 59
Interested Director Transactions.................................................................................. 60
EXPERTS............................................................................................................. 61
LEGAL MATTERS....................................................................................................... 62
SHAREHOLDER PROPOSALS............................................................................................... 62
OTHER MATTERS....................................................................................................... 62
INDEX TO FINANCIAL STATEMENTS....................................................................................... F-1
ANNEXES:
ANNEX A -- Agreement and Plan of Merger, dated as of September 17, 1996, by and among
Heilig-Meyers, Sub and Rhodes
ANNEX B -- Opinion of Salomon Brothers Inc
</TABLE>
vi
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS. THIS SUMMARY IS NOT INTENDED TO BE A COMPLETE
DESCRIPTION OF THE MATTERS COVERED IN THIS PROXY STATEMENT/PROSPECTUS AND IS
SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING
THE ANNEXES HERETO, AND IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS. THE MERGER AGREEMENT IS SET FORTH IN ANNEX A TO THIS PROXY
STATEMENT/PROSPECTUS, AND REFERENCE IS MADE THERETO FOR A COMPLETE DESCRIPTION
OF THE TERMS OF THE MERGER. SHAREHOLDERS ARE URGED TO READ CAREFULLY THE ENTIRE
PROXY STATEMENT/PROSPECTUS, INCLUDING THE ANNEXES. AS USED IN THIS PROXY
STATEMENT/PROSPECTUS, THE TERMS "HEILIG-MEYERS" AND "RHODES" REFER TO SUCH
CORPORATIONS, RESPECTIVELY, AND WHERE THE CONTEXT REQUIRES, SUCH CORPORATIONS
AND THEIR RESPECTIVE SUBSIDIARIES.
PARTIES TO THE MERGER
RHODES. Rhodes is one of the largest specialty furniture retailers in the
United States. Founded in 1875, Rhodes operates 106 stores (as of October 31,
1996) in metropolitan areas of 15 Southern, Midwestern and Western states and
for many years has focused on selling brand name residential furniture to
middle-income customers.
Each of Rhodes' stores offers a full line of residential furniture,
including upholstered furniture, recliners and occasional tables for dens and
living rooms, bedroom suites and bedding, dinettes and more formal dining room
suites and desks, lamps and other accessories. Rhodes has over the past two
years instituted a new marketing and merchandising initiative which seeks to
expand its emphasis on slightly higher priced furniture in response to the
preferences of its middle income customer base. Rhodes has implemented this
strategy through a refocused television and print media campaign and through
increased offerings of higher quality, slightly higher priced furniture.
Rhodes' principal executive offices are located at 4370 Peachtree Road,
N.E., Atlanta, Georgia 30319 and its telephone number is (404) 264-4600. For
additional information regarding Rhodes and its business, see " -- Selected
Financial Data," "AVAILABLE INFORMATION" and "INFORMATION ABOUT RHODES."
HEILIG-MEYERS. Heilig-Meyers is the nation's largest publicly held
specialty retailer of home furnishings with 813 stores (as of October 31, 1996).
Heilig-Meyers' stores are primarily located in small towns and rural markets in
31 Southern, Midwestern and Western states and Puerto Rico. Heilig-Meyers'
operating strategy includes: (1) offering a broad selection of competitively
priced home furnishings including furniture, consumer electronics, appliances,
bedding and floor coverings; (2) locating stores primarily in small towns and
rural markets which are at least 25 miles from a metropolitan area; (3) offering
in-house credit programs to provide flexible financing to its customers; (4)
utilizing centralized inventory and distribution systems in strategic regional
locations to support store inventory and merchandise delivery options; and (5)
emphasizing customer service, including free delivery on most major purchases
and repair service for consumer electronics and other mechanical items.
Heilig-Meyers believes this strategy of offering selection, credit, delivery and
service generally allows it to have the largest market share among home
furnishings retailers in most of its small-town markets.
Heilig-Meyers has undertaken several programs to enhance operating
efficiencies, reduce costs, improve management controls, and manage the growth
of its business. These programs have included: a prototype store program
featuring the latest in display techniques and construction efficiencies; a
remodeling program under which stores are typically remodeled on a seven year
schedule; improved distribution management with eight state-of-the-art
distribution centers which are designed to service stores typically located
within 250 miles of such centers (a ninth distribution center is under
construction and expected to be completed by the end of the current fiscal
year); information systems improvements including a sales and inventory control
system and a company wide hardware upgrade which have allowed numerous system
enhancements including satellite communications; a new purchasing strategy of
consolidating vendors for purchasing advantages due to scale economies and
improved inventory management including electronic data interchange (EDI)
ordering and just-in-time ordering; and increased use of market segmentation
techniques to identify prospective customers and to permit a more targeted
direct mail advertising program.
Heilig-Meyers' executive offices are located at 2235 Staples Mill Road,
Richmond, Virginia 23230. The telephone number is (804) 359-9171.
SUB. Sub is a wholly owned subsidiary of Heilig-Meyers that was
incorporated in September 1996 solely as a vehicle to facilitate the Merger. See
"THE MERGER."
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RHODES SPECIAL MEETING; RECORD DATE; VOTE REQUIRED; RECOMMENDATION
PURPOSE. The Rhodes Special Meeting will be held at 10:00 a.m., local time
on December 23, 1996, at 4370 Peachtree Road, Atlanta, Georgia 30319. At the
Rhodes Special Meeting, shareholders will consider and vote upon a proposal to
approve the Merger Agreement and transact such other business as may properly
come before the Rhodes Special Meeting. See "THE MERGER."
RECORD DATE. The Board of Directors of Rhodes has fixed the close of
business on November 15, 1996, as the record date for determining the Rhodes
shareholders entitled to receive notice of and to vote at the Rhodes Special
Meeting (the "Record Date"). As of the close of business on the Record Date,
there were 9,175,107 shares of Rhodes Common Stock outstanding and entitled to
be voted at the Rhodes Special Meeting. Holders of Rhodes Common Stock are
entitled to one vote on each matter considered and voted on at the Rhodes
Special Meeting for each share of Rhodes Common Stock held of record at the
close of business on the Record Date. For additional information with respect to
the Rhodes Special Meeting, see "RHODES SPECIAL MEETING."
VOTE REQUIRED. Approval of the Merger Agreement by the shareholders of
Rhodes requires the affirmative vote of the holders of a majority of the shares
of Rhodes Common Stock outstanding and entitled to vote at the Rhodes Special
Meeting. As of the Record Date, directors and executive officers of Rhodes
beneficially owned in the aggregate 3,233,774 shares of Rhodes Common Stock (or
approximately 34.5% of the outstanding shares of Rhodes Common Stock). Of this
amount, Holcombe T. Green, Jr., Chairman of the Executive Committee of the
Rhodes Board of Directors, owned beneficially 2,920,854 shares of Rhodes Common
Stock (or approximately 31.8% of the outstanding shares of Rhodes Common Stock).
Pursuant to the Voting Agreement, WPS Investors, L.P. ("WPS") and Green Capital
Investors, L.P. ("Green Capital"), two entities controlled by Mr. Green, and
Heilig-Meyers, have agreed to vote their respective shares of Rhodes Common
Stock in favor of approval of the Merger Agreement. See "THE MERGER -- Voting
Agreement" and "RHODES SPECIAL MEETING."
RECOMMENDATION OF THE RHODES BOARD OF DIRECTORS. The Board of Directors of
Rhodes believes that the Merger is fair to and in the best interests of Rhodes
and its shareholders and has unanimously adopted and approved the Merger
Agreement. Accordingly, the Rhodes Board of Directors unanimously recommends
that the shareholders of Rhodes vote FOR approval of the Merger Agreement. In
deciding to approve the Merger Agreement, the Rhodes Board of Directors
considered a number of factors, including the terms of the Merger, the
compatibility of the operations of Rhodes and Heilig-Meyers, the financial
condition, results of operations, and future prospects of Rhodes (on a
stand-alone basis) and Rhodes and Heilig-Meyers (on a combined basis) and the
oral opinion of Salomon Brothers Inc ("Salomon"), the financial advisor to the
Rhodes Board of Directors (which it subsequently confirmed in writing), that, as
of the date of the Rhodes Board of Directors' approval of the general terms of
the Merger Agreement, the Exchange Ratio in connection with the Merger was fair,
from a financial point of view, to the holders of Rhodes Common Stock. See "THE
MERGER -- Reasons for the Merger; Rhodes," "THE MERGER -- Background of the
Merger " and "THE MERGER -- Opinion of Financial Advisor." Moreover, the Board
of Directors of Rhodes considered the lack of definitive interest on the part of
any other potential acquirer, as determined by a comprehensive two-stage auction
process conducted by Salomon, following the announcement by Rhodes on April 29,
1996, that Rhodes had engaged Salomon to advise Rhodes concerning strategic
alternatives, including a possible sale.
THE MERGER
The Merger Agreement provides that Sub will merge with and into Rhodes,
which shall be the surviving corporation of the Merger and, as a result thereof,
will become a wholly owned subsidiary of Heilig-Meyers. At the time the Merger
becomes effective, each outstanding share of Rhodes Common Stock (excluding
shares held by Rhodes, Heilig-Meyers or any of their respective subsidiaries)
shall cease to be outstanding and shall be converted into the right to receive
0.50 (the "Exchange Ratio") shares of Heilig-Meyers common stock, $2.00 par
value ("Heilig-Meyers Common Stock"), at the effective time of the Merger. A
copy of the Merger Agreement is set forth in ANNEX A to this Proxy
Statement/Prospectus. See "THE MERGER."
OPINION OF FINANCIAL ADVISOR. On August 28, 1996, the Board of Directors of
Rhodes received an oral opinion of Salomon (that was subsequently confirmed in
writing) that, as of such date, the Exchange Ratio was fair, from a financial
point of view, to the holders of Rhodes Common Stock. A copy of Salomon's
written opinion dated November 22, 1996, which describes the assumptions made,
matters considered, and limitations on review undertaken is set forth in ANNEX B
to this Proxy Statement/Prospectus and should be read carefully and in its
entirety by the holders of Rhodes Common Stock. For additional information
regarding the opinion of Salomon and a discussion of the qualifications of
Salomon, its selection as
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financial advisor to the Board of Directors of Rhodes, and certain relationships
between Salomon and Rhodes, see "THE MERGER -- Opinion of Financial Advisor."
EFFECTIVE TIME. If the Merger Agreement is approved by the requisite vote
of the holders of Rhodes Common Stock, all required governmental and other
consents and approvals are obtained, and the other conditions to the obligations
of the parties to consummate the Merger are either satisfied or waived, the
Merger will be consummated and will become effective on the date and at the time
that a Certificate of Merger (the "Certificate of Merger"), with respect to the
Merger, is duly filed with the Secretary of State of the State of Georgia or at
such time thereafter as is agreed upon by the parties and specified in the
Certificate of Merger (the "Effective Time"). Assuming satisfaction of all
conditions for consummation, the Merger is expected to become effective during
December 1996. Heilig-Meyers and Rhodes each has the right, acting unilaterally,
to terminate the Merger Agreement should the Merger not be consummated by
February 28, 1997. See "THE MERGER -- Effective Time" and "THE
MERGER -- Amendment, Waiver and Termination."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Heilig-Meyers and Rhodes have
received an opinion of King & Spalding, counsel to Rhodes, to the effect that
(i) the Merger will be treated as a tax-free reorganization for federal income
tax purposes and (ii) no gain or loss will be recognized by holders of Rhodes
Common Stock, except in respect of cash received in lieu of fractional shares.
See "THE MERGER -- Certain Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. Certain members of Rhodes'
management and the Board of Directors of Rhodes have interests in the Merger in
addition to their interests as shareholders of Rhodes generally. These include,
among other things, provisions in the Merger Agreement relating to
indemnification and eligibility for certain Heilig-Meyers employee benefits. In
addition, pursuant to provisions in certain change of control agreements,
certain executive officers of Rhodes may be entitled to receive cash payments if
terminated within specified periods of time after the Effective Time, and Irwin
L. Lowenstein, Chairman of the Board and Chief Executive Officer of Rhodes, is
entitled to receive, at the Effective Time, a lump-sum, cash payment of
approximately $1.4 million in settlement of his change of control arrangements
with Rhodes. The Board of Directors of Rhodes has also approved a bonus for an
executive officer of Rhodes. See "THE MERGER -- Interests of Certain Persons in
the Merger."
CONDITIONS TO CONSUMMATION. Consummation of the Merger is subject to
various conditions, including, among other matters: (a) approval of the Merger
Agreement by the requisite vote of the holders of Rhodes Common Stock, (b)
effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part, (c) authorization for listing on the New York
Stock Exchange, Inc. (the "NYSE") of the shares of Heilig-Meyers Common Stock to
be issued in the Merger and (d) satisfaction of certain other conditions.
REGULATORY APPROVALS. Consummation of the Merger is also conditioned upon
the expiration or termination of the statutory waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). See "THE MERGER -- Regulatory Approvals." Early termination of the HSR
waiting period was granted on October 25, 1996.
CONDUCT OF BUSINESS PENDING THE MERGER. Each of Rhodes and Heilig-Meyers
generally has agreed in the Merger Agreement, unless the other party shall
otherwise agree in writing or as otherwise contemplated by the Merger Agreement,
to conduct their respective businesses in the ordinary course consistent with
past practice and shall use its reasonable best efforts to preserve intact their
business organizations and relationships with third parties and to keep
available the services of their present officers and key employees, subject to
the terms of the Merger Agreement.
Each of Rhodes and Heilig-Meyers generally has agreed in the Merger
Agreement not to take certain actions relating to the operation of its business
pending consummation of the Merger without the prior approval of the other
party. Each party generally has agreed not to, and to cause its respective
subsidiaries not to: (a) adopt or propose any change in its articles of
incorporation or by-laws; (b) declare, set aside or pay any dividend or other
distribution with respect to any shares of capital stock (except for regular
quarterly dividends of Heilig-Meyers in an amount no greater than $0.07 per
share), or split, combine or reclassify any of its capital stock, repurchase,
redeem or otherwise acquire any shares of capital stock or other of its
securities or ownership interests; (c) issue any capital stock or other
securities or enter into any amendment of any material term of any outstanding
securities (except that Heilig-Meyers shall be permitted to issue additional
shares of Heilig-Meyers Common Stock in an aggregate amount not to exceed 20% of
the total number of shares outstanding as of the date of the Merger Agreement
and Rhodes may issue shares of Rhodes Common Stock pursuant to its employee
stock purchase plan); or (d) take any action that could, directly or indirectly,
cause the Merger to fail to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
In addition, Rhodes has agreed in the Merger Agreement that it shall not,
and shall not permit any subsidiary to, (a) merge or consolidate with any other
person or acquire a material amount of assets of any other person, (b) with
certain
3
<PAGE>
exceptions, sell, lease, license or otherwise surrender, relinquish or dispose
of any facility owned or leased by Rhodes or any subsidiary of Rhodes or any
assets or property which are material to Rhodes and the subsidiaries of Rhodes,
taken as a whole, except pursuant to existing contracts or commitments, (c) with
certain exceptions, mortgage, pledge or otherwise encumber any of its assets
other than the pledge of inventory in the ordinary course of business consistent
with past practice, (d) incur any indebtedness except in the ordinary course of
business, amend or otherwise increase, accelerate the payment or vesting of the
amounts payable or to become payable under, or fail to make any required
contribution to, any Company Plan (as defined in the Merger Agreement), except
in the ordinary course of business consistent with past practice, (e) with
certain exceptions, grant any increase in the compensation or benefits of
directors, officers, employees, consultants or agents other than increases in
compensation of employees who are not executive officers and directors to the
extent that such increases are in the ordinary course of business consistent
with past practice, or (f) enter into or amend any employment agreement or other
employment arrangement with any employee of Rhodes or any subsidiary of Rhodes,
except in the ordinary course of business consistent with past practice.
TERMINATION. The Merger Agreement may be terminated at any time prior to
the Effective Time by mutual written agreement of Heilig-Meyers and Rhodes. In
addition, the Merger Agreement may be terminated and the Merger may be abandoned
by action of the Board of Directors of either Heilig-Meyers or Rhodes if (a) the
Merger shall not have been consummated on or before February 28, 1997, (b) any
United States federal or state court of competent jurisdiction or United States
federal or state governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement and such order, decree, ruling or other
action shall have become final and nonappealable or (c) the Closing Date has not
occurred and the closing sales price of Heilig-Meyers Common Stock is less than
$13.50 per share for at least ten (10) consecutive trading days in the twenty
(20) consecutive trading day period immediately preceding the date of such
termination.
Rhodes may terminate the Merger Agreement and may abandon the Merger at any
time prior to the Effective Time, before or after the approval of the Merger and
the adoption of the Merger Agreement by the shareholders of Rhodes, by action of
the Board of Directors of Rhodes, if (a) there has been a breach by
Heilig-Meyers or Sub of any representation or warranty contained in the Merger
Agreement which would have or would be reasonably likely to affect adversely
Heilig-Meyers' or Sub's ability to complete the Merger; (b) there has been a
material breach of any of the covenants or agreements set forth in the Merger
Agreement on the part of Heilig-Meyers, which breach is not curable or, if
curable, is not cured within thirty (30) days after written notice of such
breach is given by Rhodes to Heilig-Meyers; or (c) the Board of Directors of
Rhodes has (i) withdrawn, or modified or changed in a manner adverse to
Heilig-Meyers or Sub, its approval or recommendation of the Merger Agreement or
the Merger in order to approve and permit Rhodes to execute a definitive
agreement relating to an Acquisition Proposal, and (ii) determined, based on an
opinion of outside legal counsel to Rhodes, that the failure to take such action
as set forth in the preceding clause (i) would result in a breach of the Rhodes
Board of Directors' fiduciary duties under applicable law; PROVIDED, HOWEVER,
that (A) the Rhodes Board of Directors shall have been advised in such opinion
of outside counsel that notwithstanding a binding commitment to consummate an
agreement of the nature of the Merger Agreement entered into in the proper
exercise of their applicable fiduciary duties, and notwithstanding all
concessions which may be offered by Heilig-Meyers in negotiations entered into
pursuant to clause (B) below, such fiduciary duties would also require the
directors to terminate the Merger Agreement as a result of such Acquisition
Proposal, and (B) prior to any such termination, Rhodes shall, and shall cause
its respective financial and legal advisors to, negotiate with Heilig-Meyers to
make such adjustments in the terms and conditions of the Merger Agreement as
would enable Rhodes to proceed with the transactions contemplated therein on
such adjusted terms.
Heilig-Meyers may terminate the Merger Agreement and may abandon the Merger
at any time prior to the Effective Time by action of the Board of Directors of
Heilig-Meyers, if (a) there has been a breach by Rhodes of any representation or
warranty contained in the Merger Agreement which would have or would be
reasonably likely to have a material adverse effect on Rhodes; (b) there has
been a material breach of any of the covenants or agreements set forth in the
Merger Agreement on the part of Rhodes or set forth in the Voting Agreement on
the part of WPS or Green Capital, which breach is not curable or, if curable, is
not cured within thirty (30) days after written notice of such breach is given
by Heilig-Meyers to Rhodes; or (c) the Board of Directors of Rhodes shall have
withdrawn, or modified or changed in a manner adverse to Heilig-Meyers or Sub,
its approval or recommendation of the Merger Agreement or the Merger or shall
have recommended an Acquisition Proposal (as defined herein), or shall have
executed an agreement in principle (or similar agreement) or definitive
agreement providing for an Acquisition Proposal or other business combination
with a person or entity other than Heilig-Meyers or its affiliates (or the Board
of Directors of Rhodes resolves to do any of the foregoing).
4
<PAGE>
EXPENSES AND FEES. Except as provided in the next sentence, whether or not
the Merger is consummated, all costs and expenses incurred in connection with
the Merger Agreement and the transactions contemplated thereby shall be paid by
the party incurring such expenses, except that those expenses incurred in
connection with the preparation, clearance and distribution of the Registration
Statement and this Proxy Statement/Prospectus and other documents relating
thereto will be shared equally by Heilig-Meyers and Rhodes. If Rhodes terminates
the Merger Agreement because it determines to execute a definitive agreement
relating to an Acquisition Proposal, Rhodes must pay to Heilig-Meyers the sum of
$3,000,000 plus an amount equal to reasonable legal fees and expenses of counsel
to Heilig-Meyers and other reasonable out-of-pocket costs incurred by
Heilig-Meyers' employees in connection with the Merger.
OTHER OFFERS. Rhodes has generally agreed in the Merger Agreement that it
will not take any action to solicit, initiate or encourage any Acquisition
Proposal and, subject to the fiduciary duties of the Rhodes Board of Directors,
will not engage in negotiations with, or disclose any nonpublic information
relating to Rhodes to, any person that may be considering making, or has made,
an Acquisition Proposal.
ACCOUNTING TREATMENT. The Merger will be accounted for under the "purchase"
method of accounting, pursuant to which the assets and liabilities of Rhodes
will be recorded at their respective fair values and added to those of
Heilig-Meyers as of the Effective Time. Financial statements of Heilig-Meyers
issued after the Effective Time will reflect such values and the results of
operations from the date of acquisition and will not be restated retroactively
to reflect the historical financial position or results of operations of Rhodes.
RESALE OF HEILIG-MEYERS COMMON STOCK. The Heilig-Meyers Common Stock issued
in connection with the Merger will be freely transferable by the holders of such
shares, except for those holders who may be deemed to be "affiliates" (generally
including directors, certain executive officers, and 10% or more shareholders)
of Rhodes or Heilig-Meyers under applicable federal securities laws and except
for the transfer restrictions to which certain shares of Heilig-Meyers Common
Stock held by WPS, Green Capital and Irwin L. Lowenstein and Joel H. Dugan,
executive officers of Rhodes, are subject. See "THE MERGER -- Resale of
Heilig-Meyers Common Stock."
VOTING AGREEMENT. Pursuant to the Voting Agreement, the parties thereto
have agreed during the term thereof to vote their respective shares of the
Rhodes Common Stock, in person or by proxy, (i) in favor of approval of the
Merger Agreement at every meeting of the shareholders of Rhodes at which such
matters are considered and at every adjournment thereof and (ii) against any
Acquisition Proposal. The voting provisions of the Voting Agreement terminate
upon the earliest to occur of (i) the Effective Time; (ii) the date on which the
Merger Agreement is terminated in accordance with its terms; (iii) the date on
which the Board of Directors of Rhodes withdraws or materially modifies or
changes its recommendation for the approval of the Merger Agreement if the Board
of Directors of Rhodes after consultation with its counsel determines that the
failure to take such action could reasonably be deemed a breach of its fiduciary
duties to the Rhodes shareholders under applicable law; and (iv) February 28,
1997. Pursuant to the Voting Agreement, WPS and Green Capital have also agreed
not to, without the prior written consent of Heilig-Meyers, transfer, sell,
assign or convey, or offer or agree to transfer, sell, assign or convey (nor
grant any party any option or right to purchase), any of their Rhodes Common
Stock owned by them and the shares of Heilig-Meyers Common Stock receivable by
them in the Merger, until the earlier of the termination of the Merger Agreement
prior to the Effective Time or thirty (30) days after the date on which
Heilig-Meyers publishes information as to the financial results covering at
least thirty (30) days of post-Merger combined operations reflecting combined
sales and net income, except that they may distribute shares to their respective
partners, provided such shares continue to be subject to the restrictions of the
Voting Agreement and are legended as such.
CERTAIN LOCK-UP AGREEMENTS. Pursuant to lock-up agreements (each a "Lock-Up
Agreement"), Irwin L. Lowenstein, the Chairman of the Board and Chief Executive
Officer of Rhodes, and Joel H. Dugan, Senior Vice President, Finance and
Administration and the Secretary of Rhodes, have agreed that they will not,
without the prior written consent of Heilig-Meyers, transfer, sell, assign or
convey, or offer to transfer, sell assign or convey (nor grant any party any
option or right to purchase) the shares of Rhodes Common Stock and Heilig-Meyers
Common Stock owned by them until the earlier of (i) termination of the Merger
Agreement prior to the Effective Time or (ii) thirty (30) days after the date on
which Heilig-Meyers publishes information as to the financial results covering
at least thirty (30) days of post-Merger combined operations reflecting combined
sales and net income.
APPRAISAL RIGHTS. Holders of Rhodes Common Stock do not have dissenters'
rights or rights of appraisal with respect to the Merger.
COMPARISON OF SHAREHOLDER RIGHTS. The rights of Rhodes shareholders
currently are determined by reference to the Georgia Business Corporation Code
(the "Georgia BCC") and Rhodes' Articles of Incorporation (the "Rhodes
Articles") and
5
<PAGE>
By-Laws (the "Rhodes Bylaws"). Following the Effective Time, Rhodes shareholders
will become shareholders of Heilig-Meyers, and their rights as shareholders will
be determined by the Virginia Stock Corporation Act (the "Virginia SCA") and
Heilig-Meyers' Articles of Incorporation (the "Heilig-Meyers Articles") and
Bylaws (the "Heilig-Meyers Bylaws"). For a description of the material
differences in the rights of Rhodes and Heilig-Meyers shareholders, see "CERTAIN
DIFFERENCES IN THE RIGHTS OF RHODES AND HEILIG-MEYERS SHAREHOLDERS."
MARKET PRICES AND DIVIDENDS
Heilig-Meyers Common Stock is traded on the NYSE under the symbol "HMY,"
and Rhodes Common Stock is traded on the NYSE under the symbol "RHD." As of
November 15, 1996, there were approximately 390 holders of record of Rhodes
Common Stock. The following table sets forth the high and low sales prices per
share of Heilig-Meyers Common Stock and Rhodes Common Stock on the NYSE and the
dividends declared per share of Heilig-Meyers Common Stock with respect to each
fiscal period since March 1, 1994. No dividends have been declared on the Rhodes
Common Stock during the periods shown, and Rhodes has no present plans to pay
any cash dividends on its Common stock.
<TABLE>
<CAPTION>
SALES PRICES SALES PRICES
PER SHARE PER SHARE
OF HEILIG-MEYERS OF RHODES
COMMON STOCK COMMON STOCK
-------------------------- --------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
FISCAL 1995
First Quarter Ended May 31, 1994................................... 36 25 20 1/4 13 1/4
Second Quarter Ended August 31, 1994............................... 30 1/4 23 1/4 16 8 5/8
Third Quarter Ended November 30, 1994.............................. 30 5/8 24 3/8 10 5/8 8 7/8
Fourth Quarter Ended February 28, 1995............................. 29 23 3/8 13 8 1/4
FISCAL 1996
First Quarter Ended May 31, 1995................................... 24 3/8 19 1/4 12 8 5/8
Second Quarter Ended August 31, 1995............................... 27 3/8 20 7/8 11 3/8 8 1/2
Third Quarter Ended November 30, 1995.............................. 24 7/8 17 1/4 12 5/8 9 5/8
Fourth Quarter Ended February 29, 1996............................. 21 1/8 13 1/4 11 1/8 9 1/4
FISCAL 1997
First Quarter Ended May 31, 1996................................... 23 1/2 13 3/4 12 3/4 9 3/8
Second Quarter Ended August 31, 1996............................... 24 1/8 15 3/4 12 3/4 6 7/8
Third Quarter (through November 21, 1996).......................... 17 3/4 12 1/2 10 5/8 5 7/8
<CAPTION>
DIVIDENDS DECLARED
PER SHARE OF
HEILIG-MEYERS
COMMON STOCK
------------------
<S> <C<C>
FISCAL 1995
First Quarter Ended May 31, 1994................................... .06
Second Quarter Ended August 31, 1994............................... .06
Third Quarter Ended November 30, 1994.............................. .06
Fourth Quarter Ended February 28, 1995............................. .06
FISCAL 1996
First Quarter Ended May 31, 1995................................... .07
Second Quarter Ended August 31, 1995............................... .07
Third Quarter Ended November 30, 1995.............................. .07
Fourth Quarter Ended February 29, 1996............................. .07
FISCAL 1997
First Quarter Ended May 31, 1996................................... .07
Second Quarter Ended August 31, 1996............................... .07
Third Quarter (through November 21, 1996).......................... .07
</TABLE>
- ---------------
On September 16, 1996, the last trading day prior to the public
announcement of the execution of the Merger Agreement, the last reported sales
prices per share of Rhodes Common Stock and Heilig-Meyers Common Stock on the
NYSE were $9.125 and $14.875, respectively. Based on such closing prices, as of
such date, the pro forma equivalent per share price for Rhodes Common Stock was
$7.4375. The pro forma equivalent price for Rhodes Common Stock is computed by
multiplying the closing price per share of Heilig-Meyers Common Stock on the
NYSE on the applicable date by the Exchange Ratio. See "THE MERGER -- Opinion of
Financial Advisor -- Exchange Ratio Analysis and -- Premium Analysis" for
information concerning recent historical comparative trading information for
Heilig-Meyers Common Stock and Rhodes Common Stock. Rhodes shareholders should
obtain current market quotations for Heilig-Meyers Common Stock and Rhodes
Common Stock.
The Merger Agreement provides for the filing of a listing application with
the NYSE covering the shares of Heilig-Meyers Common Stock issuable pursuant to
the Merger Agreement. It is a condition to consummation of the Merger that such
shares of Heilig-Meyers Common Stock be authorized for listing on the NYSE, upon
official notice of issuance. See "THE MERGER -- Conditions to Consummation."
6
<PAGE>
COMPARISON OF CERTAIN UNAUDITED PER SHARE DATA
The following table summarizes certain unaudited per share data of Rhodes
and Heilig-Meyers on a historical basis, and on a pro forma combined and pro
forma equivalent basis and is derived from, should be read in conjunction with
and is qualified in its entirety by reference to, the pro forma condensed
combined financial data of Heilig-Meyers and Rhodes that are included elsewhere
in this Proxy Statement/Prospectus and the historical financial statements of
Heilig-Meyers and Rhodes included elsewhere in this Proxy Statement/Prospectus
or incorporated in this Proxy Statement/Prospectus by reference. See "AVAILABLE
INFORMATION," "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE," "PRO FORMA
COMBINED FINANCIAL DATA" and "INDEX TO FINANCIAL STATEMENTS." The information
presented in this table is not necessarily indicative of future combined
earnings or financial position or of combined earnings or financial position
that would have been reported had the Merger been completed at the beginning of
the respective periods or as of the dates for which such unaudited pro forma
information is presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
AUGUST 31, 1996 FEBRUARY 29, 1996
---------------- -----------------
<S> <C> <C>
HEILIG-MEYERS:
Historical net income per common share.................................................. $ 0.41 $ 0.84
Pro forma combined net income per common share (1)...................................... 0.28 0.86
Historical book value per common share.................................................. 10.96 10.69
Pro forma combined book value per common share (2)...................................... 11.31 11.04
Historical dividends declared per common share.......................................... 0.14 0.28
Pro forma combined dividends per common share (1)....................................... 0.14 0.28
RHODES (3):
Historical net income (loss) per common share........................................... $(0.58) $ 0.64
Equivalent pro forma net income per common share (4).................................... 0.14 0.43
Historical book value per common share.................................................. 7.08 7.53
Equivalent pro forma book value per common share (4).................................... 5.66 5.52
</TABLE>
- ---------------
(1) Assumes Merger had been consummated at the beginning of each period giving
effect to the issuance of approximately 4,575,000 shares of Heilig-Meyers
Common Stock in connection with the Merger based on the exchange ratio as
noted in (4) below, and other pro forma adjustments under the purchase
method of accounting.
(2) Assumes the Merger had been consummated at August 31, 1996 and February 29,
1996, respectively.
(3) Rhodes did not declare a dividend in any period presented.
(4) Based on Heilig-Meyers pro forma combined amounts multiplied by the exchange
ratio of .5, which is the fraction of a share of Heilig-Meyers Common Stock
which is issuable in exchange for one share of Rhodes Common Stock in the
Merger.
7
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is certain unaudited historical consolidated selected
financial data relating to Heilig-Meyers and Rhodes, and certain unaudited
combined selected financial data and the pro forma, giving effect to the Merger
under the purchase method of accounting. See "THE MERGER -- Accounting
Treatment." This information should be read in conjunction with the respective
historical financial statements of Heilig-Meyers and Rhodes, including the
respective notes thereto, and with the unaudited pro forma combined financial
information, including the notes thereto, appearing elsewhere, or incorporated
by reference, herein. See "AVAILABLE INFORMATION," "INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE," "PRO FORMA COMBINED FINANCIAL DATA" and "INDEX TO
FINANCIAL STATEMENTS."
SELECTED FINANCIAL DATA OF HEILIG-MEYERS (HISTORICAL)
The following information with respect to Heilig-Meyers' consolidated
financial statements has been derived from, and should be read in conjunction
with, Heilig-Meyers' Annual Report on Form 10-K for the year ended February 29,
1996, and Quarterly Report on Form 10-Q for the quarter ended August 31, 1996,
which are incorporated by reference herein. See "AVAILABLE INFORMATION" and
"INCORPORATION OF CERTAIN INFORMATION BY REFERENCE." The unaudited financial
data reflect, in the opinion of management of Heilig-Meyers, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of such data. Operating results for the interim period ended August 31, 1996 are
not necessarily indicative of the results that may be expected for the fiscal
year as a whole.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------ --------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
EARNINGS STATEMENT DATA:
Sales............................... $ 587,680 $ 536,324 $1,138,506 $ 956,004 $ 723,633 $549,660 $436,664
Annual growth in sales.............. 9.6% 20.1% 19.1% 32.1% 31.7% 25.9% 15.9%
Other income........................ $ 113,757 $ 107,508 $ 220,843 $ 196,135 $ 140,156 $107,883 $ 83,229
Total revenues...................... 701,437 643,832 1,359,349 1,152,139 863,789 657,543 519,893
Annual growth in revenue............ 8.9% 19.7% 18.0% 33.4% 31.4% 26.5% 16.1%
Costs of sales...................... $ 384,920 $ 349,458 $ 752,317 $ 617,839 $ 460,284 $351,361 $276,971
Gross profit margin................. 34.5% 34.9% 33.9% 35.4% 36.4% 36.1% 36.6%
Selling, general and administrative
expense........................... $ 226,637 $ 201,143 $ 436,361 $ 350,093 $ 260,161 $200,071 $160,393
Interest expense.................... 21,565 19,970 40,767 32,889 23,834 23,084 21,389
Provision for doubtful accounts..... 37,023 26,373 65,379 45,419 32,356 24,185 20,298
Provision for income taxes.......... 11,175 17,107 23,021 39,086 32,158 20,833 13,858
Effective income tax rate........... 35.7% 36.5% 35.7% 36.9% 36.9% 35.4% 33.9%
Earnings margin..................... 3.4% 5.6% 3.7% 7.0% 7.6% 6.9% 6.2%
Net earnings........................ $ 20,117 $ 29,781 $ 41,504 $ 66,813 $ 54,996 $ 38,009 $ 26,984
Net earnings per share:
Primary........................... 0.41 0.60 0.84 1.34 1.12 0.84 0.64
Fully diluted..................... 0.41 0.60 0.84 1.34 1.12 0.83 0.63
Cash dividends per share............ 0.14 0.14 0.28 0.24 0.20 0.16 0.14
BALANCE SHEET DATA:
Total assets........................ $1,380,208 $1,225,224 $1,288,960 $1,208,937 $1,049,633 $766,485 $636,576
Average assets per store............ 1,828 1,778 1,800 1,869 1,841 1,803 1,702
Accounts receivable, net............ 558,195 492,489 518,969 538,208 535,437 397,974 315,949
Inventories......................... $ 310,067 $ 275,459 $ 293,191 $ 253,529 $ 184,216 $131,889 $119,803
Property and equipment, net......... 240,226 216,401 216,059 203,201 168,142 126,611 108,758
Additions to property and
equipment......................... 37,676 32,666 40,366 49,101 36,252 27,426 24,010
Short-term debt..................... 174,245 167,912 207,812 167,925 210,318 163,171 42,086
Long-term debt...................... 454,761 359,084 352,631 370,432 248,635 176,353 226,112
Average debt per store.............. 833 765 783 832 805 799 717
Shareholders' equity................ 533,106 513,850 518,983 490,390 433,229 305,555 263,928
Shareholders' equity per share...... 10.96 10.58 10.69 10.10 8.95 6.87 6.07
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------ --------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Working capital..................... $ 611,374 $ 543,138 $ 527,849 $ 554,096 $ 453,175 $322,796 $355,975
Current ratio....................... 2.8 2.8 2.4 2.9 2.4 2.3 4.1
Debt to equity ratio................ 1.18 1.03 1.08 1.10 1.06 1.11 1.02
Debt to debt and equity............. 54.1 50.6 51.9% 52.3% 51.4% 52.6% 50.4%
Rate of return on average assets
(1)............................... 2.5% 3.5% 5.4% 7.8% 7.7% 7.5% 7.1%
Rate of return on average equity.... 3.8% 5.9% 8.2% 14.5% 14.9% 13.3% 12.0%
Number of stores.................... 755 689 716 647 570 425 374
Number of employees................. 15,160 14,033 14,383 13,063 10,536 7,850 6,700
Average sales per employee.......... $ 39 $ 38 $ 83 $ 81 $ 79 $ 76 $ 69
Weighted average common shares
outstanding (in thousands):
Primary........................... 49,289 49,742 49,604 49,954 49,103 45,356 42,123
Fully diluted..................... 49,304 49,824 49,645 49,954 49,281 45,644 42,417
Per share amounts reflect three-for-two stock splits distributed in November 1992 and July 1993.
</TABLE>
- ---------------
(1) Calculated using earnings before interest, net of tax.
SELECTED FINANCIAL DATA OF RHODES (HISTORICAL)
The following information with respect to Rhodes' consolidated financial
statements for the fiscal years ended February 29, 1996, February 28, 1995 and
1994 has been derived from, and should be read in conjunction with, Rhodes'
audited consolidated financial statements included elsewhere in this Proxy
Statement/Prospectus. The unaudited financial data presented below for the
six-month periods ended August 31, 1996 and 1995 has been derived from the
unaudited financial statements of Rhodes included elsewhere in this Proxy
Statement/Prospectus. Such unaudited financial data reflect, in the opinion of
management of Rhodes, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such data. Operating results
for the interim period ended August 31, 1996 are not necessarily indicative of
the results that may be expected for the fiscal year as a whole.
CERTAIN DEFINITIONS
INVENTORY TURNOVER: Cost of Goods Sold on a FIFO basis for the fiscal year
divided by the average of FIFO inventory levels at the beginning of the fiscal
year and at the end of each month during the fiscal year.
AVERAGE DISPLAY SQUARE FOOTAGE: Average of the total square feet of display
area open at the beginning of the fiscal year and at the end of each month
during the fiscal year.
SAME STORE SALES GROWTH: Growth in furniture and services sold and
delivered by stores open for the same months in each comparative period.
SALES PER SQUARE FOOT: Net sales for the fiscal year divided by the average
square feet of display area of those stores open at the beginning of the fiscal
year and at the end of each month during the fiscal year.
SALES PER NON-SALES EMPLOYEE: Net sales for the fiscal year divided by the
average number of non-selling forty hour units at the end of each month during
the fiscal year. A forty-hour unit is the equivalent of one employee working
forty hours each week. Sales employees, who work on commission only, are
excluded.
SALES PER STORE: Net sales for the fiscal year divided by the average
number of stores open at the end of each month during the fiscal year.
9
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED AUGUST 31, FISCAL YEAR ENDED FEBRUARY 28 OR 29,
-------------------- --------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
STATEMENT OF OPERATIONS DATA
Net Sales............................... $238,764 $184,818 $430,193 $361,238 $325,255 $286,527 $265,924
Cost of Goods Sold...................... 131,244 96,161 225,953 185,995 168,425 150,344 139,876
-------- -------- -------- -------- -------- -------- --------
Gross Profit............................ 107,520 88,657 204,240 175,243 156,830 136,183 126,048
-------- -------- -------- -------- -------- -------- --------
Finance Charges and Insurance
Commissions........................... 3,397 3,094 5,822 4,935 4,892 13,853 37,725
-------- -------- -------- -------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative..... 113,227 79,677 187,913 151,111 136,269 129,225 127,446(1)
Provision for credit losses............. 211 42 167 164 213 4,803 7,413(1)
Amortization of intangibles............. 1,597 1,444 2,933 3,074 3,132 3,253 3,433
Non-recurring charge.................... -- -- 2,400 -- -- -- --
Other (income) expense, net............. (35) (105) (401) 197 8 (575) 868
-------- -------- -------- -------- -------- -------- --------
115,000 81,058 193,012 154,546 139,622 136,706 139,160
-------- -------- -------- -------- -------- -------- --------
Operating income........................ (4,083) 10,693 17,050 25,632 22,100 13,330 24,613
Non-recurring items..................... -- -- -- -- -- -- 1,162
Interest Expense, Net................... 4,973 3,107 6,898 6,109 11,545 24,306 33,920
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before Income Taxes,
Change in Accounting Principal and
Extraordinary Item.................... (9,056) 7,586 10,152 19,523 10,555 (10,976) (10,469)
Provision (Benefit) for Income Taxes.... (3,713) 3,110 4,162 8,004 4,508 (1,145) (1,234)
-------- -------- -------- -------- -------- -------- --------
Income (Loss) Before Change in
Accounting Principle and
Extraordinary Item (2)................ (5,343) 4,476 5,990 11,519 6,047 (9,831) (9,235)
Cumulative Effect on Prior Years of
Change in Accounting for Income
Taxes................................. -- -- -- -- -- -- (719)
Extraordinary Item...................... -- -- -- -- (2,727) -- --
-------- -------- -------- -------- -------- -------- --------
Net Income (Loss)....................... ($5,343) $ 4,476 $ 5,990 $ 11,519 $ 3,320 ($9,831) ($9,954)
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
PER SHARE DATA:
Income (Loss) Before Extraordinary
Item.................................. ($0.58) $ 0.48 $ 0.80(5) $ 1.18 $ 0.83(2) ($6.68) ($8.85)
Net Income (Loss)....................... (0.58) 0.48 0.64 1.18 0.45 (6.68) (8.85)
Dividends............................... -- -- -- -- -- -- --
Weighted Average Shares
Outstanding (000's)................... 9,150 9,355 9,304 9,760 7,302 1,472 1,125
OTHER OPERATING DATA:
Depreciation and Amortization........... $ 7,006 $ 5,209 $ 11,372 $ 9,796 $ 9,531 $ 9,717 $ 10,021
Non-Cash Interest Expense............... -- -- -- -- 2,626 6,653 6,257
Capital Expenditures.................... 9,802 13,299 23,477(6) 14,101 6,860 3,405 2,769
Gross Profit Percentage................. 45.0% 48.0% 47.5% 48.5% 48.2% 47.5% 47.4%
FIFO Inventory Turnover................. 2.9x 3.4x 3.3x 3.6x 3.8x 3.8x 3.7x
STORE DATA:
Stores open at Period End............... 107 79 108 80 78 76 76
Average Display Square Footage (000s)... 3,766 2,513 2,950 2,411 2,270 2,184 2,182
Total Store Sales Growth................ 29.2% 7.7% 19.1% 11.1% 13.5% 7.7% 3.6%
Same Stores Sales Growth................ (8.0)% 5.9% 2.5% 7.1% 10.0%(3) 7.0%(4) (0.6%)
Sales Per Square Foot................... 127 147 146 150 143 131 122
Sales Per Non-Sales Employee (000s)..... 109 116 237 239 231 213 185
Sales Per Store (000s).................. 2,201 2,330 4,784 4,607 4,229 3,795 3,538
BALANCE SHEET DATA (at end of period):
Working Capital......................... ($177) ($12,752) $ 6,801 $ 171 $ 608 ($10,077) ($9,759)
Total Assets............................ 266,777 209,203 261,759 198,410 185,604 175,754 349,152
Total Debt (including obligations Under
Capital Leases)....................... 103,361 60,816 96,265 55,002 60,831 145,706 307,821
Shareholders' Equity (Deficit).......... 64,806 69,664 70,020 67,500 59,909 (23,850) (14,073)
</TABLE>
10
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- ---------------
(1) In fiscal 1992, Rhodes sold, without recourse, a portion of its written-off
accounts to an affiliate. The effect of these transactions was to reduce the
provision for credit losses by $1,001,000 and increase selling, general and
administrative expenses by $494,000.
(2) In the year ended February 28, 1994, Rhodes recorded an extraordinary
charge, net of taxes, against net income of $2,727,000, or ($0.38) per
share, which resulted from the early retirement of debt principally in
connection with Rhodes' recapitalization.
(3) Same store sales growth for fiscal 1994, excluding the results of three
Florida stores that were favorably impacted in fiscal 1993 by increased
sales following Hurricane Andrew, was 12.2% compared with fiscal 1993.
(4) Same store sales growth for fiscal 1993, excluding the three Florida stores
that were favorably impacted in fiscal 1993 by increased sales following
Hurricane Andrew, was 6.2% for fiscal 1993 compared with fiscal 1992.
(5) In the year ended February 29,1996, Rhodes recorded a non-recurring charge
to reflect the cost of changing the names of 33 stores to "Rhodes" and the
cost of closing four stores.
(6) Capital expenditures reported does not include capital assets purchased in
the Weberg Enterprises, Inc. ("Weberg") and The Glick Furniture Company
("Glick's") acquisitions which totaled $6,273,000.
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RHODES SPECIAL MEETING
The Rhodes Special Meeting will be held at 10:00 a.m., local time, on
December 23, 1996, at 4370 Peachtree Road, Atlanta, Georgia 30319. At the Rhodes
Special Meeting, Rhodes' shareholders will consider and vote upon a proposal to
approve the Merger Agreement and transact such other business as may properly
come before the Rhodes Special Meeting.
The Rhodes Board of Directors has fixed the close of business on November
15, 1996, as the record date for determining the Rhodes shareholders entitled to
receive notice of and to vote at the Rhodes Special Meeting (the "Record Date").
Only holders of record of Rhodes Common Stock as of the Record Date are entitled
to notice of and to vote at the Rhodes Special Meeting. As of the close of
business on the Record Date, there were 9,175,107 shares of Rhodes Common Stock
outstanding and held by approximately 390 holders of record. Holders of Rhodes
Common Stock are entitled to one vote on each matter considered and voted on at
the Rhodes Special Meeting for each share of Rhodes Common Stock held of record
at the close of business on the Record Date. The presence, in person or by
properly executed proxy, of the holders of a majority of the outstanding shares
of Rhodes Common Stock entitled to vote at the Rhodes Special Meeting is
necessary to constitute a quorum of the holders of Rhodes Common Stock at the
Rhodes Special Meeting. Abstentions and broker non-votes will have the practical
effect of a vote against the approval of the Merger Agreement since it is one
less vote for approval.
Proxies in the form enclosed are solicited by the Rhodes Board of
Directors. Shares of Rhodes Common Stock represented by properly executed
proxies, if such proxies are received in time and are not revoked, will be voted
in accordance with the instructions indicated on the proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT
AND CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREIN, AND AS DETERMINED BY
THE PROXIES NAMED THEREIN AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE
THE RHODES SPECIAL MEETING.
A Rhodes shareholder who has given a proxy may revoke it at any time prior
to its exercise at the Rhodes Special Meeting by (i) giving written notice of
revocation to the Secretary of Rhodes, (ii) properly submitting to Rhodes a duly
executed proxy bearing a later date, or (iii) voting in person at the Rhodes
Special Meeting. All written notices of revocation and other communications with
respect to revocation of proxies should be addressed to Rhodes as follows:
Rhodes, Inc., 4370 Peachtree Road, Atlanta, Georgia 30319, Attention: Secretary.
A proxy appointment will not be revoked by death or supervening incapacity of
the shareholder executing the proxy unless, before the shares are voted, notice
of such death or incapacity is filed with Rhodes' Secretary or other person
responsible for tabulating votes on behalf of Rhodes.
The expenses of soliciting proxies for the Rhodes Special Meeting will be
borne by Rhodes. In addition to the solicitation of shareholders of record by
mail, telephone or personal contact, Rhodes will be contacting brokers, dealers,
banks or voting trustees or their nominees who can be identified as record
holders of Rhodes Common Stock. Such holders, after inquiry by Rhodes, will
provide information concerning the quantity of proxy and other materials needed
to supply such materials to beneficial owners, and Rhodes will reimburse them
for the expense of mailing the proxy materials to such persons. It is also
contemplated that, for a fee of up to $20,000 to be paid by Rhodes, additional
solitation will be made by personal interview, telephone, telecopy and telegraph
under the direction of D.F. King & Co., Inc., 77 Water Street, New York, New
York 10005.
Approval of the Merger Agreement by the shareholders of Rhodes requires the
affirmative vote of the holders of a majority of the outstanding shares of
Rhodes Common Stock. As of the close of business on the Record Date, WPS and
Green Capital held 2,918,379 shares of Rhodes Common Stock or approximately
31.7% of the outstanding Rhodes Common Stock. Pursuant to the Voting Agreement,
WPS and Green Capital have agreed to vote their shares of Rhodes Common Stock in
favor of approval of the Merger Agreement. See "THE MERGER -- Voting Agreement."
HOLDERS OF RHODES COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES
REPRESENTING SHARES OF RHODES COMMON STOCK UNTIL THEY RECEIVE THE LETTER OF
TRANSMITTAL AND EXCHANGE INSTRUCTIONS, WHICH WILL BE SENT TO FORMER HOLDERS OF
RHODES COMMON STOCK AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE TIME.
12
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THE MERGER
THE FOLLOWING INFORMATION DESCRIBES CERTAIN INFORMATION PERTAINING TO THE
MERGER. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ANNEXES HERETO, INCLUDING THE MERGER AGREEMENT, A
COPY OF WHICH IS SET FORTH IN ANNEX A TO THIS PROXY STATEMENT/PROSPECTUS AND
INCORPORATED HEREIN BY REFERENCE. ALL SHAREHOLDERS ARE URGED TO READ THE ANNEXES
IN THEIR ENTIRETY.
GENERAL
Subject to the terms and conditions of the Merger Agreement, Sub will merge
with and into Rhodes, which will be the surviving corporation of the Merger
(hereinafter, with respect to Rhodes at and after the Effective Time, the
"Surviving Corporation") and, as a result thereof, will become a wholly owned
subsidiary of Heilig-Meyers. Upon consummation of the Merger, each outstanding
share of Rhodes Common Stock (excluding shares held by Rhodes, Heilig-Meyers or
their respective subsidiaries) will cease to be outstanding and will be
converted into the right to receive 0.50 (the "Exchange Ratio") shares of
Heilig-Meyers Common Stock, $2.00 par value ("Heilig-Meyers Common Stock"), at
the Effective Time of the Merger. See " -- Manner and Basis of Converting
Securities in the Merger."
At the Effective Time, the separate existence of Sub shall cease and Sub
shall be merged with and into Rhodes. The Rhodes Articles of Incorporation as in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation, until thereafter amended as provided
by law and such Articles of Incorporation. The Rhodes Bylaws as in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation, until thereafter amended as provided by law, such By-Laws and the
Articles of Incorporation of the Surviving Corporation. The directors of Sub
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, and the officers of Sub immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, in
each case until their respective successors shall have been duly elected or
appointed and qualified.
Consummation of the Merger is subject to various conditions, including
among other matters: (a) approval of the Merger Agreement by the requisite vote
of the holders of Rhodes Common Stock; (b) effectiveness of the Registration
Statement of which this Proxy Statement/Prospectus is a part; (c) authorization
for listing on the NYSE of the shares of Heilig-Meyers Common Stock issued in
the Merger; and (d) satisfaction of certain other conditions. See
" -- Conditions to Consummation," " -- Regulatory Approvals" and " -- Amendment,
Waiver and Termination."
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of the holders of
Rhodes Common Stock, and all required governmental and other consents and
approvals are received, and if the other conditions to the obligations of the
parties to consummate the Merger are satisfied or waived, the Merger will be
consummated and effected on the date and at the time the Certificate of Merger
with respect to the Merger is duly filed with the Secretary of State of the
State of Georgia or such time as it is agreed upon by the parties and specified
in the Certificate of Merger. The Closing of the Merger (the "Closing") will
take place at 10:00 a.m. on the second business day after satisfaction or waiver
of the conditions to Closing (excluding conditions that, by their terms, cannot
be satisfied until the Closing Date) set forth in the Merger Agreement (the
"Closing Date") unless another time or date is agreed to in writing by the
parties. Assuming satisfaction or waiver of all conditions to the consummation
of the Merger, the Merger is expected to become effective during December 1996.
Either Rhodes or Heilig-Meyers may terminate the Merger Agreement if the Merger
has not been consummated by February 28, 1997. See " -- Conditions to
Consummation," " -- Regulatory Approvals" and " -- Amendment, Waiver and
Termination."
BACKGROUND OF THE MERGER
Since Rhodes' public offering in 1993, Rhodes has taken a number of steps
to improve shareholder value and return, including remodeling and renovating a
significant portion of its store base, expanding the number of stores and
improving the locations of the stores in Rhodes' existing markets, expanding
into new markets, by acquisition and the opening of new stores, and repurchasing
stock from time to time. As part of its review of strategic alternatives, Rhodes
also considered a major refinancing and repurchase of stock to be funded through
the issuance of high yield debt securities. The proceeds of such financing would
also have been used to fund Rhodes' acquisitions of stores from Weberg
Enterprises, Inc. and The Glick Furniture Company in late 1995 in lieu of the
bank indebtedness incurred in connection with such acquisitions. Despite these
steps, Rhodes has been disappointed in its stock performance and, in the first
quarter of fiscal 1997, Rhodes engaged Salomon to serve as financial advisor to
advise the Rhodes Board of Directors concerning strategic alternatives,
including the possible sale of Rhodes.
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<PAGE>
While considering the various alternatives available to Rhodes, the Rhodes
Board of Directors, with the assistance of its financial advisor, Salomon,
decided to determine the level of interest that might exist on the part of
potential acquirors of Rhodes. Salomon contacted approximately 60 prospective
acquirors that Salomon, along with the management of Rhodes, believed were
likely to have a strategic and/or financial interest in the potential
acquisition of Rhodes.
Of the approximately 60 prospective acquirors contacted, 28 signed
confidentiality agreements, including Heilig-Meyers, and received confidential
evaluation materials compiled by Salomon and Rhodes, including certain public
and non-public financial and operating data regarding Rhodes. Heilig-Meyers
signed a confidentiality agreement with Rhodes in May 1996 and obtained the
confidential evaluation materials referred to in the immediately preceding
sentence. Each of the parties executing confidentiality agreements was
instructed by Salomon to submit preliminary indications of interest to Rhodes by
June 11, 1996. On or before such date Salomon also received preliminary,
non-binding bids from three of these parties (which did not include
Heilig-Meyers) ranging in cash prices from $12.25-$16.00 per share of Rhodes
Common Stock. Two of these bidders were invited back for a second round of
diligence and upon due diligence both bidders indicated that their bids would be
significantly reduced. Further diligence resulted in both bidders retracting
their preliminary bids (one in June and the other in late July 1996), citing the
recent deteriorating financial and operating performance of Rhodes. As noted
above, Heilig-Meyers did not submit a bid in June 1996, indicating at that time
it was not interested in pursuing a transaction with Rhodes, because, among
other considerations, Heilig-Meyers was not interested in pursuing an
acquisition involving a competitive bidding process. Rhodes and Heilig-Meyers
had previously entered into store acquisition transactions in which each had
acquired stores from the other. In addition, Heilig-Meyers and Rhodes
representatives periodically had informal discussions concerning the possibility
of combining the two companies in the late 1980s; however, these discussions had
not been pursued.
On August 7, Troy A. Peery, Jr., President and Chief Operating Officer of
Heilig-Meyers, called Holcombe T. Green concerning whether Rhodes would be
interested in discussing a possible acquisition by Heilig-Meyers on a
stock-for-stock basis. On August 8, Mr. Peery, Joseph R. Jenkins, Executive
Vice-President and Chief Financial Officer of Heilig-Meyers, Mr. Green and Mr.
Dugan met to discuss whether to pursue a possible transaction between the two
companies. Mr. Peery indicated that Heilig-Meyers would be interested in
pursuing a transaction at a ratio of 0.50 shares of Heilig-Meyers Common Stock
for every one share of Rhodes Common Stock, subject to Heilig-Meyers conducting
due diligence to determine whether such an exchange ratio would be appropriate
and subject to the Heilig-Meyers Board of Directors determining to pursue such
an acquisition. Mr. Green indicated that in the event an agreement was reached
with respect to such an acquisition, he would cause the partnerships he
controlled to agree to vote their shares of Rhodes Common Stock in favor of such
a transaction.
On August 13, 1996, the Executive Committee of the Heilig-Meyers Board of
Directors met and considered a possible transaction with Rhodes, at an exchange
ratio not to exceed 0.50 shares of Heilig-Meyers Common Stock for each
outstanding share of Rhodes Common Stock. The Executive Committee authorized
management to continue to negotiate the terms of a possible transaction with
Rhodes and to conduct the due diligence review with respect to such a
transaction to determine whether to pursue the transaction and the
appropriateness of the possible exchange ratio.
Thereafter, Heilig-Meyers retained Goldman Sachs to serve as financial
advisor to Heilig-Meyers in connection with a possible transaction with Rhodes.
On August 28, 1996, the Heilig-Meyers Board of Directors met. Management
reported on the discussions with Rhodes and indicated that management was
conducting a due diligence review to determine whether to pursue the transaction
and the appropriateness of the possible exchange ratio. The Heilig-Meyers Board
of Directors authorized management to pursue the transaction and authorized the
Executive Committee of the Heilig-Meyers Board of Directors to approve such a
transaction, subject to satisfactory completion of due diligence and negotiation
of satisfactory terms, at an exchange ratio not to exceed 0.50 shares of
Heilig-Meyers Common Stock for each outstanding share of Rhodes Common Stock.
On August 28, 1996, the Rhodes Board of Directors met with Salomon and its
outside legal counsel to assess and consider, among other things, the terms and
conditions of a potential transaction with Heilig-Meyers, as well as other
strategic options, including remaining independent, which would require the
Company to take additional steps to improve operations. At these meetings,
Salomon made detailed presentations relating to the discussions with
Heilig-Meyers, the strategic rationale for a combination with Heilig-Meyers, and
also updated background information relating to the value of Rhodes and recent
merger and acquisition pricing. The Rhodes Board of Directors also reviewed the
terms and conditions set forth in a draft merger agreement. At this meeting,
Salomon delivered an oral opinion to the Rhodes Board of Directors that the
exchange ratio proposed by Heilig-Meyers was fair, from a financial point of
view, to the holders of Rhodes Common Stock. See" -- Opinion of Financial
Advisor." After considerable discussion and review of the strategic alternatives
and options
14
<PAGE>
available to Rhodes, the Rhodes Board of Directors approved the general terms of
such proposed transaction and the draft of the Merger Agreement as presented to
the meeting and instructed management to engage in further discussions with
Heilig-Meyers to finalize a definitive merger agreement.
During August and September 1996, representatives of Heilig-Meyers and
Rhodes and their respective legal and financial advisors conducted due diligence
reviews with respect to each other. From August 29 through September 9, 1996
members of management of both companies, together with their respective
financial and legal advisors, continued to negotiate the terms of the proposed
merger and the definitive documentation.
On September 9, 1996, at a meeting of the Rhodes Board of Directors that
included the participation of Salomon and Rhodes' outside legal counsel, the
Rhodes Board of Directors reviewed the terms of the proposed Merger Agreement
and the exchange ratio being offered by Heilig-Meyers. The Board of Directors
discussed the decrease in the price of Rhodes Common Stock (which had decreased
from $9.00 at the close of business on August 27, 1996 to $8.375 at the close of
business on September 6, 1996) and the decrease in the price of Heilig-Meyers
Common Stock (which had declined from $17.25 at the close of business on August
27, 1996 to $14.875 at the close of business on September 6, 1996) since the
August 28, 1996 Board of Directors' meeting and reviewed again the financial
information presented by Salomon at such meeting. Salomon reconfirmed its view
that the Exchange Ratio was fair, from a financial point of view, to the holders
of Rhodes Common Stock. In the meeting, management reported that it believed
that, based upon its negotiations to date, Heilig-Meyers would not increase its
proposed exchange ratio of 0.50 shares of Heilig-Meyers Common Stock for each
outstanding share of Rhodes Common Stock. After further discussion, the Rhodes
Board of Directors unanimously approved the offer from Heilig-Meyers and
authorized senior management to enter into the Merger Agreement upon the
completion of negotiations of final documentation.
From September 9 through September 17, 1996, members of management of both
companies, together with their respective legal advisors, continued to conduct
due diligence and negotiate the terms of the proposed merger and the definitive
documentation.
On September 16, 1996, the Executive Committee of Heilig-Meyers met to
consider the proposed merger and discussed reports from Heilig-Meyers'
management and its legal and financial advisors concerning the proposed
transaction. The Heilig-Meyers Executive Committee approved the proposed merger
subject to satisfactory resolution of outstanding issues and agreement upon
final documentation.
On September 17, 1996, Heilig-Meyers, Sub and Rhodes executed the Merger
Agreement and Heilig-Meyers, WPS and Green Capital executed the Voting
Agreement. Heilig-Meyers and Rhodes each issued a press release announcing the
proposed Merger.
REASONS FOR THE MERGER
RHODES. As discussed under "Background of the Merger" above, Rhodes has
taken a number of steps to enhance shareholder value without substantial effect,
in part because of the limited liquidity in Rhodes' stock. Rhodes believes that
the Merger will provide to Rhodes' shareholders the opportunity to participate
in the growth potential of the largest publicly held specialty retailer of home
furnishings in the United States and that the combined company will be able to
realize improved results from the increased scale of its operations and thereby
provide the best opportunity to maximize shareholder value and reduce risk for
the benefit of the Rhodes shareholders. On a pro forma basis after giving effect
to the Merger, Heilig-Meyers would have had sales of approximately $1.5 billion
for the year ended February 29, 1996 (more than three times Rhodes' revenues for
such fiscal year) and 824 stores at that date. In addition, the Rhodes Board of
Directors believes that the equity securities of the combined company should be
less volatile than the securities of Rhodes as a stand-alone company based on
the expectation that the combined company will have larger scale with stronger
financial characteristics, including a lower cost of financing, and will also
have a much larger market capitalization and provide increased liquidity for
Rhodes shareholders. The Rhodes Board of Directors believes that the
Heilig-Meyers Common Stock offers a greater possibility for long-term
appreciation with less risk than shares of Rhodes as a stand-alone entity.
Rhodes believes that substantial synergies exist in this combination, which will
allow further cost savings while maintaining an ability to continue strong sales
growth.
In the course of reaching its determination to approve the Merger
Agreement, the Rhodes Board of Directors, without assigning any relative or
specific weights, also considered other factors, including the following
material factors: (i) the terms and conditions of the Merger Agreement and the
other documents executed in connection with the Merger Agreement, including the
amount and form of the merger consideration and the conditions to the parties'
respective obligations to consummate the transaction contemplated thereby; (ii)
the financial and valuation analyses prepared by Salomon and the opinion
15
<PAGE>
rendered by Salomon that the Exchange Ratio was fair, from a financial point of
view, to the holders of the Rhodes Common Stock (see " -- Opinion of Financial
Advisor" below); (iii) the strong financial condition, operations and prospects
of Heilig-Meyers and the anticipated effect thereon of the proposed transaction;
(iv) the recent operating results of Rhodes and its need for a larger capital
base to fund future expansion; (v) the absence of available alternative
transactions that appeared likely to offer the shareholders of Rhodes economic
benefits comparable or superior to the Merger, including the lack of definitive
interest on the part of any other potential acquirer, as determined by a
comprehensive two-stage auction process conducted by Salomon, following the
announcement by Rhodes on April 29, 1996, that Rhodes had engaged Salomon to
advise Rhodes concerning strategic alternatives, including a possible sale; (vi)
industry and economic factors, including the cyclicality of the furniture retail
business; (vii) the nature and compatibility of Heilig-Meyers' management,
business philosophy and overlapping customer and geographic base; and (viii) the
prospects for growth and expanded products and services, and other anticipated
impacts on employees and customers served by Rhodes.
In approving the Merger Agreement, the Rhodes Board of Directors was aware
that (i) the Merger Agreement contains certain provisions restricting Rhodes
ability to solicit, initiate, encourage or negotiate with respect to other
offers or agreements to acquire Rhodes (see " -- Other Offers") and (ii)
Heilig-Meyers would be entitled to receive a termination fee plus certain fees
and expenses from Rhodes under certain circumstances generally relating to a
failure by Rhodes to consummate the Merger because of another offer for Rhodes
(see " -- Expenses and Fees"). However, the Rhodes Board of Directors was also
aware that such terms were specifically bargained for and inducements for
Heilig-Meyers to enter into the Merger Agreement, and that the Rhodes Board of
Directors' obligations under the Merger Agreement to recommend approval of the
Merger Agreement by its shareholders was explicitly made subject to the Rhodes
Board of Directors' fiduciary duties under applicable law. Accordingly, the
Merger Agreement expressly permits the Rhodes Board of Directors, if required by
the exercise of its fiduciary duties under applicable law, to withdraw, modify
or change such recommendations. See " -- Amendment, Waiver and Termination."
THE RHODES BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS FAIR TO AND
IN THE BEST INTERESTS OF RHODES AND ITS SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT SHAREHOLDERS OF RHODES VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
HEILIG-MEYERS. Heilig-Meyers constantly evaluates opportunities for further
expansion of its business. Heilig-Meyers has grown from 322 stores at February
28, 1991 to 813 stores at October 31, 1996. The combination with Rhodes is
expected to broaden Heilig-Meyers' avenues for growth utilizing its national
presence and current infrastructure. Heilig-Meyers services credit-oriented
customers primarily in small towns while Rhodes targets credit-oriented
customers primarily in large and mid-sized markets. Heilig-Meyers believes that
the synergies and efficiencies created from the Merger will create opportunities
that the two respective companies do not have as separate operating entities.
OPINION OF FINANCIAL ADVISOR
At the meeting of the Rhodes Board of Directors held on August 28, 1996,
Salomon delivered its opinion, and confirmed such opinion orally on September 9,
1996, and in writing on November 22, 1996, in each case that, as of each such
date, the Exchange Ratio was fair, from a financial point of view, to the
holders of Rhodes Common Stock. No limitations were imposed by the Rhodes Board
of Directors upon Salomon with respect to the investigation made or the
procedures followed by Salomon in rendering its opinion.
The full text of the written opinion of Salomon, dated as of November 22,
1996, is set forth as ANNEX B to this Proxy Statement/Prospectus and sets forth
the assumptions made, procedures followed and matters considered by Salomon.
Holders of Rhodes Common Stock are urged to read Salomon's opinion in its
entirety. The summary of the opinion as set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the full text
of such opinion.
In connection with rendering its opinion, Salomon reviewed certain publicly
available information concerning Rhodes and Heilig-Meyers. In the case of
Rhodes, Salomon also reviewed certain other financial information, including
financial forecasts, that were provided to Salomon by Rhodes. Salomon also
discussed the business operations and financial condition of Rhodes and
Heilig-Meyers, as well as other matters Salomon believed relevant to its
inquiry, with certain officers and employees of Rhodes and Heilig-Meyers,
respectively. Salomon also considered such other information, financial studies,
analyses, investigations and financial, economic and market criteria that
Salomon deemed relevant.
In its review and analysis and in arriving at its opinion, Salomon assumed
and relied upon the accuracy and completeness of the financial and other
information (including information relating to the obtaining of regulatory
approvals for the Merger) reviewed by it, and Salomon did not assume any
responsibility for independent verification of such information.
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<PAGE>
With respect to the financial forecasts of Rhodes, Salomon assumed that such
forecasts had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Rhodes as to the future
financial performance of Rhodes and Salomon expressed no opinion with respect to
such forecasts or the assumptions on which such forecasts were based. Salomon
did not make or obtain or assume any responsibility for making or obtaining any
independent evaluations or appraisals of the assets (including properties and
facilities) or liabilities of Rhodes or Heilig-Meyers.
Salomon's opinion is necessarily based upon conditions as they existed and
could be evaluated on the date thereof. Salomon's opinion does not imply any
conclusion as to the likely trading range for Heilig-Meyers Common Stock
following the consummation of the Merger, which may vary depending upon, among
other factors, changes in interest rates, dividend rates, market conditions,
general economic conditions and other factors that generally influence the price
of securities. Salomon's opinion does not address Rhodes' underlying business
decision to effect the Merger. Further, Salomon's opinion is directed only to
the fairness, from a financial point of view, of the Exchange Ratio to the
holders of Rhodes Common Stock and does constitute a recommendation concerning
how holders of Rhodes Common Stock should vote with respect to the Merger
Agreement or the Merger.
In its evaluations, however, Salomon specifically considered certain events
occurring after Rhodes' April 29, 1996 press release (the "Press Release") in
which Rhodes stated that it had retained Salomon to seek strategic alternatives,
including a possible sale. After such announcement, Salomon initiated a
comprehensive two-stage auction process resulting in 60 strategic and financial
buyers being contacted. Of the 60 parties contacted, 39 parties requested
confidentiality agreements pursuant to which 28 selling memorandums were
distributed. Twenty-five of such 28 parties subsequently indicated that they
were not interested in proceeding with a transaction, three parties submitted
bids and two parties were asked to proceed to the second stage of the auction.
Both remaining parties retracted their bids after completing due diligence,
attributing such decisions to Rhodes' deteriorating operating performance.
Salomon also considered that, subsequent to the Press Release, Rhodes made the
following announcements relating to operating results: (a) April 1996 sales
generated by stores that were open during April 1995 (sales for stores that were
open during a corresponding period in the previous fiscal year are hereafter
referred to as "same store sales") were down 7.9% (announced on May 5, 1996);
(b) first quarter FY 1997 same store sales were down 5.9% (announced on June 7,
1996); (c) first quarter earnings per share ("EPS") were a loss of $(0.29)
(announced on June 17, 1996); (d) June 1996 same store sales were down 3.3%
(announced on July 3, 1996) and (e) July 1996 same store sales were down 14%
(announced on August 8, 1996).
The following is a summary of the reports and analyses (collectively, the
"Salomon Report") presented on August 28, 1996, by Salomon to the Rhodes Board
in connection with the rendering of Salomon's opinion.
The Salomon Report considered, and estimated the value of Rhodes relative
to Heilig-Meyers on the basis of, base forecasts for Rhodes developed by the
management of Rhodes (the "Base Case"). In light of the recent financial
performance of Rhodes, Salomon also considered an adjusted financial forecast,
revised downward to reflect more conservative assumptions by Rhodes management,
such assumptions including a flat (0%) same store sales, a significantly lower
new store expansion rate and a relatively higher selling, general and
administrative expense rate (the "Adjusted Case").
(i) HISTORICAL TRADING ANALYSIS. Salomon reviewed the history of
trading prices for shares of Rhodes Common Stock and Heilig-Meyers Common
Stock in relation to each other over the period from January 1, 1996 to
August 23, 1996. This review showed high, low and average prices to be
$12.63, $6.88 and $10.09, respectively, per share of Rhodes Common Stock
and $24.13, $13.50 and $18.99, respectively, per share of Heilig-Meyers
Common Stock. Salomon noted that the prices of Rhodes Common Stock and
Heilig-Meyers Common Stock have experienced similar fluctuations in price
and volume over the nine month period ended August 23, 1996. Salomon also
noted that the closing stock prices for Rhodes Common Stock and
Heilig-Meyers Common Stock as of August 23, 1996, were $8.75 and $17.25,
respectively.
(ii) EXCHANGE RATIO ANALYSIS. Salomon reviewed the historical ratio of
the daily closing prices of Rhodes Common Stock to Heilig-Meyers Common
Stock over the period from January 1, 1996 to August 23, 1996. Based on
such prices and over such period, the high, low and average exchange ratios
implied by such prices were 0.71, 0.42 and 0.54, respectively, shares of
Heilig-Meyers Common Stock to each share of Rhodes Common Stock, as
compared to the Exchange Ratio of 0.50 shares of Heilig-Meyers Common Stock
to each share of Rhodes Common Stock provided for in the Merger Agreement.
Salomon noted that, based on closing prices for Rhodes Common Stock and
Heilig-Meyers Common Stock over the 30 days of trading from July 12, 1996
to August 23, 1996, the high, low and average exchange ratios implied by
such prices were 0.54, 0.42 and 0.48. Salomon also noted that on August 23,
1996, the exchange ratio implied by the closing prices of Rhodes Common
Stock and Heilig-Meyers Common Stock was 0.51.
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(iii) PREMIUM ANALYSIS. Salomon calculated the implied premium to be
received by holders of Rhodes Common Stock (the "Rhodes Premium") based on
the average trading prices per share of Rhodes Common Stock and Heilig-
Meyers Common Stock. Salomon noted that the Rhodes Premium was
approximately 6%, based on the 30-day average stock price for Heilig-Meyers
as of August 23, 1996, and the closing price for Rhodes Common Stock as of
August 23, 1996. Further, Salomon calculated the Rhodes Premium as 14% and
15%, based on the 60-day and 90-day average stock prices, respectively, of
Heilig-Meyers Common Stock as of August 23, 1996 and the closing price for
Rhodes Common Stock as of August 23, 1996. Salomon also reviewed the
premiums paid in all stock for stock transactions since January 1, 1996,
and compared such premiums to the premium to be received by holders of
Rhodes Common Stock, as such premium is implied by the Exchange Ratio.
(iv) COMPARABLE COMPANY ANALYSIS. Salomon compared the financial and
market performance of Rhodes and Heilig-Meyers with that of the following
group of selected publicly traded furniture companies: Haverty Furniture
Companies, Inc. ("Haverty"); Levitz Furniture Corporation ("Levitz"); and
Seaman Furniture Company, Inc. ("Seaman"). Salomon examined certain
publicly available financial and operating data of the comparable
companies, in particular: projected 5-year growth in EPS based on EPS
growth rates as reported on the Institutional Brokers' Estimate system
("IBES") at August 15, 1996; the ratio of current stock prices per share to
the latest twelve months ("LTM") EPS (the "LTM P/E Ratio"); the ratio of
current stock price per share to estimated EPS ("P/E Ratio") for the 1997
fiscal year ("FY 1997") and the 1998 fiscal year ("FY 1998") (and the
estimated EPS for such years as reported on IBES); the ratio of the market
capitalization plus total debt, preferred stock and minority interests but
less cash (collectively, "Firm Value") to LTM gross sales, earnings before
interest, taxes, depreciation and amortization ("EBITDA") and earnings
before interest and taxes ("EBIT"). This analysis showed: 5-year EPS growth
rates of 15.0% for the comparable companies as compared to rates of 15.0%
for Rhodes and 18.0% for Heilig-Meyers; an LTM P/E Ratio of 11.2x for
Haverty (such ratios for the other two comparable companies were not
meaningful), as compared to 40.2x for Rhodes and 24.2x for Heilig-Meyers;
estimated FY 1997 P/E Ratios of 10.3x for Haverty and 15.9x for Seaman
(such ratio for Levitz was not meaningful), as compared to 15.9x for Rhodes
and 16.6x for Heilig-Meyers; estimated FY 1998 P/E Ratios of 8.6x for
Haverty and 16.5x for Levitz (such ratio for Seaman was not meaningful), as
compared to 12.9x for Rhodes and 13.2x for Heilig-Meyers; a range of ratios
of Firm Value to LTM gross sales from 43.6% to 77.3% for the comparable
companies, as compared to 35.0% for Rhodes and 120.3% for Heilig-Meyers; a
range of ratios of Firm Value to LTM EBITDA from 8.1x to 29.2x for the
comparable companies, as compared to 7.0x for Rhodes and 11.2x for Heilig-
Meyers; and a range of Firm Value to LTM EBIT from 11.0x to 13.4x for the
comparable companies as compared to 14.2x for Rhodes and 14.7x for
Heilig-Meyers.
(v) DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow
("DCF") methodology, Salomon valued Rhodes in accordance with the Base Case
and in accordance with the Adjusted Case, in each case by estimating the
present value of future cash flows that could be produced by Rhodes for the
fiscal years ending February 28 or 29, 1997-2001. Free cash flows represent
the amount of cash generated and available for interest, principal and
dividend payments after providing for ongoing business operations. Salomon
aggregated (x) the present value of such cash flows for the period
including the fiscal years ending February 28, 1997-2001 (the "Forecast
Period") with (y) the present value of the range of terminal values
described below. The range of terminal values was generally calculated by
applying a range of multiples to Rhodes' EBITDA for the fiscal year ended
February 28, 2001. This range of terminal values represented Rhodes' value
beyond the Forecast Period. As part of the DCF analysis, Salomon used
discount rates ranging from 10.5% to 11.5%. This DCF analysis resulted in
values ranging from $13.99 to $19.03 per share of Rhodes Common Stock based
upon the Base Case and values ranging from $6.64 to $9.75 based on the
Adjusted Case.
(vi) PRECEDENT TRANSACTION REVIEW. The Salomon Report contained a
summary of recent acquisition transactions and reviewed the Firm Value,
Sales, EBITDA and EBIT for the combined companies resulting from such
acquisitions.
(vii) PRO FORMA MERGER CONSEQUENCES ANALYSIS. Based on the management
forecasts for Rhodes, publicly available information for Heilig-Meyers and
assuming the realization of certain synergies by the combined entity (the
"Synergies"), Salomon examined the pro forma impacts on revenues, EBITDA,
EBIT and net income to common stock for each of the years ending February
28, 1996-2001. Salomon also examined the pro forma impacts on EPS and
selected pro forma credit ratios for the combined entity.
(viii) CONTRIBUTION ANALYSIS. Salomon reviewed the pro forma
contribution by Rhodes to the revenues, EBITDA, EBIT, net income, total
assets and stockholders' equity of the combined entity, without
consideration to any cost savings related to the Merger, for the fiscal
years ending February 28, 1997 and February 28, 1998, such estimates by
Salomon
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having been prepared in accordance with management's estimates, in the case
of Rhodes, and in accordance with publicly available information, in the
case of Heilig-Meyers. The contribution analysis showed that Rhodes'
estimated percentage contribution to the financial results of the combined
entity for FY 1997 would be 29.5% of revenues, 14.2% of EBITDA, 8.4% of
EBIT and 2.5% of net income while Rhodes' estimated percentage contribution
to the total assets and stockholders' equity of the combined entity in FY
1997 would be 16.4% and 11.4%, respectively. The analysis also showed that
Rhodes' estimated percentage contribution to the financial results of the
combined entity for FY 1998 would be 29.2% of revenues, 16.7% of EBITDA,
13.3% of EBIT and 12.5% of net income, while the contribution to total
assets and stockholders' equity in FY 1998 would be 15.5% and 11.8%,
respectively. Salomon also noted that holders of Rhodes Common Stock will
own 8.6% of the combined company upon consummation of the Merger.
The preparation of a fairness opinion is not susceptible to partial
analysis or summary descriptions. Salomon believes that its analysis and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion and the Salomon Report. The
ranges of valuations resulting from any particular analysis described above
should not be taken to be the view of Salomon of the actual value of Rhodes or
Heilig-Meyers.
In performing its analyses, Salomon made numerous assumptions with respect
to industry performance, general business, financial, market and economic
conditions and other matters, many of which are beyond the control of Rhodes or
Heilig-Meyers. The analyses which Salomon performed are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Such analyses were
prepared solely as part of Salomon's analysis of the fairness, from a financial
point of view, of the Exchange Ratio to the holders of Rhodes Common Stock. The
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold or the prices at which any securities may trade
at the present time or any time in the future.
In the ordinary course of its business, Salomon actively trades the equity
securities of Rhodes and Heilig-Meyers for its own account and the accounts of
its customers and, accordingly, may at any time hold a long or short position in
such securities. Pursuant to an engagement letter dated May 10, 1996, Rhodes
agreed to pay Salomon for its services in connection with the Merger an advisory
fee equal to $2,000,000 plus, under certain circumstances (not present in
connection with the Merger), an additional amount depending on the consideration
received by holders of Rhodes Common Stock in connection with the Merger, all of
which is due upon consummation of the Merger. Rhodes also agreed, under certain
circumstances, to reimburse Salomon for certain out-of-pockets expenses incurred
by Salomon in connection with the Merger, and agreed to indemnify Salomon and
certain related persons against certain liabilities, including liabilities under
the federal securities laws, relating to or arising out of its engagement.
Salomon is an internationally recognized investment banking firm that
provides financial services in connection with a wide range of business
transactions. As part of its business, Salomon regularly engages in the
valuation of companies and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and other
purposes. The Rhodes Board retained Salomon based on Salomon's expertise in the
valuation of companies as well as its familiarity with companies in the
furniture industry.
MANNER AND BASIS OF CONVERTING SECURITIES IN THE MERGER
Subject to the provisions regarding fractional shares described below, each
remaining Share of Rhodes Common Stock issued and outstanding immediately prior
to the Effective Time shall be converted into the right to receive 0.50 fully
paid and nonassessable shares of Heilig-Meyers Common Stock. All such shares of
Rhodes Common Stock shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate previously
representing any such shares shall thereafter represent the right to receive the
shares of Heilig-Meyers Common Stock into which such Rhodes Common Stock has
been converted. Certificates previously representing shares of Rhodes Common
Stock shall be exchanged for certificates representing whole shares of
Heilig-Meyers Common Stock issued in consideration therefor upon the surrender
of such certificates, without interest.
At the Effective Time, each outstanding option to purchase shares of Rhodes
Common Stock (a "Rhodes Stock Option") issued pursuant to any incentive or stock
option program of Rhodes, whether vested or unvested, shall be assumed by
Heilig-Meyers. The Merger Agreement provides that each Rhodes Stock Option shall
be deemed to constitute an option to acquire, on the same terms and conditions
as were applicable under such Rhodes Stock Option, the same number of shares of
Heilig-Meyers Common Stock as the holder of such Rhodes Stock Option would have
been entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time, rounded, if necessary,
up or down, to the nearest whole share, at a price per share equal to (x) the
exercise price for the shares of Rhodes Common Stock
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otherwise purchasable pursuant to such Rhodes Stock Option multiplied by (y)
two. Notwithstanding this provision in the Merger Agreement, Heilig-Meyers and
Rhodes may seek the approval of each holder of a Rhodes Stock Option to modify
such options by reducing the number of shares subject thereto and the exercise
prices.
Prior to the Effective Time, Heilig-Meyers shall designate a United States
bank or trust company to act as exchange agent (the "Exchange Agent") for the
benefit of the holders of certificates which immediately prior to the Effective
Time evidenced shares of Rhodes Common Stock (the "Rhodes Certificates"), for
exchange through the Exchange Agent, certificates representing the shares of
Heilig-Meyers Common Stock (such certificates for shares of Heilig-Meyers Common
Stock, together with any dividends or distributions with respect thereto, being
hereinafter referred to as the " Exchange Fund") issuable pursuant to the Merger
Agreement in exchange for such shares of Rhodes Common Stock.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of shares of Rhodes Common Stock
immediately prior to the Effective Time whose shares were converted into the
right to receive shares of Heilig-Meyers Common Stock, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Rhodes Certificates shall pass, only upon delivery of the
Rhodes Certificates to the Exchange Agent) (the "Letter of Transmittal"), and
(ii) instructions for use in effecting the surrender of the Rhodes Certificates
in exchange for certificates representing shares of Heilig-Meyers Common Stock
(the "Exchange Instructions"). Upon surrender of a Rhodes Certificate for
cancellation to the Exchange Agent together with such Letter of Transmittal,
duly executed, the holder of such Rhodes Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Heilig-Meyers Common Stock which such holder has the right to receive
in respect of the Rhodes Certificate surrendered (after taking into account all
shares of Rhodes Common Stock then held by such holder), and the Rhodes
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Rhodes Common Stock which is not registered in the
transfer records of Rhodes, a certificate representing the proper number of
shares of Heilig-Meyers Common Stock may be issued to a transferee if the Rhodes
Certificate representing such Rhodes Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered, each Rhodes Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive Heilig-Meyers
Common Stock into which the shares of Rhodes Common Stock represented by such
Rhodes Certificate have been converted and the right to receive upon such
surrender cash in lieu of any fractional shares of Heilig-Meyers Common Stock.
No dividends or other distributions declared or made after the Effective
Time with respect to Heilig-Meyers Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Rhodes
Certificate with respect to the right to receive the shares of Heilig-Meyers
Common Stock represented thereby, and no cash payment in lieu of fractional
shares shall be paid to any such holder, until the holder of such Rhodes
Certificate shall surrender such Rhodes Certificate. Subject to the effect of
applicable laws, following surrender of any such Rhodes Certificate, there shall
be paid to the holder of the certificates representing whole shares of
Heilig-Meyers Common Stock issued in exchange therefor, without interest, (A) at
the time of such surrender or as promptly after the sale of the Excess Shares
(as defined below) as practicable, the amount of any cash payable with respect
to a fractional share of Heilig-Meyers Common Stock to which such holder is
entitled and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid (but withheld pursuant to the
immediately preceding sentence) with respect to such whole shares of
Heilig-Meyers Common Stock, and (B) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective Time
but prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Heilig-Meyers Common Stock.
Former holders of record as of the Effective Time of shares of Rhodes
Common Stock shall not be entitled, at and after the Effective Time, to vote the
number of shares of Heilig-Meyers Common Stock which they have the right to
receive until the Rhodes Certificates formerly representing shares of Rhodes
Common Stock shall have been surrendered and certificates evidencing such
Heilig-Meyers Common Stock shall have been issued in exchange therefor.
All shares of Heilig-Meyers Common Stock issued upon conversion of shares
of Rhodes Common Stock (including any cash paid for fractional shares) shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Rhodes Common Stock subject, however, to the Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Effective Time which may have been declared or made by Rhodes
on such shares of Rhodes Common Stock on or prior to the Effective Time and
which remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Rhodes Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Rhodes
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as described above.
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HOLDERS OF RHODES COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL AND THE EXCHANGE INSTRUCTIONS.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Heilig-Meyers
Common Stock shall be issued upon the surrender for exchange of Rhodes
Certificates evidencing Rhodes Common Stock, and such fractional share interests
will not entitle the owner thereof to vote or to any rights of a shareholder of
the Surviving Corporation.
As promptly as practicable following the Effective Time, the Exchange Agent
shall determine the excess of (x) the number of full shares of Heilig-Meyers
Common Stock delivered to the Exchange Agent by Heilig-Meyers over (y) the
aggregate number of full shares of Heilig-Meyers Common Stock to be distributed
to holders of Rhodes Common Stock (such excess being herein called the "Excess
Shares"). Following the Effective Time, the Exchange Agent, as agent for the
holders of Rhodes Common Stock, shall sell the Excess Shares at then prevailing
prices on the NYSE. The Exchange Agent shall determine the amount of the
proceeds from such sale, if any, to which each holder of Rhodes Common Stock
shall be entitled by multiplying the amount of such proceeds by a fraction the
numerator of which is the amount of the fractional share interest to which such
holder of Rhodes Common Stock is entitled and the denominator of which is the
aggregate amount of fractional share interests to which all holders of Rhodes
Common Stock are entitled.
Heilig-Meyers may elect at its option, exercised prior to the Effective
Time, in lieu of the issuance and sale of Excess Shares and the making of the
payments contemplated above, to pay each holder of Rhodes Common Stock an amount
in cash equal to the product obtained by multiplying (x) the fractional share
interest to which such holder (after taking into account all shares of Rhodes
Common Stock held at the Effective Time by such holder) would otherwise be
entitled by (y) the closing price for a share of Heilig-Meyers Common Stock on
the NYSE Composite Transaction Tape on the first business day immediately
preceding the Effective Time.
As soon as practicable after the determination of the amount of cash, if
any, to be paid to holders of Rhodes Common Stock with respect to any fractional
share interests, the Exchange Agent shall make available such amounts to such
holders of Rhodes Common Stock.
OPERATIONS AFTER THE MERGER
It is currently anticipated that after the Merger, Rhodes will be operated
as a separate division of Heilig-Meyers with minimal interruption to
Heilig-Meyers' current operations. Rhodes stores will continue to operate under
the Rhodes name. Certain Heilig-Meyers stores in metropolitan areas may be
considered for conversion into Rhodes stores and Rhodes stores in smaller
markets may be considered for conversion into Heilig-Meyers stores. The members
of the board of directors and the executive officers of Rhodes after the Merger
have not been determined. However, it is currently anticipated that current
Rhodes management will continue to operate the Rhodes business after the Merger.
THE SUCCESS OF THE MERGER WILL BE DETERMINED BY VARIOUS FACTORS, INCLUDING
THE FINANCIAL PERFORMANCE OF THE COMBINED COMPANY'S OPERATIONS AFTER THE MERGER
AND MANAGEMENT'S ABILITY TO REALIZE COST SAVINGS THROUGH COMBINING CERTAIN
FUNCTIONS OF BOTH HEILIG-MEYERS AND RHODES. THERE CAN BE NO ASSURANCE THAT THE
ANTICIPATED BENEFITS OF THE MERGER WILL BE REALIZED OR THAT THE MERGER WILL NOT
ADVERSELY AFFECT THE FUTURE OPERATING RESULTS OF HEILIG-MEYERS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Rhodes' management and the Board of Directors of Rhodes
have interests in the Merger in addition to their interests as shareholders of
Rhodes generally. These include, among other things, provisions in the Merger
Agreement relating to indemnification and eligibility for certain Heilig-Meyers
employee benefits. In addition, pursuant to provisions in certain change of
control agreements, certain executive officers of Rhodes may be entitled to
receive cash payments if terminated within specified periods of time after the
Effective Time, and Irwin L. Lowenstein, Chairman of the Board and Chief
Executive Officer of Rhodes, is entitled to receive, at the Effective Time, a
lump-sum, cash payment of approximately $1.4 million in connection with the
settlement of his change of control arrangements with Rhodes. The Board of
Directors of Rhodes has also approved a bonus of $250,000 for Joel H. Dugan,
Senior Vice President, Finance and Administration in recognition of his service
to Rhodes, to be paid upon consummation of the Merger.
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CONDITIONS TO CONSUMMATION
CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective
obligations of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions: (a)
any waiting period applicable to the consummation of the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), shall have expired or been terminated, and no action shall have been
instituted by the Department of Justice or the Federal Trade Commission (the
"FTC") challenging or seeking to enjoin the consummation of this transaction,
which action shall have not been withdrawn or terminated; (b) no statute, rule,
regulation, executive order, decree, ruling or preliminary or permanent
injunction shall have been enacted, entered, promulgated or enforced by any
federal or state court or governmental authority which prohibits, restrains,
enjoins or restricts the consummation of the Merger, and there shall not have
been threatened in writing, nor shall there be pending, any action or proceeding
in any court or before any governmental agency seeking to prohibit or delay, or
challenging the validity of, the Merger; (c) the Registration Statement shall
have become effective and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for the purpose
shall have been initiated by the Commission, and (d) the Heilig-Meyers Common
Stock issuable in the Merger shall have been authorized for listing on the NYSE,
subject to official notice of issuance.
CONDITIONS TO HEILIG-MEYERS' AND SUB'S OBLIGATION TO EFFECT MERGER. The
obligation of Heilig-Meyers and Sub to consummate the Merger is further subject
to the satisfaction at or prior to the Effective Time of the following
conditions: (a) each of the acts and undertakings of Rhodes to be performed or
complied with by it on or before the Effective Time pursuant to the terms of the
Merger Agreement shall have been duly performed and complied with in all
material respects; (b) the representations and warranties of Rhodes contained in
the Merger Agreement shall be true and correct on and as of the Effective Time
in all material respects with the same effect as though made on and as of such
date, except to the extent such representations and warranties are made as of a
specified date; (c) Heilig-Meyers shall have received an opinion of King &
Spalding, dated the date of the Effective Time, reasonably satisfactory in form
and substance to Heilig-Meyers, substantially to the effect that, on the basis
of certain facts, representations and assumptions set forth in such opinion,
which are consistent with the state of facts existing at the Effective Time, (i)
the Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and (ii) the holders of Rhodes
Common Stock will recognize no gain or loss upon receipt of Heilig-Meyers Common
Stock in the Merger; (d) all corporate action required to be taken by Rhodes
(including receiving the requisite approval of its shareholders) in connection
with the Merger shall have been taken and all documents incident thereto shall
be reasonably satisfactory in substance and form to Heilig-Meyers; (e) Rhodes
shall have obtained and delivered to Heilig-Meyers estoppel certificates and
consents required by the Merger Agreement with respect to certain of Rhodes'
leased properties, except for estoppel certificates and consents relating to
stores which represent in the aggregate less than $35 million of Rhodes' gross
sales for the fiscal year ended February 29, 1996; (f) Rhodes shall have
obtained and delivered to Heilig-Meyers a waiver of Beneficial National Bank USA
("BNB"), satisfactory in form and substance to Heilig-Meyers, pursuant to which
BNB will agree to waive certain rights under the Merchant Agreement, dated as of
May 15, 1993, between Rhodes and BNB; (g) Heilig-Meyers shall have received the
written resignation, effective as of the Effective Time, of each officer and
director of Rhodes and its subsidiaries whom it shall have specified in writing
prior to the Closing; (h) if, as a result of the consummation of the Merger, a
consent would be required under Section 8.19(b) of that certain Note Purchase
Agreement, dated June 17, 1993 (the "Note Agreement"), among Rhodes and the note
purchasers (or their successors) party thereto (the "Note Purchasers"), Rhodes
shall have obtained and delivered to Heilig-Meyers a consent, satisfactory in
form and substance to Heilig-Meyers, pursuant to which the Note Purchasers waive
any such non-compliance with Section 8.19(b) of the Note Agreement in connection
with the Merger; provided, that notwithstanding any other provision of the
Merger Agreement, no provision contained therein shall prevent Rhodes from
paying a reasonable fee in connection with obtaining such consent; (i) there
shall not have occurred an acceleration of the Notes (as such term is defined in
the Note Agreement) pursuant to Section 11.1 of the Note Agreement on or prior
to the Effective Time; (j) Heilig-Meyers shall have received letters from
Rhodes' independent certified public accountants dated (i) the mailing date of
the Proxy Statement and (ii) the Closing Date, with respect to such matters as
Heilig-Meyers may reasonably request relating to the financial information
regarding Rhodes and its subsidiaries contained in the Registration Statement;
and (k) Heilig-Meyers shall have received an opinion from King & Spalding,
counsel for Rhodes, in substantially the form attached to the Merger Agreement.
CONDITIONS TO RHODES' OBLIGATION TO EFFECT MERGER. The obligation of Rhodes
to consummate the Merger is further subject to the satisfaction at or prior to
the Effective Time of the following conditions: (a) each of the acts or
undertakings of Heilig-Meyers and Sub to be performed or complied with by them
on or before the Effective Time pursuant to the terms of the Merger Agreement
shall have been duly performed and complied with in all material respects; (b)
the representations and warranties of Heilig-Meyers and Sub contained in the
Merger Agreement shall be true and correct on and as of the Effective
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Time in all material respects with the same effect as though made on and as of
such date, except to the extent such representations and warranties are made as
of a specified date; (c) the Merger Agreement shall have been duly adopted and
approved by the shareholders of Rhodes by the requisite vote in accordance with
applicable law; (d) Rhodes shall have received an opinion of King & Spalding,
dated the date of the Effective Time, reasonably satisfactory in form and
substance to Rhodes, substantially to the effect that, on the basis of certain
facts, representations and assumptions set forth in such opinion, which are
consistent with the state of facts existing at the Effective Time, (i) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and (ii) the holders of Rhodes
Common Stock will recognize no gain or loss upon receipt of Heilig-Meyers Common
Stock in the Merger; (e) all corporate action required to be taken by
Heilig-Meyers in connection with the Merger shall have been taken and all
documents incident thereto shall be reasonably satisfactory in substance and
form to Rhodes; (f) Rhodes shall have received letters from Heilig-Meyers'
independent certified public accountants dated (i) the mailing date of the Proxy
Statement and (ii) the Closing Date, with respect to such matters as Rhodes may
reasonably request relating to the financial information regarding Heilig-Meyers
and its subsidiaries contained in the Registration Statement; and (g) Rhodes
shall have received an opinion from McGuire, Woods, Battle & Boothe, L.L.P.,
counsel for Heilig-Meyers, in substantially the form attached to the Merger
Agreement.
The conditions to consummation of the Merger may be waived, and the time
for the performance of any of the obligations of the parties to the Merger
Agreement may be extended, by the parties to the Merger Agreement in writing.
See
" -- Amendment, Waiver and Termination." NO ASSURANCES CAN BE PROVIDED AS TO
WHEN OR IF ALL OF THE CONDITIONS PRECEDENT TO THE MERGER CAN OR WILL BE
SATISFIED OR WAIVED BY THE APPROPRIATE PARTY. AS OF THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS, THE PARTIES HAVE NO REASON TO BELIEVE THAT ANY OF THE
CONDITIONS SET FORTH ABOVE WILL NOT BE SATISFIED.
REGULATORY APPROVALS
HSR ACT. Under the HSR Act and the rules that have been promulgated
thereunder by the FTC, the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and specified waiting period requirements have been satisfied. Early
termination of the HSR waiting period was granted on October 25, 1996.
At any time before or after the consummation of the Merger, and
notwithstanding the granting of early termination of the waiting period under
the HSR Act, the Antitrust Division or the FTC could take such action under the
antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Merger or seeking
divestiture of substantial assets of Rhodes or Heilig-Meyers. Private parties
(including individual states) may also seek to take legal action under the
antitrust laws under certain circumstances. Based on information available to
them, Rhodes and Heilig-Meyers believe that the Merger can be effected in
compliance with applicable federal and state antitrust laws. However, there can
be no assurance that a challenge to the consummation of the Merger on antitrust
grounds will not be made or that, if such a challenge were made, Heilig-Meyers
and Rhodes would prevail or would not be required to accept certain adverse
conditions in order to consummate the Merger.
Other than the approvals discussed above, Heilig-Meyers and Rhodes are not
aware of any federal, state or foreign regulatory requirements that must be
complied with or approvals that must be obtained in connection with the Merger
other than the filing with the Commission of the Registration Statement and this
Proxy Statement/Prospectus and compliance with applicable state securities laws
and regulations. Should any such approval be required, it is currently
contemplated that such approval will be sought.
CONDUCT OF BUSINESS PENDING THE MERGER
Each of Rhodes and Heilig-Meyers generally has agreed in the Merger
Agreement, unless the other party shall otherwise agree in writing or as
otherwise contemplated by the Merger Agreement, to conduct their respective
businesses in the ordinary course consistent with past practice and shall use
its reasonable best efforts to preserve intact their business organizations and
relationships with third parties and to keep available the services of their
present officers and key employees, subject to the terms of the Merger
Agreement.
Each of Rhodes and Heilig-Meyers generally has agreed in the Merger
Agreement not to take certain actions relating to the operation of its business
pending consummation of the Merger without the prior approval of the other
party. Each party generally has agreed not to, and to cause its respective
subsidiaries not to: (a) adopt or propose any change in its articles of
incorporation or by-laws; (b) declare, set aside or pay any dividend or other
distribution with respect to any shares of capital stock (except for regular
quarterly dividends of Heilig-Meyers in an amount no greater than $0.07 per
share), or split, combine or reclassify any of its capital stock; (c)
repurchase, redeem or otherwise acquire any shares of capital stock or other of
23
<PAGE>
its securities or ownership interests; (d) issue any capital stock or other
securities or enter into any amendment of any material term of any outstanding
securities (except that Heilig-Meyers shall be permitted to issue additional
shares of Heilig-Meyers Common Stock in an aggregate amount not to exceed 20% of
the total number of shares outstanding as of the date of the Merger Agreement
and except that Rhodes may issue Rhodes Common Stock pursuant to Rhodes'
employee stock purchase plan); or (e) take any action that could, directly or
indirectly, cause the Merger to fail to qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code.
In addition, Rhodes has agreed in the Merger Agreement that it shall not,
and shall not permit any subsidiary to, (a) merge or consolidate with any other
person or acquire a material amount of assets of any other person, (b) with
certain exceptions, sell, lease, license or otherwise surrender, relinquish or
dispose of any facility owned or leased by Rhodes or any subsidiary of Rhodes or
any assets or property which is material to Rhodes and the subsidiaries of
Rhodes, taken as a whole, except pursuant to existing contracts or commitments,
(c) with certain exceptions mortgage, pledge or otherwise encumber any of its
assets other than the pledge of inventory in the ordinary course of business
consistent with past practice, (d) incur any indebtedness except in the ordinary
course of business, amend or otherwise increase, accelerate the payment or
vesting of the amounts payable or to become payable under, or fail to make any
required contribution to, any Company Plan (as defined in the Merger Agreement),
except in the ordinary course of business consistent with past practice, (e)
with certain exceptions grant any increase in the compensation or benefits of
directors, officers, employees, consultants or agents other than increases in
compensation of employees who are not executive officers and directors to the
extent that such increase are in the ordinary course of business consistent with
past practice; or (f) enter into or amend any employment agreement or other
employment arrangement with any employee of Rhodes or any subsidiary of Rhodes,
except in the ordinary course of business consistent with past practice.
In addition, Heilig-Meyers has agreed in the Merger Agreement not to, and
to not permit its subsidiaries to, purchase or otherwise acquire any shares of
Rhodes Common Stock prior to the Effective Time.
AMENDMENT, WAIVER AND TERMINATION
AMENDMENT. The Merger Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties thereto.
WAIVER. At any time prior to the Effective Time, the parties to the Merger
Agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other parties thereto, (b) waive any inaccuracies in the
representations and warranties continued in the Merger Agreement or in any
document delivered pursuant thereto, and (c) waive compliance with any of the
agreements or conditions contained in the Merger Agreement. Any agreement on the
part of a party to the Merger Agreement to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
TERMINATION BY MUTUAL CONSENT. The Merger Agreement may be terminated at
any time prior to the Effective Time by mutual written agreement of
Heilig-Meyers and Rhodes.
TERMINATION BY EITHER HEILIG-MEYERS OR RHODES. The Merger Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Heilig-Meyers or Rhodes if (a) the Merger shall not have been
consummated on or before February 28, 1997, (b) any United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling or other action shall have
become final and nonappealable or (c) the Closing Date has not occurred and the
closing sales price of Heilig-Meyers Common Stock is less than $13.50 per share
for at least ten (10) consecutive trading days in the twenty (20) consecutive
trading day period immediately preceding the date of such termination.
TERMINATION BY RHODES. The Merger Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval of the Merger and the adoption of the Merger Agreement by the
shareholders of Rhodes, by action of the Board of Directors of Rhodes, if (a)
there has been a breach by Heilig-Meyers or Sub of any representation or
warranty contained in the Merger Agreement which would have or would be
reasonably likely to affect adversely Heilig-Meyers' or Sub's ability to
complete the Merger; (b) there has been a material breach of any of the
covenants or agreements set forth in the Merger Agreement on the part of
Heilig-Meyers, which breach is not curable or, if curable, is not cured within
thirty (30) days after written notice of such breach is given by Rhodes to
Heilig-Meyers; or (c) the Board of Directors of Rhodes has (i) withdrawn, or
modified or changed in a manner adverse to Heilig-Meyers or Sub,
24
<PAGE>
its approval or recommendation of the Merger Agreement or the Merger in order to
approve and permit Rhodes to execute a definitive agreement relating to an
Acquisition Proposal, and (ii) determined, based on an opinion of outside legal
counsel to Rhodes, that the failure to take such action as set forth in the
preceding clause (i) would result in a breach of the Rhodes Board of Directors'
fiduciary duties under applicable law; provided, however, that (A) the Rhodes
Board of Directors shall have been advised in such opinion of outside counsel
that notwithstanding a binding commitment to consummate an agreement of the
nature of the Merger Agreement entered into in the proper exercise of their
applicable fiduciary duties, and notwithstanding all concessions which may be
offered by Heilig-Meyers in negotiations entered into pursuant to clause (B)
below, such fiduciary duties would also require the directors to terminate the
Merger Agreement as a result of such Acquisition Proposal, and (B) prior to any
such termination, Rhodes shall, and shall cause its respective financial and
legal advisors to, negotiate with Heilig-Meyers to make such adjustments in the
terms and conditions of the Merger Agreement as would enable Rhodes to proceed
with the transactions contemplated therein on such adjusted terms.
TERMINATION BY HEILIG-MEYERS. The Merger Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time by action of
the Board of Directors of Heilig-Meyers, if (a) there has been a breach by
Rhodes of any representation or warranty contained in the Merger Agreement which
would have or would be reasonably likely to have a material adverse effect on
Rhodes; (b) there has been a material breach of any of the covenants or
agreements set forth in the Merger Agreement on the part of Rhodes or set forth
in the Voting Agreement on the part of WPS or Green Capital, which breach is not
curable or, if curable, is not cured within thirty (30) days after written
notice of such breach is given by Heilig-Meyers to Rhodes; or (c) the Board of
Directors of Rhodes shall have withdrawn, or modified or changed in a manner
adverse to Heilig-Meyers or Sub, its approval or recommendation of the Merger
Agreement or the Merger or shall have recommended an Acquisition Proposal, or
shall have executed an agreement in principle (or similar agreement) or
definitive agreement providing for an Acquisition Proposal or other business
combination with a person or entity other than Heilig-Meyers or its affiliates
(or the Board of Directors of Rhodes resolves to do any of the foregoing).
EXPENSES AND FEES
Except as provided in the next succeeding paragraph, whether or not the
Merger is consummated, all costs and expenses incurred in connection with the
Merger Agreement and the transactions contemplated thereby shall be paid by the
party incurring such expenses, except that those expenses incurred in connection
with the preparation, clearance and distribution of the Registration Statement
and this Proxy Statement/Prospectus and other documents relating thereto, will
be shared equally by Heilig-Meyers and Rhodes.
In the event that Rhodes terminates the Merger Agreement pursuant to the
terms and conditions thereof because the Board of Directors of Rhodes has
withdrawn, or modified or changed in a manner adverse to Heilig-Meyers or Sub,
its approval or recommendation of the Merger Agreement or the Merger in order to
approve or permit Rhodes to execute a definitive agreement relating to an
Acquisition Proposal, then Rhodes is required under the Merger Agreement to pay
Heilig-Meyers promptly after such termination in cash the sum of $3,000,000 plus
an amount equal to reasonable legal fees and expenses of counsel to
Heilig-Meyers and other reasonable out-of-pocket costs incurred by
Heilig-Meyers' employees in connection with the Merger.
INDEMNIFICATION PROVISION
Heilig-Meyers has agreed in the Merger Agreement that the articles of
incorporation and by-laws of the Surviving Corporation shall contain provisions
no less favorable with respect to indemnification than are set forth in Rhodes'
articles of incorporation or by-laws or the articles of incorporation, by-laws
or similar organizational documents of any of its subsidiaries as in effect as
of the date of the Merger Agreement, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would affect adversely the rights thereunder of individuals
who at the Effective Time were Indemnified Parties (as defined below) of Rhodes
or its subsidiaries, unless such modification shall be required by law.
Heilig-Meyers has agreed to cause the Surviving Corporation to indemnify and
hold harmless the present and former directors, officers, employees, fiduciaries
and agents of Rhodes and its subsidiaries (collectively, the "Indemnified
Parties") against all costs and expenses (including attorneys' fees), judgments,
fines, losses, claims, damages, liabilities and settlement amounts paid in
connection with any claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Time), whether civil, criminal,
administrative or investigative, arising out of or pertaining to any action or
omission in their capacity as an officer, director, employee, fiduciary or
agent, whether occurring before or after the Effective Time, for a period of six
years after the date of the Merger Agreement. Heilig-Meyers has agreed to cause
the Surviving Corporation to maintain in effect for not less than six years from
the Effective Time the current policies of the directors' and officers'
liability insurance maintained by Rhodes (provided that Heilig-Meyers may
substitute
25
<PAGE>
therefor policies of at least equivalent coverage containing terms and
conditions which are no less advantageous) with respect to matters occurring
prior to the Effective Time, provided that in no event shall Heilig-Meyers or
the Surviving Corporation be required to expend to maintain or procure such
insurance coverage any amount per annum in excess of 250% of the aggregate
premiums paid in fiscal year 1996 on an annualized basis for such purpose. In
the event the payment of such amount for any year is insufficient to maintain
such insurance or equivalent coverage cannot otherwise be obtained, the
Surviving Corporation shall purchase as much insurance as may be purchased for
the amount indicated.
OTHER OFFERS
Rhodes has agreed in the Merger Agreement that, from the date of the Merger
Agreement until the termination thereof, Rhodes and its subsidiaries will not,
and will use their best efforts to cause their respective officers, directors,
employees or other agents not to, directly or indirectly, (i) take any action to
solicit, initiate or encourage any Acquisition Proposal, (ii) subject to the
fiduciary duties of the Board of Directors under applicable law as advised by
counsel, waive any provision of any standstill or similar agreements entered
into by Rhodes or (iii) subject to the fiduciary duties of the Board of
Directors under applicable law as advised by counsel to Rhodes, engage in
negotiations with, or disclose any nonpublic information relating to Rhodes or
any of its subsidiaries or afford access to the properties, books or records of
Rhodes or any of its subsidiaries to, any person that may be considering making,
or has made, an Acquisition Proposal.
Pursuant to the Merger Agreement, Rhodes will (i) promptly notify
Heilig-Meyers after receipt of any Acquisition Proposal or any inquiries
indicating that any person is considering making or wishes to make an
Acquisition Proposal, (ii) promptly notify Heilig-Meyers after receipt of any
request for nonpublic information relating to Rhodes or any of its subsidiaries
or for access to the properties, books or records of Rhodes or any of its
subsidiaries or any person that may be considering making, or has made, an
Acquisition Proposal and (iii) subject to the fiduciary duties of the Rhodes
Board of Directors under applicable law as advised by counsel to Rhodes, keep
Heilig-Meyers advised of the status and principal financial terms of any such
Acquisition Proposal. The term "Acquisition Proposal" means any offer or
proposal for, or any indication of interest in, a merger or other business
combination involving Rhodes or any of its subsidiaries or the acquisition of
any equity interest in, or a substantial portion of, the assets of Rhodes or any
of its subsidiaries, other than the transactions contemplated by the Merger
Agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary sets forth the principal federal income tax
consequences of the Merger to holders of Rhodes Common Stock. The summary is
based on provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect as of the date hereof. Such
laws or interpretations may differ at the Effective Time, and relevant facts may
also differ.
The tax treatment of each holder of Rhodes Common Stock will depend in part
upon such holder's particular situation. Special tax consequences not described
below may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are legal entities formed under the laws of jurisdictions
outside the United States, and holders of Rhodes Common Stock who acquired their
shares through the exercise of employee stock options or otherwise as
compensation. All Rhodes shareholders should consult with their own tax advisors
as to the particular tax consequences of the Merger to them, including the
applicability and effect of any state, local and foreign tax laws.
Heilig-Meyers and Rhodes have received an opinion of King & Spalding,
counsel to Rhodes, to the effect that the Merger will be a tax-free
reorganization under Section 368 of the Code. The opinion of King & Spalding is
based on certain facts, representations and assumptions that are set forth in
the opinion and are customary for opinions of this type. In the opinion of King
& Spalding, the following federal income tax consequences will apply with
respect to the Merger:
(i) The exchange in the Merger of Rhodes Common Stock for
Heilig-Meyers Common Stock will not give rise to gain or loss to the Rhodes
shareholders;
(ii) The tax basis of the Heilig-Meyers Common Stock received in the
Merger by a Rhodes shareholder will be the same as the tax basis of such
shareholder in the Rhodes Common Stock exchanged for such Heilig-Meyers
Common Stock; and
(iii) The holding period for the Heilig-Meyers Common Stock received
in the Merger by a Rhodes shareholder will include the holding period of
such shareholder in the Rhodes Common Stock exchanged for such
Heilig-Meyers Common Stock.
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<PAGE>
Cash received in the Merger by a Rhodes shareholder in lieu of a fractional
share of Heilig-Meyers Common Stock will be treated under Section 302 of the
Code as having been received by the Rhodes shareholder in exchange for such
fractional share, and the Rhodes shareholder generally will recognize capital
gain or loss in such exchange equal to the difference between the cash received
and the Rhodes shareholder's tax basis allocable to the fractional share. Any
gain or loss recognized will be capital gain or loss if the Rhodes Common Stock
or Heilig-Meyers fractional share interest was a capital asset in the hands of
the Rhodes shareholder, and will be long-term capital gain or loss if the Rhodes
Common stock was held by such shareholder for more than one year.
THE DISCUSSION SET FORTH ABOVE DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN
TAX ASPECTS OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE
SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF
THIS DISCUSSION. EACH RHODES SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX
ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR
HER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting,
pursuant to which the assets and liabilities of Rhodes will be recorded at their
respective fair values and added to those of Heilig-Meyers as of the Effective
Time. Financial statements of Heilig-Meyers issued after the Effective Time will
reflect such values and will not be restated retroactively to reflect the
historical financial position or results of operations of Rhodes. See "PRO FORMA
COMBINED FINANCIAL DATA."
VOTING AGREEMENT
The following is a brief summary of certain provisions of the Voting
Agreement. WPS and Green Capital are collectively the beneficial owners of
2,918,379 shares (approximately 31.7% of the outstanding shares) of Rhodes
Common Stock and Heilig-Meyers is the beneficial owner of 25 shares of Rhodes
Common Stock. Pursuant to the Voting Agreement, WPS, Green Capital and
Heilig-Meyers have agreed during the term thereof to vote their respective
shares of Rhodes Common Stock, in person or by proxy, (a) in favor of approval
of the Merger Agreement at every meeting of the shareholders of Rhodes at which
such matters are considered and at every adjournment thereof and (b) against any
Acquisition Proposal. The voting provisions of the Voting Agreement terminate
upon the earliest to occur of (i) the Effective Time; (ii) the date on which the
Merger Agreement is terminated in accordance with its terms; (iii) the date on
which the Board of Directors of Rhodes withdraws or materially modifies or
changes its recommendation for the approval of the Merger Agreement if the Board
of Directors of Rhodes after consultation with its counsel determines that the
failure to take such action could reasonably be deemed a breach of its fiduciary
duties to the Rhodes' shareholders under applicable law; and (iv) February 28,
1997. Pursuant to the Voting Agreement, WPS and Green Capital have also agreed
not to, without the prior written consent of Heilig-Meyers, transfer, sell,
assign or convey, or offer or agree to transfer, sell, assign or convey (nor
grant any party any option or right to purchase), any of their Rhodes Common
Stock owned by them and the shares of Heilig-Meyers Common Stock receivable by
them in the Merger, until the earlier of the termination of the Merger Agreement
prior to the Effective Time or thirty (30) days after the date on which
Heilig-Meyers publishes information as to the financial results covering at
least thirty (30) days of post-Merger combined operations reflecting combined
sales and net income. Notwithstanding the foregoing restrictions, WPS and Green
Capital each may distribute all or a portion of their shares of Rhodes Common
Stock or Heilig-Meyers Common Stock, as applicable, to their respective partners
provided such shares continue to be subject to the restrictions of the Voting
Agreement and are legended to that effect.
CERTAIN LOCK-UP AGREEMENTS
Pursuant to lock-up agreements (each a "Lock-Up Agreement"), Irwin L.
Lowenstein, the Chairman of the Board and Chief Executive Officer of Rhodes, and
Joel H. Dugan, Senior Vice President, Finance and Administration and the
Secretary of Rhodes, have agreed that they will not, without the prior written
consent of Heilig-Meyers, transfer, sell, assign or convey, or offer to
transfer, sell assign or convey (nor grant any party any option or right to
purchase) the shares of Rhodes Common Stock and Heilig-Meyers Common Stock owned
by them until the earlier of (i) termination of the Merger Agreement prior to
the Effective Time or (ii) thirty (30) days after the date on which
Heilig-Meyers publishes information as to the financial results covering at
least thirty (30) days of post-Merger combined operations reflecting combined
sales and net income.
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APPRAISAL RIGHTS
Shareholders of Rhodes do not have dissenters' rights or rights of
appraisal with respect to the Merger under the Georgia BCC.
RESALES OF HEILIG-MEYERS COMMON STOCK
The shares of Heilig-Meyers Common Stock issued in connection with the
Merger will be freely transferable under the Securities Act, except for shares
issued to any shareholder who may be deemed to be an "affiliate" (generally
including, without limitation, directors, certain executive officers, and
beneficial owners of 10% or more of the Rhodes Common Stock) of Rhodes for
purposes of Rule 145 under the Securities Act as of the date of the Rhodes
Special Meeting. Such affiliates (which include WPS and Green Capital) may not
sell their shares of Heilig-Meyers Common Stock acquired in connection with the
Merger except pursuant to an effective registration statement under the
Securities Act or other applicable exemption from the registration requirements
of the Securities Act. Heilig-Meyers may place restrictive legends on
certificates representing Heilig-Meyers Common Stock issued to all persons who
are deemed to be "affiliates" of Rhodes under Rule 145. In addition, Rhodes has
agreed to use its reasonable efforts to cause each person or entity that is an
"affiliate" to enter into a written agreement in the form annexed to the Merger
Agreement relating to such restrictions on sale or other transfer. This Proxy
Statement/Prospectus does not cover resales of Rhodes Common Stock, including by
WPS and Green Capital. Two executive officers of Rhodes are also subject to
certain additional restrictions on the transfer of certain Heilig-Meyers Common
Stock held by them. See " -- Voting Agreement" and " -- Certain Lock-Up
Agreements."
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<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined statements of earnings for the
year ended February 29, 1996 and the six months ended August 31, 1996 give
effect to (i) acquisitions of certain assets from various entities by
Heilig-Meyers, and by Rhodes that have occurred and (ii) the proposed
acquisition of Rhodes. The pro forma information is based on the historical
financial statements of Heilig-Meyers and Rhodes giving effect to the Merger
under the purchase method of accounting and the assumptions and adjustments
described in the accompanying notes to the unaudited pro forma financial
statements. The following unaudited pro forma combined balance sheet gives
effect to (i) acquisitions of certain assets by Heilig-Meyers which were
completed after the balance sheet date and (ii) the proposed acquisition of
Rhodes as if such acquisitions had been completed as of August 31, 1996.
The unaudited pro forma statements have been prepared by the management of
Heilig-Meyers and Rhodes based upon the historical information included herein
and other financial information. These pro forma statements do not purport to be
indicative of the results of operations or financial position which would have
occurred had the acquisition been made at the beginning of the periods or as of
the date indicated or of the financial position or results of operations which
may be obtained in the future.
Heilig-Meyers will account for the transaction under the purchase method of
accounting. Accordingly, the cost to acquire Rhodes will be allocated to the
assets acquired and liabilities assumed according to their respective fair
values. The final allocation of the purchase price is dependent upon certain
valuations and other studies that have not progressed to a stage where there is
sufficient information to make such a complete allocation in the accompanying
pro forma statements. Accordingly, the purchase allocation adjustments are
preliminary and have been made solely for the purpose of preparing such pro
forma statements.
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<PAGE>
HEILIG-MEYERS COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEAR ENDED FEBRUARY 29, 1996
<TABLE>
<CAPTION>
HEILIG-MEYERS RHODES
------------------------------------------ -----------------------------------------
OTHER OTHER
HISTORICAL ACQUISITIONS (I) PRO FORMA HISTORICAL ACQUISITIONS (J) PRO FORMA
---------- ---------------- ---------- ---------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Sales........................ $1,138,506 $ 92,750 $1,231,256 $ 430,193 $ 76,015 $ 506,208
Other Income................. 220,843 7,900 228,743 5,822 5,822
---------- ---------------- ---------- ---------- -------- ---------
Total Revenues............. 1,359,349 100,650 1,459,999 436,015 76,015 512,030
---------- ---------------- ---------- ---------- -------- ---------
COSTS AND EXPENSES:
Costs of sales............... 752,317 62,400 814,717 225,953 46,161 272,114
Selling, general and
administrative............. 436,361 32,400 468,761 190,445 29,678 220,123
Interest..................... 40,767 4,950 45,717 6,898 1,884 8,782
Non-recurring charge......... 2,400 2,400
Provision for doubtful
accounts................... 65,379 1,600 66,979 167 61 228
---------- ---------------- ---------- ---------- -------- ---------
Total costs and expenses... 1,294,824 101,350 1,396,174 425,863 77,784 503,647
---------- ---------------- ---------- ---------- -------- ---------
EARNINGS (LOSS) BEFORE INCOME
TAXES........................ 64,525 (700) 63,825 10,152 (1,769) 8,383
Provision for income taxes..... 23,021 (250) 22,771 4,162 (726) 3,436
---------- ---------------- ---------- ---------- -------- ---------
NET EARNINGS (LOSS)............ $ 41,504 $ (450) $ 41,054 $ 5,990 $ (1,043) $ 4,947
---------- ---------------- ---------- ---------- -------- ---------
---------- ---------------- ---------- ---------- -------- ---------
NET EARNINGS PER SHARE:
Primary and fully diluted.... $ 0.84
Weighted average shares:
Fully diluted.............. 49,645
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS (H) COMBINED
--------------- ----------
<S> <<C> <C>
REVENUES:
Sales........................ $1,737,464
Other Income................. 234,565
----------
Total Revenues............. 1,972,029
----------
COSTS AND EXPENSES:
Costs of sales............... 55,450(A) 1,141,731
(550)(B)
Selling, general and
administrative............. (55,450)(A) 633,334
(2,050)(C)
1,950(D)
Interest..................... (830)(E) 53,669
Non-recurring charge......... 2,400
Provision for doubtful
accounts................... 67,207
--------------- ----------
Total costs and expenses... 1,480 1,898,341
--------------- ----------
EARNINGS (LOSS) BEFORE INCOME
TAXES........................ 1,480 73,688
Provision for income taxes..... 590(F) 26,797
--------------- ----------
NET EARNINGS (LOSS)............ $ 890 $ 46,891
--------------- ----------
--------------- ----------
NET EARNINGS PER SHARE:
Primary and fully diluted.... $ 0.86
Weighted average shares:
Fully diluted.............. (G) 54,220
</TABLE>
See notes to pro forma condensed consolidated statements of earnings.
30
<PAGE>
HEILIG-MEYERS COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996
<TABLE>
<CAPTION>
HEILIG-MEYERS
-----------------------------------------
OTHER RHODES PRO FORMA
HISTORICAL ACQUISITIONS (I) PRO FORMA HISTORICAL ADJUSTMENTS (H)
---------- ---------------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES:
Sales.......................................... $ 587,680 $ 44,900 $632,580 $ 238,764
Other Income................................... 113,757 3,650 117,407 3,397
---------- ---------------- --------- ----------
Total Revenues.............................. 701,437 48,550 749,987 242,161
---------- ---------------- --------- ----------
COSTS AND EXPENSES:
Costs of sales................................. 384,920 30,550 415,470 131,244 37,300(A)
(350)(B)
Selling, general and administrative............ 226,637 15,500 242,137 114,789 (37,300)(A)
(1,080)(C)
970(D)
Interest....................................... 21,565 2,500 24,065 4,973 (410)(E)
Provision for doubtful accounts................ 37,023 700 37,723 211
---------- ---------------- --------- ---------- ---------------
Total costs and expenses.................... 670,145 49,250 719,395 251,217 (870)
---------- ---------------- --------- ---------- ---------------
EARNINGS (LOSS) BEFORE INCOME TAXES.............. 31,292 (700) 30,592 (9,056) 870
Provision for income taxes....................... 11,175 (250) 10,925 (3,713) 350(F)
---------- ---------------- --------- ---------- ---------------
NET EARNINGS (LOSS).............................. $ 20,117 $ (450) $ 19,667 $ (5,343) $ 520
---------- ---------------- --------- ---------- ---------------
---------- ---------------- --------- ---------- ---------------
NET EARNINGS PER SHARE:
Primary and fully diluted...................... $ 0.41
Weighted average shares:
Fully diluted............................... 49,304 (G)
<CAPTION>
PRO FORMA
COMBINED
---------
<S> <C>
REVENUES:
Sales.......................................... $871,344
Other Income................................... 120,804
---------
Total Revenues.............................. 992,148
---------
COSTS AND EXPENSES:
Costs of sales................................. 583,664
Selling, general and administrative............ 319,516
Interest....................................... 28,628
Provision for doubtful accounts................ 37,934
---------
Total costs and expenses.................... 969,742
---------
EARNINGS (LOSS) BEFORE INCOME TAXES.............. 22,406
Provision for income taxes....................... 7,562
---------
NET EARNINGS (LOSS).............................. $ 14,844
---------
---------
NET EARNINGS PER SHARE:
Primary and fully diluted...................... $ 0.28
Weighted average shares:
Fully diluted............................... 53,879
</TABLE>
See notes to pro forma condensed consolidated statements of earnings.
31
<PAGE>
HEILIG-MEYERS COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(A) Rhodes occupancy, warehouse and delivery expenses have been
reclassified from selling, general and administrative expenses to cost
of sales to be consistent with the Heilig-Meyers presentation.
(B) Elimination of the effect of LIFO inventory on cost of goods sold.
(C) Elimination of amortization of Rhodes' historical goodwill,
organization costs and excess deferred loan costs.
(D) Amortization of estimated goodwill attributable to the transaction.
(E) To give effect to planned refinancing of certain Rhodes long term
notes payable.
(F) To tax effect pro forma adjustments at the statutory rate adjusted for
the tax treatment of goodwill.
(G) To give effect to the issuance of Heilig-Meyers common stock in
connection with the Merger at an exchange rate of 0.50, which is the
fraction of a share of Heilig-Meyers common stock which is issuable in
exchange for one share of Rhodes common stock in the Merger.
(H) Heilig-Meyers expects to achieve certain synergies in relation to the
business combination. Such synergies are not included in the above pro
forma adjustments.
(I) Amounts reflect the pro forma results of other Heilig-Meyers
acquisitions that have occurred. These amounts include pro forma
adjustments to reflect the amortization of goodwill and additional
interest expense that would have been incurred had the acquisitions
been completed at the beginning of the period.
(J) Amounts reflect the acquisition of certain assets of Weberg by Rhodes
during fiscal year 1996. These amounts include pro forma adjustments
to reclass certain revenue and expense amounts to conform to Rhodes'
presentation. Additionally, amounts reflect the amortization of
goodwill and additional interest expense that would have occurred had
the acquisition been completed at the beginning of the period.
32
<PAGE>
HEILIG-MEYERS COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 1996
<TABLE>
<CAPTION>
HEILIG-MEYERS
------------------------------------------
OTHER RHODES PRO FORMA
HISTORICAL ACQUISITIONS (I) PRO FORMA HISTORICAL ADJUSTMENTS (H)
---------- ---------------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
ASSETS:
Current assets:
Cash..................................... $ 14,080 $ 14,080 $ 716
Accounts receivable, net................. 558,195 25,490 583,685 7,838
Inventories.............................. 310,067 19,781 329,848 85,052 (3,282)(C)
Other.................................... 70,632 70,632 14,186 4,314(G)
---------- ---------------- ---------- ---------- ---------------
Total Current Assets.................. 952,974 45,271 998,245 107,792 1,032
---------- ---------------- ---------- ---------- ---------------
Property, plant & equipment, net........... 240,226 20,025 260,251 86,488
Excess cost over net assets acquired
and other, net........................... 187,008 10,500 197,508 72,497 (61,849)(B)
77,400(B)
(1,292)(D)
(1,000)(F)
---------- ---------------- ---------- ---------- ---------------
$1,380,208 $ 75,796 $1,456,004 $ 266,777 $ 14,291
---------- ---------------- ---------- ---------- ---------------
---------- ---------------- ---------- ---------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................ $ 75,000 $ 75,796 $ 150,796 $ 3,171
Long-term debt due within one year....... 99,245 99,245 14,945
Accounts payable......................... 82,022 82,022 47,916
Accrued expenses and other............... 85,333 85,333 41,937 7,900(E)
2,000(F)
---------- ---------------- ---------- ---------- ---------------
Total Current Liabilities............. 341,600 75,796 417,396 107,969 9,900
---------- ---------------- ---------- ---------- ---------------
Long-term debt/capital leases.............. 454,761 454,761 87,140
Deferred income taxes...................... 50,741 50,741 6,862
Stockholders' equity:
Common stock, at par..................... 97,245 97,245 -- 9,150(A)
Capital in excess of par value........... 121,478 121,478 99,838 60,047(A)
(99,838)(A)
Retained earnings (accumulated
deficit).............................. 314,383 314,383 (35,032) 35,032
---------- ---------------- ---------- ---------- ---------------
Total stockholders' equity............ 533,106 533,106 64,806 4,391
---------- ---------------- ---------- ---------- ---------------
$1,380,208 $ 75,796 $1,456,004 $ 266,777 $ 14,291
---------- ---------------- ---------- ---------- ---------------
---------- ---------------- ---------- ---------- ---------------
<CAPTION>
PRO FORMA
COMBINED
----------
<S> <C>
ASSETS:
Current assets:
Cash..................................... $ 14,796
Accounts receivable, net................. 591,523
Inventories.............................. 411,618
Other.................................... 89,132
----------
Total Current Assets.................. 1,107,069
----------
Property, plant & equipment, net........... 346,739
Excess cost over net assets acquired
and other, net........................... 283,264
----------
$1,737,072
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................ $ 153,967
Long-term debt due within one year....... 114,190
Accounts payable......................... 129,938
Accrued expenses and other............... 137,170
----------
Total Current Liabilities............. 535,265
----------
Long-term debt/capital leases.............. 541,901
Deferred income taxes...................... 57,603
Stockholders' equity:
Common stock, at par..................... 106,395
Capital in excess of par value........... 181,525
Retained earnings (accumulated
deficit).............................. 314,383
----------
Total stockholders' equity............ 602,303
----------
$1,737,072
----------
----------
</TABLE>
See notes to pro forma condensed consolidated balance sheet.
33
<PAGE>
HEILIG-MEYERS COMPANY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(A) To record proposed consideration for Merger and remove Rhodes
stockholders' equity balances:
<TABLE>
<S> <C>
Heilig-Meyers shares to be issued in exchange for Rhodes common stock........................ 4,575
Market value per share of Heilig-Meyers Common Stock on announcement date.................... $15.125
-------
Total value of stock exchange.............................................................. $69,197
-------
-------
</TABLE>
(B) To remove Rhodes net goodwill balance of $61,849 and to reflect the
net effect of pro forma adjustments that impact the excess purchase
price and other direct expenses of the Merger over the fair value of
net assets acquired which is an estimated $77,400.
(C) To eliminate Rhodes' LIFO inventory reserve.
(D) To eliminate Rhodes deferred organization costs.
(E) To record liability for direct out-of-pocket costs and contractual
obligations arising due to the change in control of Rhodes.
(F) To eliminate Rhodes deferred loan costs and to accrue estimated
prepayment penalities related to long term debt obligations of Rhodes
which are intended to be refinanced.
(G) To record the estimated deferred income tax effects of adjustments
described in (B) through (F) above.
(H) The final allocation of the purchase price is dependent upon certain
valuations and other studies that have not progressed to a stage where
there is sufficient information to make such a complete allocation in
the condensed consolidated pro forma balance sheet. Accordingly, the
purchase price allocation adjustments are preliminary and have been
made solely for the purpose of preparing such pro forma balance sheet.
(I) Amounts reflect the net assets acquired by Heilig-Meyers in connection
with acquisitions that occurred after the balance sheet date. These
amounts include pro forma adjustments to reflect the excess of cost
over net assets acquired and the related financing that would have
been incurred had the acquisitions been completed on August 31, 1996.
34
<PAGE>
INFORMATION ABOUT RHODES
BUSINESS
BACKGROUND
Rhodes is one of the largest specialty furniture retailers in the United
States. Founded in 1875, Rhodes operated 106 stores at October 31, 1996 in
metropolitan areas of 15 Southern, Midwestern and Western states and for many
years has focused on selling brand name residential furniture to middle-income
customers.
Each of Rhodes' stores offers a full line of residential furniture,
including upholstered furniture, recliners and occasional tables for dens and
living rooms, bedroom suites and bedding, dinettes and more formal dining room
suites and desks, lamps and other accessories. Rhodes has over the past two
years instituted a new marketing and merchandising initiative which seeks to
expand its emphasis on slightly higher priced furniture in response to the
preferences of its middle income customer base. Rhodes has implemented this
strategy through a refocused television and print media campaign and through
increased offerings of higher quality, slightly higher priced furniture.
On November 1, 1995 Rhodes consummated the acquisition of 21 store
operations and two distribution center operations from Weberg in the states of
Colorado, Texas and Illinois. The store locations purchased recorded over $100
million in sales for the year ended December 31, 1994. The acquisition was
accomplished through a purchase of the inventory and operating assets for
approximately $31 million, assumption of operating leases on stores owned by
third parties and the execution of new operating leases on stores owned by
Weberg or its sole shareholder. Financing was provided primarily through bank
credit lines. The operations of the Weberg stores are included in Rhodes'
results since November 1, 1995.
On December 15, 1995 Rhodes consummated the acquisition of the furniture
store operations of Glick's in Columbus, Ohio, consisting of seven stores and
one distribution center. The store locations purchased recorded over $41 million
in sales for year ended December 31, 1994. The acquisition was accomplished
through a purchase of the inventory and operating assets for approximately $11
million, assumption of operating leases on stores owned by third parties and the
execution of new operating leases on stores owned by Glick's. Financing was
provided through bank credit lines and a seller note in the amount of $2
million. The operations of the Glick's stores are included in Rhodes' results
since December 15, 1995.
In September 1988 Rhodes was acquired by a group of investors led by
Holcombe T. Green, Jr., who is currently Chairman of the Executive Committee of
the Board of Directors of Rhodes. In June 1993 Rhodes conducted an initial
public offering and an exchange of stock for outstanding Junior Subordinated
Debentures. As a result of the Initial Public Offering, the issuance of senior
indebtedness and the Exchange, Rhodes retired $120.2 million of indebtedness and
$14.7 million of preferred stock. As of November 15, 1996 Mr. Green beneficially
owned approximately 31.8% of the outstanding shares of Rhodes Common Stock.
STORE OPERATIONS
TARGET MARKET. Rhodes' retailing strategy is selling quality furniture to a
broad base of middle income customers. Rhodes carefully tracks the demographic
profile of its customer base, designs its merchandising and promotions to appeal
to its targeted market and evaluates particular programs by analyzing changes in
the profile of the resulting customer base. In fiscal 1995, Rhodes commissioned
a follow-up marketing study (the "Customer Survey") of its customers and their
furniture shopping needs. Based on the Customer Survey Rhodes believes that
approximately 80% of its customers are between the ages of 25 and 54 and that
approximately 65% of its customers have an annual family income of $30,000 to
$75,000. Rhodes' senior management team has utilized the Customer Survey and
other information to tailor its advertising, merchandising and other operational
efforts to the perceptions and needs of its target customers.
STORE FORMAT AND SITE SELECTION. Rhodes continuously assesses retail trade
areas and specific sites in its existing markets and targeted metropolitan areas
to evaluate the feasibility of opening new stores. Within a trade area, Rhodes
carefully analyzes prospective sites with respect to traffic-count levels along
contiguous roadways, visibility of the site and ingress/egress characteristics,
proximity to competitors and other retail trade generators, zoning restrictions,
availability of suitable leasable space and other factors. Rhodes is
particularly interested in opening new stores in shopping centers containing
super stores and similar category-dominant merchandising concepts.
Furniture typically is displayed in model room settings, complete with
accessories. The design is intended to make it easy for each customer to shop at
Rhodes stores and to facilitate movement of the customer from the shopping to
the purchasing phase. Rhodes' existing stores average approximately 34,300
square feet of display space. New stores are expected to
35
<PAGE>
average approximately 35,000 square feet of display space. All stores are open
362 days each year and at least five evenings each week.
MERCHANDISING AND PURCHASING. Rhodes' merchandising strategy is to offer a
broad selection of affordably priced home furnishings. Each of Rhodes' stores
offers a full line of residential furniture, including upholstered furniture,
recliners and occasional tables for dens and living rooms, bedroom suites and
bedding, dinettes and more formal dining room suites, and desks, lamps and other
accessories. With respect to many upholstered lines, Rhodes selects its own
fabrics during the manufacturing process, rather than relying on manufacturer
selections.
The table below set forth the percentage of sales derived from the types of
merchandise indicated during each of the last three fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 28 OR 29
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Living Room Furniture................................................. 49.5 % 49.6 % 49.3 %
Bedroom Furniture..................................................... 25.5 % 25.1 % 24.5 %
Dining Room Furniture................................................. 10.7 % 10.4 % 11.8 %
Bedding............................................................... 11.0 % 11.7 % 11.7 %
All Other Merchandise and Accessories................................. 3.3 % 3.2 % 2.7 %
------ ------ ------
100.0 % 100.0 % 100.0 %
------ ------ ------
------ ------ ------
</TABLE>
Rhodes' centralized merchandising and buying group selects all lines of
merchandise, negotiates purchase prices and terms with suppliers and places
orders for each of Rhodes' stores and Regional Distribution Centers ("RDCs").
Rhodes purchases merchandise from a large number of manufacturers, including
well-known brands such as Alan White, Bassett, Berkline, Broyhill, Kincaid,
Klaussner, Kroehler, La-Z-Boy, River Oaks, Samuel Lawrence, Sealy, Simmons and
Universal, which manufactures products designed by Alexander Julian. In fiscal
1996, La-Z-Boy, making products under the brand names La-Z Boy and Kincaid,
accounted for approximately 11.2% of Rhodes' total purchases, and Universal
accounted for approximately 10.1%. Rhodes believes its buying power results in
advantageous pricing and delivery and favorable freight costs from vendors
thereby enhancing competitiveness and profitability. Rhodes' inventory control
system provides its headquarters group with merchandising information, and the
group also receives information from regional and store managers regarding local
preferences and market conditions.
Rhodes continually reviews and revises its merchandising mix to respond to
the tastes of its customers. Rhodes recently added a new line of affordable home
furnishings designed by clothing designer Alexander Julian and manufactured by
Universal. Rhodes believes that this line, which includes dining, bedroom and
living room furniture, has been attractive to its customers because it offers
designer furnishings at affordable prices.
PROMOTIONS AND ADVERTISING. Rhodes relies to a considerable extent upon its
promotions and advertising to produce sales, with much of Rhodes' marketing also
featuring the availability of in store credit and special credit plans. Rhodes
conducts over 40 company-wide promotional events each year. Sales events are
generally related to holidays and other promotional events. The staff at Rhodes'
headquarters develops a monthly calendar of company-wide promotional events.
Rhodes advertises extensively throughout the year in newspapers and by use
of radio and television in each of its markets. Color circulars also are issued
twice a year in special mailings or newspaper inserts. Over the last two years,
Rhodes has shifted the focus of its advertising program from newspaper and print
media to television and radio advertising. In fiscal 1996 radio and television
advertising accounted for approximately 49.3% of Rhodes' total advertising
expense. Regional managers along with the staff of Rhodes' headquarters and
advertising agency are responsible for determining the appropriate media mix for
the monthly advertising budget in each market. All advertising is prepared by
the staff at Rhodes' headquarters in conjunction with an outside advertising
agency.
MANAGEMENT INFORMATION SYSTEM. Rhodes has developed and installed an
advanced inventory control and point of-sale information system which enables
senior management to improve individual store performance and to access customer
demographics, credit, sales and inventory information on a real-time basis. This
system, which Rhodes believes to be one of the most advanced in the furniture
retailing industry, expedites the processing of customer transactions and credit
approval, controls inventory levels and is designed to support future growth.
Specifically, Rhodes monitors and controls merchandise levels and movements in
each store and RDC from its Atlanta headquarters.
36
<PAGE>
Rhodes has successfully completed installation of bar coding in six RDCs,
including the three RDCs acquired from Weberg and Glick's. The remaining five
RDCs will be put on bar coding during fiscal 1997. Additionally, all the
acquired stores were operating on Rhodes total inventory and point-of-sale
system by March 16, 1996.
Management believes that this system will allow Rhodes to support the
operation of new stores without major capital expenditures or substantial
increases in its corporate overhead. Although entering a new market will require
the expansion of certain hardware systems, Rhodes believes that its existing
merchandising, promotional, inventory and training systems will allow it to add
new stores in existing or new markets in a cost-effective manner.
MANAGEMENT AND TRAINING. One of the competitive strengths of Rhodes is the
experience of its senior management team. With the exception of the Senior Vice
President, Marketing, who was hired in June 1995 and has over 25 years of
experience in the advertising business, the seven executive officers of Rhodes
have between 9 and 24 years of experience with Rhodes.
Senior management is supported in each of Rhodes' 9 operating regions by a
regional manager and, in most regions, area managers. The 9 regional managers
have an average of thirteen years of experience with Rhodes. Rhodes believes
that its regional, area and store managers are attractively compensated with
substantial incentive compensation based on operating results. In addition, all
store, sales personnel are compensated through sales commissions with minimum
commission guarantees. Rhodes management believes that this incentive
compensation increases motivation at the store level and contributes to
increased sales in its stores.
Store management personnel undergo extensive and regular training, which is
designed to keep managers and employees informed of all standardized Company
operating policies, including procedures for sales, inventory maintenance,
credit extension, advertising, store administration and merchandise display.
Training programs are conducted both at Rhodes' stores and at Rhodes'
headquarters in Atlanta. Through the training process, management believes it
has identified employees whose experience and training will qualify them to be
store managers in stores expected to be opened or acquired in the current fiscal
year.
DISTRIBUTION AND DELIVERY. Inventories are maintained in 11 RDCs, from
which merchandise is shipped to the appropriate store for delivery to the
customer's home. The 11 RDCs, which collectively have more than 1.1 million
square feet, have cantilever racking and computer-controlled inventory storage.
Rhodes believes that the RDC acquired from Glick's will support the Columbus
stores and store openings or acquisitions in Cincinnati, Ohio and other areas
within an approximately 300-mile radius of Columbus, and the Denver, Colorado
RDC acquired from Weberg will support the Colorado stores and store openings or
acquisitions within an approximately 300 mile radius of Denver. An addition of
98,000 square feet was completed at the Powder Springs, Georgia RDCs in May,
1995. Rhodes believes its RDCs and inventory control and point-of-sale
information system will provide it with the aggregate capacity needed to support
the presently planned store growth.
Typically, each store is within 300 miles of one of the RDCs. Substantially
all of Rhodes' merchandise is distributed to its stores through its RDCs. Rhodes
operates a fleet of trucks which delivers merchandise from an RDC to each store
several times each week. Rhodes believes the use of the RDCs and its inventory
control system enable Rhodes to make available a broader selection of
merchandise, to reduce inventory requirements at individual stores, to benefit
from volume purchasing and to provide prompt delivery to customers.
Deliveries to customers are made from Rhodes' stores or home delivery
locations for multiple stores in larger markets by independent contractors or,
in certain markets, by Rhodes-operated trucks. In certain of its major
metropolitan markets, Rhodes guarantees next-day delivery for all in-stock
purchases and Rhodes believes that this program and its prompt delivery for all
stores provide it with a competitive advantage.
CREDIT OPERATIONS. Rhodes offers its customers the option to purchase
furniture using cash, the Rhodes credit card or other major nationally
recognized credit cards. Approximately 72.7% of Rhodes' sales in fiscal 1996
were made through the Rhodes credit card, which operates as a revolving charge
account. All credit applications, sales and many payments on account are
processed electronically through Rhodes' point-of-sale system. The terms for the
Rhodes credit card purchases are flexible and on most purchases allow up to 57
months to pay. Rhodes also provides promotional credit plans to its customers in
which no interest is charged on purchases made under the plan or in which
monthly payments are deferred. Rhodes' credit operation was installed in all
stores purchased from Weberg and Glick's upon the closing of their acquisition.
Since June of 1992 BNB has operated the Rhodes private-label credit card
program. Pursuant to the Merchant Agreement, Rhodes sells its customer
installment receivables to BNB and derives income from commissions earned on
certain credit transactions. The Merchant Agreement is terminable by either
Rhodes or BNB on 180 days notice and is subject to early termination by BNB in
the event of a bankruptcy filing by or against Rhodes or upon 30 days notice in
the event of a
37
<PAGE>
material change in any law or regulation or in the operation, assets, condition
(financial or otherwise), business or ownership of Rhodes. Upon termination,
Rhodes may, at its option, repurchase the total portfolio of outstanding
consumer installment receivables for 106% of the outstanding principal balances,
including accrued interest, subject to certain rights of BNB to securitize and
sell the portfolio. The consummation of the Merger is also conditioned upon
Rhodes obtaining the waiver of BNB of certain of its rights under the Merchant
Agreement, including BNB's right to terminate the Merger Agreement upon 30 days
notice after consummation of the Merger. See "THE MERGER -- Conditions to
Consummation."
COMPETITION
The retail home furnishings business is highly competitive and fragmented.
Rhodes competes with a large number of independent furniture stores which
operate in single markets, other regional and national furniture store chains
and various department stores and mass merchandisers. Based on statistics
published by FURNITURE/TODAY magazine for 1995, Rhodes was the sixth largest
conventional furniture retailer in the United States; however, the ten largest
conventional furniture retailers accounted for less than 16% of industry sales
in 1995. Rhodes' competition varies according to geographic area. Rhodes'
principal competitors consist of other local independent specialty furniture
retailers, regional specialty furniture retailers and general merchandisers.
Some of the furniture store chains, department stores and mass merchandisers
with which Rhodes competes have greater financial and other resources than
Rhodes.
The retail furniture industry competes primarily on the basis of quality,
price and service. Each of Rhodes' stores offers a broad line of brand name
merchandise emphasizing good quality and an extensive selection. Rhodes employs
an aggressive pricing policy, under which it guarantees to sell each item at the
lowest advertised price in the market. Rhodes emphasizes superior service
through in-store credit, prompt delivery of merchandise, professionally trained
salespersons and convenient locations.
SERVICE MARKS
Rhodes currently conducts its business under the names "Rhodes,"
"Marks-Fitzgerald" (in Birmingham, Alabama) and "Fowler's Furniture Center" (in
Knoxville, Tennessee) and holds service marks for each of these names and other
service marks. However, Rhodes ultimately intends to operate all of its stores
under the "Rhodes" name and has begun to systematically implement changes in
signage and other forms of advertising in the markets where business is
conducted under names other than "Rhodes". In the third quarter of fiscal 1996,
Rhodes recorded a one-time non-recurring charge for certain costs relating to
changing the names of the stores operating as "Crossroads", "Marks-Fitzgerald,"
"Fowler's Furniture Center," "Weberg Furniture Company" and "The Glick Furniture
Company" to "Rhodes," although in addition to "Rhodes" it also currently
conducts business under the name "Marks-Fitzgerald" and "Fowler's Furniture
Center."
EMPLOYEES
As of August 31, 1996, Rhodes employed 3,404 persons, including 3,012 in
sales and store operations, 247 in its RDCs and 145 in its corporate office.
Rhodes has never experienced a work stoppage due to labor difficulties. Rhodes
is not a party to any collective bargaining agreements and considers its
relations with employees to be good.
PROPERTIES
Rhodes' stores are free-standing units or are located in shopping centers,
and have display space ranging from approximately 17,000 square feet to
approximately 92,000 square feet (with an average of approximately 34,300 square
feet). Rhodes owns eight of its stores and leases the remaining 99, of which
nine are leased pursuant to sale/leaseback arrangements.
Rhodes also operates 11 RDCs which are used to warehouse inventory pending
shipment to individual stores. The 11 RDCs collectively have more than 1.1
million square feet and have cantilever racking and computer-controlled
inventory. Five of the RDCs are owned and six are leased. In addition, one of
the owned RDCs has an attached facility which is leased. The six leased RDCs
have initial terms which will expire at various dates through 2010, with an
average lease term, including options, of approximately 13 years.
Store leases have initial terms which will expire at various dates through
2021, with an average lease term, including renewal options, of approximately 14
years. Rhodes' leases generally provide for fixed monthly rentals, although some
provide for fixed minimum rentals with a percentage rental based on sales.
38
<PAGE>
Rhodes' principal executive offices are located in a 59,289 square foot
leased facility located in Atlanta, Georgia. The facility is leased by Rhodes
pursuant to two leases, one of which extends to July 2005 and the other of which
extends to May 2002 and which Rhodes has an option to extend for an additional
ten-year term.
LEGAL PROCEEDINGS
Due to the nature of Rhodes' business, it is from time to time a party to
other legal proceedings arising in the ordinary course of its business, none of
which, in the judgment of management, would have a material adverse effect on
its operations or financial condition if adversely determined.
RHODES COMMON STOCK OWNERSHIP BY MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of shares of Rhodes
Common Stock as of November 15, 1996 for (i) the Chief Executive Officer and
each of the four other most highly compensated executive officers of Rhodes
(collectively, the "Named Executive Officers"), (ii) each director of Rhodes
owning shares of Common Stock, (iii) the directors and executive officers of
Rhodes as a group and (iv) each person who is known to Rhodes to be a beneficial
owner of more than 5% of the outstanding shares of Common Stock. Unless
otherwise indicated in the footnotes, all of such interests are owned directly,
and the indicated person or entity has sole voting and investment power.
<TABLE>
<CAPTION>
PRO FORMA
OWNERSHIP OF
HEILIG-MEYERS
COMMON STOCK
NUMBER AFTER MERGER
OF SHARES ------------------
NAME AND ADDRESS BENEFICIALLY % OF
OF BENEFICIAL OWNER(1) OWNED % OF CLASS AMOUNT CLASS
- ------------------------------------------------------------------------------ --------- ---------- ---------- ----
<S> <C> <C> <C> <C>
Irwin L. Lowenstein (2)....................................................... 113,325 1.2% 56,662 *
Joel T. Lanham (3)............................................................ 62,780 * 31,390 *
Joel H. Dugan (4)............................................................. 55,575 * 27,787 *
James A. Welch (5)............................................................ 18,116 * 9,058 *
Don M. Parker (6)............................................................. 29,734 * 14,867 *
Don L. Chapman (7)............................................................ 7,000 * 3,500 *
Tug Manufacturing Corporation
2652 South Main Street
Kennesaw, Georgia 30144-3520
James V. Napier (8)........................................................... 6,500 * 3,520 *
3343 Peachtree Rd., NE
Suite 1420-East Tower
Atlanta, Georgia 30326
Holcombe T. Green, Jr. (9).................................................... 2,920,854 31.8% 1,460,427 2.7 %
WPS Investors, L.P............................................................ 2,912,679 31.7% 1,456,340 2.7 %
3343 Peachtree Rd., NE
Suite 1420-East Tower
Atlanta, Georgia 30326
FMR Corp. (10)................................................................ 630,800 6.9% 315,400 *
82 Devonshire Street
Boston, Massachusetts 02109
Swiss Bank Corporation (11)................................................... 743,000 8.1% 371,500 *
Aeschenplatz 6 CH-4002
Basel, Switzerland
Southeastern Asset Management, Inc. (12)...................................... 1,581,600 17.2% 790,800 1.5 %
6075 Poplar Avenue, Suite 900
Memphis, TN 38119
Longleaf Partners Small-Cap Fund (12)(13)..................................... 715,000 7.8% 357,500 *
All executive officers and directors as a
group (11 persons) (14)..................................................... 3,233,774 34.5% 1,616,887 3.0 %
</TABLE>
- ---------------
* Less than 1%.
39
<PAGE>
(1) Unless otherwise indicated, the business address of each beneficial owner
is the principal executive office of Rhodes at 4370 Peachtree Road,
Atlanta, Georgia 30319.
(2) Includes 70,000 shares of Common Stock which Mr. Lowenstein has the right
to acquire pursuant to options exercisable within 60 days. Excludes 400
shares of Common Stock owned by Mr. Lowenstein's daughters, as to which Mr.
Lowenstein disclaims beneficial ownership.
(3) Includes 46,000 shares of Common Stock which Mr. Lanham has the right to
acquire pursuant to options exercisable within 60 days.
(4) Includes 30,000 shares of Common Stock which Mr. Dugan has the right to
acquire pursuant to options exercisable within 60 days.
(5) Includes 15,500 shares of Common Stock which Mr. Welch has the right to
acquire pursuant to options exercisable within 60 days.
(6) Includes 19,000 shares of Common Stock which Mr. Parker has the right to
acquire pursuant to options exercisable within 60 days.
(7) Includes 4,500 shares of Common Stock which Mr. Chapman has the right to
acquire pursuant to options exercisable within 60 days.
(8) Includes 4,500 shares of Common Stock which Mr. Napier has the right to
acquire pursuant to options exercisable within 60 days.
(9) Includes 2,912,679 and 5,700 shares of Common Stock held by WPS and Green
Capital, respectively. WPS and Green Capital are partnerships controlled by
Mr. Green. Also includes 2,475 shares owned by Mr. Green in his capacity as
trustee of the HTG Corp. Profit Sharing Plan. The partnership agreement for
Green Capital provides that the partnership shall continue in existence
until the earlier of (i) the close of business on December 31, 1994
(provided that the general partner (which is an entity controlled by Mr.
Green), at its option, in order to permit an orderly termination of the
partnership, may extend the term of the partnership for up to three
successive one-year terms following the expiration of such initial term) or
(ii) the second anniversary of the death or disability of Mr. Green. The
term of the Green Capital partnership has been extended until December 31,
1997. The partnership agreement of WPS provides that the partnership shall
continue in existence until the earliest of February 28, 1998 and certain
other events enumerated in the partnership agreement. The partnership
agreements of Green Capital and WPS are not agreements to which Rhodes is a
party, and Rhodes does not have any rights or obligations thereunder. In
addition, the general partner, in its discretion, may effect the early
dissolution of a Partnership at any time. Green Capital and WPS have agreed
to certain restrictions on the transfer of their shares of Rhodes Common
Stock (and the shares of Heilig-Meyers Common Stock receivable by them in
the Merger) pursuant to the Voting Agreement, but such restrictions do not
include distributions to their respective partners, although the shares,
upon any such distribution, would continue to be subject to such transfer
restrictions. See "THE MERGER -- Voting Agreement."
(10) The information regarding FMR Corp. is given in reliance upon a Schedule
13G, which is dated February 14, 1996 and was filed with the Securities and
Exchange Commission. Fidelity Management & Research Company, a wholly owned
subsidiary of FMR Corp., is the beneficial owner of all of the 630,800
shares.
(11) The information regarding Swiss Bank Corporation ("SBC") is given in
reliance upon a Schedule 13G, which is dated February 9, 1996 and was filed
with the Securities and Exchange Commission. Brinson Partners, Inc. ("BPI")
filed the Schedule 13G on behalf of itself, Brinson Trust Company ("BTC"),
Brinson Holdings, Inc. ("BHI"), SBC Holding (USA), Inc. ("SBCUSA") and SBC.
BTC is a wholly owned subsidiary of BPI. BPI is a wholly owned subsidiary
of BHI. BHI is a wholly owned subsidiary of SBCUSA. SBCUSA is a wholly
owned subsidiary of SBC. By virtue of these corporate relationships, each
of SBC, SBCUSA, BHI and BPI may be deemed to beneficially own and have the
power to dispose and vote or direct the disposition or voting of all of the
743,000 shares. BTC shares dispositive and voting power with respect to
199,316 of the shares.
(12) The information regarding Southeastern Asset Management, Inc. is given in
reliance upon a Schedule 13D, which is dated as of October 1, 1996 and was
filed with the Securities and Exchange Commission. Southeastern Asset
Management, Inc. has sole power of disposition over 630,000 shares and
shared power of disposition over 959,600 shares, of which Longleaf Partners
Small-Cap Fund shares power of disposition with respect to 723,000 shares.
Southeastern Asset Management, Inc. has sole voting power with respect to
530,000 shares and shared voting power with respect to 959,600 shares (with
no voting power with respect to 100,000 shares).
40
<PAGE>
(13) The information regarding Longleaf Partners Small-Cap Fund is given in
reliance upon a Schedule 13D, which is dated as of October 1, 1996 and was
filed with the Securities and Exchange Commission. Longleaf Partners
Small-Cap Fund shares voting and dispositive power with Southeastern Asset
Management, Inc. over all such shares.
(14) Includes an aggregate of 202,000 shares of Common Stock which may be
acquired pursuant to options exercisable within 60 days and excludes 400
shares of Common Stock owned by Mr. Lowenstein's daughters, as to which Mr.
Lowenstein disclaims beneficial ownership, and 300 shares of Common Stock
owned by Barbara Snow's children, as to which Ms. Snow disclaims beneficial
ownership.
41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales for the fiscal years ended February 29, 1996, February
28, 1995, and 1994 and the unaudited six-month periods ended August 31, 1996 and
1995.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
SIX MONTHS ENDED FEBRUARY 28 OR 29,
---------------------------------- -------------------------
AUGUST 31, 1996 AUGUST 31, 1995 1996 1995 1994
--------------- --------------- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold............................................ 55.0 52.0 52.5 51.5 51.8
------ ------ ----- ----- -----
Gross Profit................................................ 45.0 48.0 47.5 48.5 48.2
------ ------ ----- ----- -----
Finance Charges and Insurance Commissions..................... 1.4 1.7 1.4 1.4 1.5
------ ------ ----- ----- -----
Operating Expenses:
Selling..................................................... 17.0 16.4 16.8 16.0 15.9
General and Administrative.................................. 30.4 26.7 26.9 25.9 26.0
Amortization................................................ 0.7 0.8 0.7 0.9 1.0
Provision for credit losses................................. 0.1 0.0 -- -- 0.1
Other (income) expense, net................................. 0.0 0.0 (0.1) 0.1 --
------ ------ ----- ----- -----
48.2 43.9 44.3 42.9 42.9
------ ------ ----- ----- -----
Operating Income (Loss)..................................... (1.8) 5.8 4.5 7.1 6.8
Interest Expense, net......................................... 2.1 1.7 1.6 1.7 3.5
------ ------ ----- ----- -----
Income (Loss) Before Income Taxes and Extraordinary Item...... (3.9) 4.1 2.9 5.4 3.3
Net Income (Loss) Before Extraordinary Item................... (2.2) 2.4 1.7 3.2 1.9
</TABLE>
The following discussion contains forward-looking statements with respect
to Rhodes' sales and remodeling and refurbishment plans. Rhodes' ability to meet
these projections will be subject to general economic trends, available cash
flow and sales trends for Rhodes and the industry.
SIX MONTHS ENDED AUGUST 31, 1996 AND 1995 COMPARED. Net sales increased
29.2% to $238,764,000 from $184,818,000 for the six months ended August 31, 1996
compared with the same period last year. Same store sales decreased 8.0% for the
six months ended August 31, 1996. The net loss for the six months ended August
31, 1996 was $5,343,000 compared with net income of $4,476,000 for the six
months last year. Net loss per share was $.58 for the six months ended August
31, 1996 compared with earnings per share of $.48 for the six months ended
August 31, 1995.
At August 31, 1996 the Company had 107 stores in operation compared with 79
at August 31, 1995. During the six month period ended August 31, 1996, two new
stores were opened and three stores were closed. The Company has entered into
leases for two new stores in Memphis, Tennessee, a new market for the Company,
which will be delayed until fiscal 1998. The Company is also considering new
markets for potential store additions in the future but will delay entering new
markets until the recently acquired stores have been completely integrated into
Rhodes and Rhodes is integrated into Heilig-Meyers following the Merger. The
Company did not remodel any stores during the second quarter of the current
fiscal year, and all remodeling activity has been indefinitely suspended in
light of the execution of the Merger Agreement and to allow the stores acquired
from Weberg and Glick's to be fully integrated into Rhodes' operations.
Gross profit as a percentage of net sales for the six months ended August
31, 1996 decreased to 45.0% from 48.0%, compared with the same period last year.
The decline in the gross profit percentage was due to the liquidation sale of
inventory acquired from Weberg and Glick's during the first four months of the
six month period and was also due to more aggressive price promotions in all
stores during the six months due to the weak retailing environment for
mid-priced furniture. The acquired stores will have lower gross profit in fiscal
year 1997 than Rhodes has had historically as the inventories are liquidated and
changed to Rhodes' line-up and due to the accounting deferral of revenues from
warranties sold for the first time in the acquired stores. The Texas and
Colorado stores will continue to have lower gross profit due to higher freight
costs.
42
<PAGE>
Finance charge and insurance commission income derives from commissions
earned under the Company's merchant agreement (the "Merchant Agreement") whereby
all newly created accounts receivable are sold to BNB and from commissions on
credit insurance on credit customer balances. The amounts earned increased 9.8%
for the six months ended August 31, 1996 due to an increase in the net insurance
commissions collected on customers' accounts. As the Weberg and Glick's stores
sell credit insurance and customers' aggregate balances increase, management
expects insurance commission income to increase.
Selling expense for the six months ended August 31, 1996 increased as a
percentage of net sales to 17.0% compared to 16.4%, for the same period last
year. The increase as a percentage of net sales is due to a decrease in same
store sales and an increase in advertising over prior year levels.
General and administrative expenses for the six months ended August 31,
1996 increased to $72,672,000 (30.4% of net sales) from $49,321,000 (26.7% of
net sales) for the same period last year. The increased expense for the six
month period ended August 31, 1996 is due to increases in employee expenses and
the cost of adding 35 new stores. The increase in the percentage of net sales is
due primarily to a decline in same store sales for the six months compared with
last year. In light of recent disappointing results the Company has instituted
expense saving measures by reducing the employee count by approximately 200 in
the stores and approximately 75 in the corporate office since February 29, 1996.
FISCAL YEARS ENDED 1996 AND 1995 COMPARED. Net sales increased 19.1% to
$430,193,000 from $361,238,000 for the fiscal year ended February 29, 1996,
compared with the same period last year. Same store sales growth was 2.5% for
fiscal 1996. Income before a third quarter non-recurring charge for fiscal 1996
decreased 35.7% to $7,406,000, compared with $11,519,000 for the same period
last year. Earnings per share for the year before the non-recurring charge was
$.80, compared with $1.18 per share last year, a decrease of 32.2%. Operating
income for the year ended February 29, 1996 before the non-recurring charge was
$19,450,000 (4.5% of net sales) a decrease of 24.1% compared with $25,632,000
(7.1% of net sales) for the same period.
Rhodes' same store sales percentage increase was negative in the fourth
quarter of fiscal 1996 reflecting an unfavorable economic climate for furniture
retailing.
In fiscal 1996, Rhodes opened three stores in new markets, two in Kansas
City, Missouri and one in Cincinnati, Ohio. Subsequent to year end, Rhodes
opened a third store in Kansas City.
In existing markets, Rhodes opened four stores in Atlanta, Georgia, two
stores in Charlotte, North Carolina and one store in Jacksonville, Florida.
Also, one store in the Orlando, Florida market was relocated. Rhodes closed 11
stores in fiscal 1996, four of which were stores in Atlanta whose customers can
be better served by nearby, larger and more attractive stores. Three other
under-performing stores in Venice and Bradenton, Florida and Jackson,
Mississippi were closed. Three of the 21 Weberg stores, two in Texas and one in
Colorado, were closed as part of Rhodes' acquisition plan for Weberg.
Rhodes completed remodeling nine stores and refurbishing three stores
during fiscal 1996, bringing the total completed to 48 since the program began
in fiscal 1993. Sixteen more stores are scheduled for remodeling or
refurbishment during this fiscal year, including 13 acquired from Weberg and
Glick's, subject to the delay explained under "SIX MONTHS ENDED AUGUST 31, 1996
AND 1995 COMPARED."
Gross profit as a percentage of net sales for fiscal 1996, decreased to
47.5% from 48.5%, compared with last year. The decline in the gross profit
percentage was due to more aggressive price promotions during the year, and
lower gross profit in the acquired stores. The acquired stores will have lower
gross profit in fiscal year 1997 than Rhodes has had historically as the
inventories are liquidated and changed to Rhodes' line-up in the first quarter
of fiscal 1997 and due to the accounting deferral of revenues from warranties
sold for the first time in the acquired stores. The Texas and Colorado stores
will continue to have lower gross profit due to higher freight costs.
Finance charge and insurance commission income derives from commissions
earned under the Merchant Agreement and from commissions on credit insurance on
credit customer balances. The amounts earned increased for fiscal 1996 due to an
increase since last year in the amounts paid to Rhodes by BNB for origination of
new accounts and an increase in the net insurance commission collected on
customers' accounts.
Selling expense for fiscal 1996 increased as a percentage of net sales to
16.8%, compared with 16.0% last year. The increase is due to more expensive
interest-free and deferred payment credit promotions, compared with the prior
year. Advertising expense was higher as a percentage of net sales, due to more
aggressive advertising late in the year due to the poor furniture retailing
environment.
43
<PAGE>
General and administrative expenses for fiscal 1996 increased to
$115,809,000 (26.9% of net sales) from $93,391,000 (25.9% of net sales) last
year. The increased expense is due to increases in employee expenses and the
cost of adding 39 new stores and four RDCs. The increase in the percentage of
net sales is due primarily to lower comparable store sales growth this year
compared with last year.
Rhodes also recorded in the third quarter a non-recurring one-time charge
to reflect the cost of changing the names of 33 stores to "Rhodes" and the cost
of closing four stores. The aggregate amount of the charge was $2,400,000,
before income tax benefit of $984,000, for a net charge of $1,416,000. Net
income for fiscal 1996 after deducting the non-recurring charge was $5,990,000
or $.64 per share.
Interest expense on Rhodes' indebtedness is expected to increase in future
periods due to the debt incurred to finance the acquisitions of the Weberg and
Glick's stores and distribution center operations.
FISCAL YEARS 1995 AND 1994 COMPARED. Net sales increased 11.1% to
$361,238,000 from $325,255,000 for fiscal 1995 compared with the prior fiscal
year. Same store sales growth was 7.1% for fiscal 1995. Operating income for
fiscal 1995 was $25,632,000 (7.1% of net sales), an increase of 16.0% compared
with $22,100,000 (6.8% of net sales) for the prior fiscal year. Net income for
fiscal 1995 increased 90.5% to $11,519,000, or $1.18 per share, compared with
$6,047,000, or $.83 per share for the prior year before extraordinary item.
During fiscal 1995 Rhodes opened three new stores in Atlanta, Georgia, one
in Birmingham, Alabama, one in St. Louis, Missouri and one in Eustis, Florida,
which was acquired in an exchange for Rhodes' three Miami stores. One store was
also opened in Columbia, South Carolina to replace a store that was closed at
the same time. Rhodes also lost one store to a fire in Jacksonville, Florida,
bringing the total stores in operation at February 28, 1995 to 80, compared to
78 stores in operation at February 28, 1994. Sixteen stores were remodeled or
refurbished in fiscal 1995.
Gross profit as a percentage of net sales for the year increased to 48.5%
from 48.2%, compared with last year. The gross profit improvement is
attributable to improved gross profit on furniture sales and improved sales
penetration of extended warranties which have a higher gross profit margin.
Finance charge and insurance commission income derives from commissions
earned from BNB on new credit sales under the Merchant Agreement and from
commissions on credit insurance on credit customer balances. Income increased
due to additional commissions earned on customers' accounts partially offset by
lower commissions earned from BNB.
Selling expense for fiscal 1995 increased slightly as a percentage of net
sales to 16.0%, compared with 15.9% last year due to an increase in advertising
expenses, which were offset, in part, by lower net costs on credit promotions
charges. Selling expense varies as a percentage of sales due to a number of
factors including the level of advertising, credit promotions and the opening of
new stores.
General and administrative expenses for the year increased to $93,391,000
(25.9% of net sales) from $84,404,000(26.0% of net sales) last year. The
increased expense for the year is due to having seven new stores in fiscal 1995,
less the three Miami stores sold in the second quarter plus increases in
employee expenses. General and administrative expenses, as a percentage of
sales, were approximately the same due to increased sales volume.
Other expenses for fiscal 1995 includes an accrual of $375,000 in
anticipation of the losses expected to be incurred upon closing two stores in
fiscal 1996.
Interest expense for the year ended February 28, 1995 decreased to
$6,109,000 compared with $11,545,000 for last year as a result of the Initial
Public Offering, the issuance of the Senior Notes, the Exchange and the related
reduction in Rhodes' indebtedness.
EFFECTS OF INFLATION ON OPERATIONS. Although the rate of inflation has
remained low and has had little impact on Rhodes during the last three fiscal
years ended February 29, 1996, Rhodes' operating results could be adversely
affected by high rates of inflation. The area which could be most affected is
Rhodes' cost to replenish inventory. An increase in the cost of inventory would
be mitigated, however, to the extent Rhodes was able to pass along such costs to
its customers through price increases. Rhodes' interest rate risk is limited to
the variable rate of interest paid under Rhodes' revolving credit agreement with
Wachovia Bank of Georgia, N.A. and Fleet Capital Corporation for an aggregate of
$65 million (the "Revolving Credit Agreement").
44
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Currently, Rhodes' principal sources of liquidity are cash flow from
operations and additional borrowing capacity under its Revolving Credit
Agreement described below. Rhodes had net cash provided by operating activities
of approximately $23.3 million, $25.9 million and $19.4 million, in fiscal years
1996, 1995 and 1994, respectively. Net cash provided by operating activities for
the six months ended August 31, 1996 was approximately $3.7 million compared
with $6.0 million cash provided in the same period last year. Rhodes' principal
uses of cash are debt service obligations, capital expenditures and working
capital needs.
As of August 31, 1996 and at the end of fiscal years 1996, 1995, and 1994,
LIFO inventories were $85.1 million, $88.0 million, $54.4 million, and $48.2
million, respectively. FIFO inventory turns decreased to 2.9x for the six months
ended August 31, 1996 compared with 3.4x for the same period last year and to
3.3x for fiscal 1996 from 3.6x in fiscal 1995 and 3.8x in fiscal 1994.
Inventories have been increased due to the acquisitions, the addition of new,
larger stores and the addition of the Kansas City, Missouri RDC and expansion of
the Powder Springs, Georgia RDC. Rhodes has historically had low or negative
working capital, primarily as a result of its tight inventory controls, low cash
balances and the inclusion in current liabilities of deferred revenues, such as
merchandise sold but not delivered and deferred warranty revenue. Rhodes had a
working capital deficit of $0.2 million at August 31, 1996.
Rhodes made additions to property and equipment of approximately $23.5
million, $14.1 million and $6.9 million for fiscal years 1996, 1995 and 1994,
respectively. The fiscal 1996 additions exclude $6.3 million related to the
Weberg and Glick's acquisitions. The expenditures have been both for the opening
of new stores and capital replacements in existing stores, including the
remodeling completed for 12 stores in fiscal 1996, 16 stores in fiscal 1995 and
16 stores in fiscal 1994. Rhodes has presently suspended the remodeling program
for fiscal year 1997 following completion of six stores to allow the stores
acquired from Weberg and Glick's to be fully integrated into Rhodes' operations
and to permit Rhodes to be integrated with Heilig-Meyers following the Merger.
These increases also reflect the cost of the additional 17 new stores and the
relocation of six stores over the two year period. Rhodes anticipates that these
increased capital expenditures will be funded primarily from cash flow from
operations. If Rhodes' cash flow from operations were insufficient to fund such
capital expenditures, Rhodes would consider additional means to finance its
remodeling and refurbishing and expansion programs or delaying or limiting such
programs. Acquisitions over $3 million or $5 million in the aggregate for any
four consecutive quarters require approval under the Revolving Credit Agreement.
Rhodes maintains a Revolving Credit Agreement with Wachovia National Bank
and Fleet Credit Corporation for the lesser of $45.0 million or 50% of eligible
inventory plus a three year term loan of $20.0 million. The loan agreement
expires on January 12, 1999 and therefore has been classified in the financial
statements as long term debt, with the exception of the portion of the term loan
due within one year. The agreement is secured by substantially all of the
inventory of Rhodes. As of October 9, 1996, there was $40.9 million outstanding
under the Revolving Credit Agreement, including $17.5 million outstanding under
the term loan, and approximately $10.6 million remains available under the
Agreement.
Since January 1995, Rhodes has purchased 685,300 shares of its Common Stock
for an aggregate purchase price of $7.5 million. Under the Revolving Credit
Agreement, Rhodes is generally prohibited from making distributions without the
approval of the lending banks thereunder; however, Rhodes may make distributions
to its shareholders (including stock purchases) (i) so long as no event of
default exists or would result from any such distribution and (ii) the amount of
the distributions during the term of the Revolving Credit Agreement (for which
approval has not been given) does not exceed, in the aggregate $3.0 million.
The terms of the Revolving Credit Agreement also impose restrictions that
affect, among other things, Rhodes' ability to (i) incur certain additional
indebtedness, (ii) create liens on assets, (iii) sell assets, (iv) engage in
mergers or consolidations, (v) make investments, and (vi) engage in certain
actions with affiliates and subsidiaries. The Revolving Credit Agreement also
requires Rhodes to comply with certain specified financial ratios and tests. In
connection with the proposed Merger, on October 15, 1996, Rhodes entered into an
amendment to the Revolving Credit Agreement pursuant to which certain of these
financial ratios and tests were modified.
In June 1996 Rhodes arranged a bridge loan of $9.0 million for 60 days as
an amendment to the Revolving Credit Agreement. Green Capital Investors, L.P.,
an affiliate of Rhodes, participated in the extension of the loan to Rhodes in
the amount of $3 million. Proceeds of the loan were used to make a mandatory
prepayment on Rhodes' senior secured notes in the amount of $7.5 million and for
working capital purposes. The bridge loan was extended to September 30, 1996,
but was repaid in full on September 24, 1996.
45
<PAGE>
Rhodes has outstanding senior secured notes in the aggregate principal
amount of $32,278,000. The senior secured notes require Rhodes to comply with
certain specified financial ratios and tests, including a fixed charge coverage
ratio test. In June 1996, Rhodes advised the holders of the senior secured notes
that, as a result of Rhodes' first quarter loss, its ability to meet the fixed
charge coverage ratio test would be adversely affected and in July 1996 entered
into an amendment lowering the fixed charge coverage ratios for the remainder of
fiscal 1997. On October 21, 1996, Rhodes obtained a waiver of its fixed charge
coverage ratio covenant for the second quarter from the senior note holders
effective until November 19, 1996. This waiver was extended on November 14, 1996
until the earlier to occur of February 28, 1997 or the public announcement that
the Merger will not be consummated. In connection with the extended waiver,
Rhodes has agreed to prepay the senior secured notes upon consummation of the
Merger.
Rhodes expects to continue to finance inventories, future expansion, debt
service requirements and other cash needs with cash flow from operations
supplemented by other potential sources of capital, principally the sources
described above. Although there can be no assurance as to the availability of
other sources of funding, management believes that internally generated funds
and amounts available under the its bank lending arrangements will be sufficient
to fund Rhodes' present and proposed operations and capital expenditure program
and expansion program.
In connection with the acquisitions of the Weberg stores and Glick's,
Rhodes assumed or executed operating leases for an aggregate of 28 store
locations and three distribution centers and paid additional consideration for
inventory and operating assets aggregating approximately $41.0 million. Funding
was provided through bank debt and the issuance of notes aggregating $2.0
million to Glick's.
INFORMATION ABOUT HEILIG-MEYERS
BUSINESS
INTRODUCTION
Heilig-Meyers is the nation's largest publicly held specialty retailer of
home furnishings with 813 stores (as of October 31, 1996). Heilig-Meyers' stores
are primarily located in small towns and rural markets in 31 Southern,
Midwestern and Western states and Puerto Rico. Heilig-Meyers' operating strategy
includes: (1) offering a broad selection of competitively priced home
furnishings including furniture, consumer electronics, appliances, bedding and
floor coverings; (2) locating stores primarily in small towns and rural markets
which are at least 25 miles from a metropolitan area; (3) offering in-house
credit programs to provide flexible financing to its customers; (4) utilizing
centralized inventory and distribution systems in strategic regional locations
to support store inventory and merchandise delivery options; and (5) emphasizing
customer service, including free delivery on most major purchases and repair
service for consumer electronics and other mechanical items. Heilig-Meyers
believes this strategy of offering selection, credit, delivery and service
generally allows it to have the largest market share among home furnishings
retailers in most of its small-town markets.
Heilig-Meyers has undertaken several programs to enhance operating
efficiencies, reduce costs, improve management controls, and manage the growth
of its business. These programs have included: a prototype store program
featuring the latest in display techniques and construction efficiencies; a
remodeling program under which stores are typically remodeled on a seven year
schedule; improved distribution management with eight state-of-the-art
distribution centers which are designed to service stores typically located
within 250 miles of such centers (a ninth distribution center is under
construction and expected to be completed by the end of the current fiscal
year); information systems improvements including a sales and inventory control
system and a company wide hardware upgrade which have allowed numerous system
enhancements including satellite communications; a new purchasing strategy of
consolidating vendors for purchasing advantages due to scale economies and
improved inventory management including electronic data interchange (EDI)
ordering and just-in-time ordering; and increased use of market segmentation
techniques to identify prospective customers and to permit a more targeted
direct mail advertising program.
RECENT DEVELOPMENT. On October 1, 1996 the Company acquired certain assets
of McMahan's Furniture Company of Santa Monica, California relating to 20
stores. Six of these stores are in Washington, 13 are in California and one is
in Nevada. In October 1996, the Company also purchased certain assets relating
to 23 stores of Self Service Furniture, Inc. Eight of these stores are in
Washington, six are in Oregon, four are in Idaho, three are in California and
two are in Montana.
COMPETITION. The retail home furnishings industry is a highly competitive
and fragmented market. Heilig-Meyers competes with large chains, independent
stores, discount stores, furniture stores, specialty stores and others, some of
which have financial resources greater than those of Heilig-Meyers, and some of
which derive revenues from the sale of products other than home furnishings.
Heilig-Meyers believes that locating stores in small towns and rural markets
provides an important
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competitive advantage. Currently, approximately 80% of all stores are located in
towns with populations under 50,000 and more than 25 miles from a metropolitan
market. As the majority of other furniture chains locate their stores in larger
cities, competition in these small towns largely comes from locally owned store
operations which generally lack the financial strength to compete effectively
with Heilig-Meyers. Due to volume purchasing, Heilig-Meyers believes it is
generally able to offer merchandise at lower prices than its competitors,
especially local independent and regional specialty furniture retailers. In
addition, management believes that it offers a broader selection of merchandise
than many of its competitors. Consequently, Heilig-Meyers believes that its
stores have the largest market share among home furnishings retailers in the
majority of their areas.
Based on its experience, Heilig-Meyers believes its competitive environment
is comparable in all geographic regions in which it operates. Therefore,
Heilig-Meyers does not believe that a regional analysis of its competitive
market is meaningful at this time.
STORE OPERATIONS
GENERAL. Heilig-Meyers' stores generally range in size from 10,000 to
35,000 square feet, with the average being approximately 20,000 square feet. A
store's attached or nearby warehouse usually measures from 3,000 to 5,000 square
feet. A typical store is designed to give the customer an urban shopping
experience in a rural location. During the last four years, Heilig-Meyers has
revitalized its prototype store construction program. Heilig-Meyers' most recent
version of its prototype stores opened in fiscal 1993. Heilig-Meyers added 3 of
these stores in fiscal 1994, 7 in fiscal 1995, 8 in fiscal 1996 and plans to add
up to 13 more for fiscal 1997. The prototype stores feature the latest display
techniques and construction efficiencies. Certain features of these prototype
stores are incorporated into other locations through Heilig-Meyers' ongoing
remodeling program. Heilig-Meyers' existing store remodeling program, under
which stores are remodeled on a rotational basis, provides Heilig-Meyers' older
stores with a fresh look and up-to-date displays on a periodic basis. During
fiscal 1996, Heilig-Meyers remodeled 55 existing stores and approximately 115
additional remodelings are planned for fiscal 1997.
All operations of Heilig-Meyers are managed as one line of business. Each
store unit is managed by an on-site manager responsible for day-to-day store
operations including installment credit extension and collection. Stores are
grouped into divisions and regions for executive management purposes.
Heilig-Meyers has an extensive in-house education program to train new employees
in its operations and to keep current employees informed of Heilig-Meyers'
policies. This training program emphasizes sales productivity, credit extension
and collection, and store administration. The training program utilizes the
publication of detailed store manuals, internally produced training videotape
and Company-conducted classes for employees. Heilig-Meyers also has an in-store
manager training program which provides potential managers hands-on experience
in all aspects of store operations. Heilig-Meyers' ongoing education program is
designed to provide a sufficient number of qualified personnel for its stores.
In recent years, Heilig-Meyers has enhanced operating systems to increase
the availability and effectiveness of management information and to provide a
foundation for planned future growth. In fiscal 1995, Heilig-Meyers made
improvements to inventory management by use of just-in-time ordering and
backhauling. Also during fiscal 1995, Heilig-Meyers completed a conversion to
updated hardware providing a foundation for numerous system enhancements. In
fiscal 1996, Heilig-Meyers completed the installation of a new satellite system.
This system provides immediate communication between Heilig-Meyers' corporate
headquarters, stores and distribution centers. As a result, Heilig-Meyers
believes customer service has been improved by providing store management more
timely access to information related to product availability. This system is
also expected to provide the means for Heilig-Meyers to implement its new
inventory reservation system in addition to enhance target marketing programs.
MERCHANDISING. Heilig-Meyers' merchandising strategy is to offer a broad
selection of competitively priced home furnishings, including furniture and
accessories, consumer electronics, appliances, bedding, and other items such as
jewelry, small appliances and seasonal goods. During the fiscal year ended
February 29, 1996, approximately 58% of Heilig-Meyers' sales were derived from
furniture and accessories; 12% from consumer electronics; 11% from bedding; 9%
from appliances; with the remaining 10% being divided among other items such as
jewelry, small appliances and seasonal goods. These percentages have not varied
significantly over the past four fiscal years.
Heilig-Meyers carries a wide variety of items within each merchandise
category to appeal to individual tastes and preferences. Heilig-Meyers believes
this broad selection of products has enabled it to expand its customer base and
increase repeat sales to existing customers. By carrying seasonal merchandise
(heaters, air conditioners, lawn mowers, outdoor furniture, etc.), Heilig-Meyers
has been able to moderate seasonal fluctuations in sales common to its industry.
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While the basic merchandise mix remained fairly constant during fiscal
1996, Heilig-Meyers continued to refine its merchandise selections to capitalize
on variations in customer preferences. In fiscal 1997, Heilig-Meyers plans to
implement (in certain markets) a new merchandising program referred to as "MUST
2000." This program is designed to provide store management more flexibility
when implementing merchandise line-ups with emphasis on product categories,
styles and price points best suited for each individual store. During fiscal
1996 Heilig-Meyers continued to strengthen its vendor relationships. In addition
to providing purchasing advantages, these relationships provide warehousing and
distribution arrangements which improve inventory management.
ADVERTISING AND PROMOTION. Direct mail circulars are a key part of
Heilig-Meyers' marketing program. Heilig-Meyers centrally designs its direct
mail circulars which accounted for approximately 43% of Heilig-Meyers'
advertising expenses in fiscal 1996. In fiscal 1996 Heilig-Meyers distributed
over 160 million direct mail circulars. This included monthly circulars sent by
direct mail to over ten million households on Heilig-Meyers' mailing list and
special private sale circulars mailed to over two million of these households
each month, as well as during special promotional periods.
In addition to Heilig-Meyers' utilization of direct mail circulars,
television and radio commercials are produced centrally and aired in virtually
all of Heilig-Meyers' markets. Newspaper and radio advertising is placed largely
at the store level. In fiscal 1996 Heilig-Meyers utilized Spanish language
television and radio in selected markets with significant Hispanic populations.
Heilig-Meyers also regularly conducts approximately 40 company-wide promotional
events each year. In addition to these events, individual stores periodically
conduct promotional events locally. Besides the conventional marketing
techniques noted above, Heilig-Meyers has sought alternative methods to increase
Heilig-Meyers' name recognition and customer appeal. In fiscal 1996
Heilig-Meyers continued its sponsorship of the Heilig-Meyers NASCAR Racing Team
as a means of enhancing Heilig-Meyers' name recognition among the millions of
NASCAR fans in its market areas.
During fiscal 1996 Heilig-Meyers continued to utilize market segmentation
techniques (begun in fiscal 1994) to identify prospective customers by matching
their demographics to those of existing customers. Management believes ongoing
market research and improved mailing techniques enhance Heilig-Meyers' ability
to place circulars in the hands of potential customers most likely to make a
purchase. Heilig-Meyers believes that the availability, as well as the terms of
credit, are key determinants in the purchase decision and, therefore, promotes
credit availability by disclosing monthly payment terms in its circulars.
Historically, expenses for advertising and promotion have been between 6% and 8%
of sales. Advertising expense was above its historical levels in fiscal 1996 at
approximately 8.4% of sales. This was the result of increased promotional
activity in response to the sluggish home furnishings retail environment.
CREDIT OPERATIONS. Heilig-Meyers believes that offering flexible, in-house
credit is an important part of its business strategy which provides a
significant competitive advantage. Because installment credit is administered at
the store level, terms can generally be tailored to meet the customer's ability
to pay. Each store has a credit manager who, under the store manager's
supervision, is responsible for extending and collecting that store's accounts
in accordance with corporate guidelines. Because Company representatives work
with customers on a local level, they can often extend credit, without
significantly increasing the risk of nonpayment, to customers who may not
qualify for credit under bank card programs or from competitors who typically
use strict, impersonal credit extension models.
Heilig-Meyers believes its credit program fosters customer loyalty and
repeat business. Historically, approximately 80% of Heilig-Meyers' sales have
been made through Heilig-Meyers' installment credit program. Although
Heilig-Meyers extends credit for terms up to 24 months, the average term of the
installment obligation for the fiscal year ended February 29, 1996, was
approximately 17 months. Heilig-Meyers accepts major credit cards in all of its
stores and, in addition, offers a revolving credit program featuring its private
label credit card. Heilig-Meyers promotes this program by direct mailings to
revolving credit customers of acquired stores and potential new customers in
targeted areas. Credit extension and collection of revolving accounts are
handled centrally from Heilig-Meyers' credit center located at its corporate
office.
Revenue is recognized on installment and credit sales upon approval and
establishment of a delivery date, which does not materially differ from
recognition at time of shipment. The effect of sales returns prior to shipment
date have been immaterial. Finance charges are included in revenues on a monthly
basis as earned. During fiscal 1996 finance income amounted to $182,426,000 or
approximately 13.4% of total revenues. Heilig-Meyers is unable to estimate
accurately the contribution of its financing operations to net income because
Heilig-Meyers does not specifically allocate various costs and expenses of
operations between retail sales and credit operations.
Heilig-Meyers offers, but does not require, one or more of the following
credit insurance products at the time of a credit sale: property, life,
disability and unemployment insurance. Heilig-Meyers' employees enroll customers
under a master policy issued by an unrelated third party insurer with respect to
these credit insurance products.
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DISTRIBUTION. Heilig-Meyers currently operates seven distribution centers
in the continental U.S. and one center in Puerto Rico. These centers are located
in Orangeburg, South Carolina; Rocky Mount, North Carolina; Russellville,
Alabama; Mount Sterling, Kentucky; Thomasville, Georgia; Moberly, Missouri;
Fontana, California; and Cidra, Puerto Rico. In fiscal 1995 Heilig-Meyers
expanded the Rocky Mount, Russellville, and Mount Sterling distribution centers
to meet increased volume demands. These additions added the equivalent of one
distribution center. During fiscal 1996, Heilig-Meyers expanded the Moberly
distribution center with a 150,000 square foot addition. Currently,
Heilig-Meyers' distribution network has the capacity to service over 800 stores
in the continental U.S. Heilig-Meyers plans to open an eighth distribution
center in Athens, Texas in late fiscal 1997 to service expected growth in Texas,
Oklahoma and Louisiana. With this addition, the number of stores Heilig-Meyers
will be able to service in the continental U.S. will increase to approximately
900.
Heilig-Meyers utilizes several sophisticated design and management
techniques to increase the operational efficiency of its distribution network.
These include cantilever racking and computer-controlled random access inventory
storage. Use of direct shipping and backhauling from vendors has also enhanced
distribution efficiency. Backhauling from vendors is the transportation of
purchased inventory to the distribution center while returning from normal store
deliveries. Heilig-Meyers backhauled approximately 18% of its purchased
inventory in the continental U.S. in fiscal 1996.
Typically, each of Heilig-Meyers' stores is located within 250 miles of one
of the seven distribution centers. Heilig-Meyers operates a fleet of trucks
which delivers merchandise to each store at least twice a week. Heilig-Meyers
believes the use of the distribution centers enables it to make available a
broader selection of merchandise, to reduce inventory requirements at individual
stores, to benefit from volume purchasing, to provide prompt delivery to
customers and to minimize freight costs.
CUSTOMER SERVICE. Heilig-Meyers believes that customer service is an
important element for success in the retail furniture business and therefore
provides a broad range of services to its customers. These include, in most
markets, free home delivery of major purchases and set-up in the home, as well
as liberal policies with respect to exchanges and returns. In addition,
Heilig-Meyers offers service agreements on certain merchandise sold in its
stores. Heilig-Meyers sells substantially all of its service policies to third
parties and recognizes service policy income on these at the time of sale. Prior
to fiscal 1995, Heilig-Meyers retained a portion of its service policies and
deferred recognition of the related income along with the direct cost of
acquiring the contracts. Income on these contracts is being earned over the life
of the service policies.
In addition, Heilig-Meyers provides repair services on virtually all
consumer electronics and mechanical items sold in its stores. Heilig-Meyers
operates service centers in Fayetteville, North Carolina, Moberly, Missouri and
Fontana, California. The Fayetteville Service Center occupies approximately
40,000 square feet and has the capacity to process 2,000 repair jobs a week. The
Moberly Service Center occupies 35,000 square feet adjacent to the Moberly,
Missouri Distribution Center and has the capacity to process 2,000 repair jobs a
week. The Fontana service center occupies 15,000 square feet and has the
capacity to process 500 repair jobs a week. The service centers provide service
for all consumer electronic items, most mechanical items (except major
appliances which are serviced locally) and watches. The service centers are also
authorized to perform repair work under certain manufacturers' warranties.
Service center trucks visit stores weekly, allowing one week turnaround on most
repair orders.
CORPORATE EXPANSION
Heilig-Meyers has grown from 322 stores at February 28, 1991, to 716 stores
at February 29, 1996. Over this time period, Heilig-Meyers has expanded from its
traditional Southeast operating region into the Midwest, West, Southwest, and
outside the continental United States into Puerto Rico.
Heilig-Meyers currently operates stores in Alabama, Arizona, Arkansas,
California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,
Kentucky, Louisiana, Mississippi, Missouri, Montana, Nevada, North Carolina, New
Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, Washington, West Virginia, Wisconsin and Puerto Rico. Growth in the
number of stores comes primarily from three sources: acquisition of chains or
independent stores, refurbishing of existing retail space and new construction.
During the fiscal year ended February 29, 1996, Heilig-Meyers opened 72 stores
and closed 3 stores for a net increase of 69 stores. Of these, 11 are in Puerto
Rico, 6 are in Illinois, 2 are in Ohio, 2 are in Iowa, 7 are in Mississippi, 5
are in Missouri, 9 are in Florida, 4 are in Georgia, 2 are in Arizona, 1 is in
South Carolina, 1 is in West Virginia, 1 is in Wisconsin, 4 are in California, 4
are in Kentucky, 5 are in North Carolina, 1 is in Colorado, 1 is in Texas, 1 is
in Oklahoma and 5 are in Louisiana. During fiscal 1996, 1 store in North
Carolina, 1 store in Illinois, and 1 store in California were closed. Of the 72
new stores, 41 were existing furniture stores acquired by Heilig-Meyers in
separate transactions, 23 were operations begun by Heilig-Meyers in vacant
existing buildings and 8 were prototype stores built according to Heilig-Meyers'
specifications.
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Heilig-Meyers constantly evaluates opportunities for further expansion of
its business. In addition to the Merger and acquisitions discussed under "Recent
Developments," Heilig-Meyers plans to add approximately 70 to 80 stores in the
continental U.S. during fiscal 1997 by seeking acquisitions of existing
businesses, obtaining and renovating existing retail space or constructing new
prototype stores in selected small towns. Most of this fiscal 1997 expansion is
expected to be focused in Texas, Louisiana, and Oklahoma due to the proximity of
the new Athens, Texas distribution center. In addition, Heilig-Meyers plans to
add two new stores in Puerto Rico during fiscal 1997. In selecting new
locations, Heilig-Meyers intends to follow its established strategy of generally
locating stores within 250 miles of a distribution center and in towns with
populations of 5,000 to 50,000 and over 25 miles from the closest metropolitan
market. Heilig-Meyers believes that it has substantial growth potential in its
present and contiguous market areas.
OTHER FACTORS AFFECTING THE BUSINESS OF HEILIG-MEYERS
SUPPLIERS. During the fiscal year ended February 29, 1996, Heilig-Meyers'
ten largest suppliers accounted for approximately 32% of merchandise purchased.
Heilig-Meyers has no long-term contracts for the purchase of merchandise. In the
past, Heilig-Meyers has not experienced difficulty in obtaining satisfactory
sources of supply and believes that adequate alternative sources of supply exist
for the types of merchandise sold in its stores. Neither Heilig-Meyers nor its
officers or directors have an interest, direct or indirect, in any of its
suppliers of merchandise other than minor investments in publicly held
companies.
SERVICE MARKS, TRADEMARKS AND FRANCHISE OPERATIONS. The marks
"Heilig-Meyers," "MacSaver," "MacSaver, design of a Scotsman," other marks
acquired through various acquisitions and Heilig-Meyers' distinctive logo are
federally registered service marks of Heilig-Meyers. Heilig-Meyers has
registrations for numerous other trademarks and service marks routinely used in
Heilig-Meyers' business. These registrations can be kept in force in perpetuity
through continued use of the marks and timely applications for renewal.
The mark "Berrios" is a federally registered service mark of Heilig-Meyers.
Heilig-Meyers has also applied for certain other trademarks and service marks
for use in connection with its stores in Puerto Rico.
EMPLOYEES. As of February 29, 1996, Heilig-Meyers employed approximately
13,500 persons full- or part-time in the continental United States, of whom
approximately 12,750 worked in Heilig-Meyers' stores, distribution centers and
service centers, with the balance in Heilig-Meyers' corporate offices. As of
February 29, 1996, Heilig-Meyers employed approximately 900 persons full or
part-time in Puerto Rico, of whom approximately 780 worked in the stores and
distribution center, with the balance in the corporate office. Heilig-Meyers is
not a party to any union contract and considers its relations with its employees
to be excellent.
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EXECUTIVE OFFICERS AND ADDITIONAL DIRECTORS
EXECUTIVE OFFICERS. The following table sets forth certain information with
respect to the executive officers of Heilig-Meyers as of November 1, 1996:
<TABLE>
<CAPTION>
YEARS WITH POSITIONS WITH HEILIG-MEYERS OR PRINCIPAL OCCUPATION FOR
NAME AGE HEILIG-MEYERS THE PAST FIVE YEARS AND OTHER INFORMATION
- ------------------------------ --- ------------- ---------------------------------------------------------------------------
<S> <C> <C> <C>
William C. DeRusha 46 27 Chairman of the Board since April 1986. Chief Executive Officer since April
1984. Director since January 1983.
Troy A. Peery, Jr. 50 24 President since April 1986. Chief Operating Officer since December 1987.
Director since April 1984.
James F. Cerza, Jr. 48 8 Executive Vice President since April 1995. Executive Vice President,
Operations from August 1989 to April 1995.
Joseph R. Jenkins 50 8 Executive Vice President and Chief Financial Officer since January 1988.
James R. Riddle 55 11 Executive Vice President since April 1995. Executive Vice President,
Marketing from January 1988 to April 1995.
William J. Dieter 57 23 Senior Vice President, Accounting since April 1986. Chief Accounting
Officer since 1975.
Roy B. Goodman 39 16 Senior Vice President, Finance since April 1995. Vice President from 1987
to April 1995, Secretary and Treasurer from 1987 to June 1996.
John M. Hamilton 46 24 Senior Vice President, Operations since October 1996. Regional Vice
President from 1986 to October 1996.
William E. Helms 48 17 Senior Vice President, Corporate Expansion since May 1987.
Curtis C. Kimbrell 51 5 Senior Vice President, Operations since April 1995. Regional Vice President
from March 1994 to April 1995. Division Supervisor from 1991 to March 1994.
H.C. Poythress 54 4 Senior Vice President, Advertising since March 1993. Vice President,
Advertising from July 1991 to March 1993. Vice President, Advertising,
Lowes, Inc. prior to July 1991.
John H. Sniffin 54 27 Senior Vice President, Government Relations since August 1992. Senior Vice
President, Merchandising Administration from March 1989 to August 1992.
A. R. Weiler 60 1 Senior Vice President, Merchandising since April 1995. Chairman and CEO of
Chittenden & Eastman from January 1985 to February 1995.
</TABLE>
ADDITIONAL DIRECTORS. Since the 1996 Annual Meeting, the Heilig-Meyers
Board of Directors has elected three additional directors: Beverley E. Dalton,
Charles A. Davis, and Eugene P. Trani. Information concerning these directors'
principal occupation for the past five years, age, other directorships, and
beneficial ownership of Heilig-Meyers Common Stock follows. Beverley E. Dalton,
48, is an owner of W.C. English, Inc., a general construction firm. She is the
beneficial owner of 1,000 shares of Heilig-Meyers Common Stock. Charles A.
Davis, 47, is a Limited Partner and Senior Director, Investment Banking of
Goldman, Sachs and Co. He is a director of Lechters, Inc., Media General, Inc.,
Merchants Bancshares, Inc., Progressive Corporation, and USLIFE Corporation.
Eugene P. Trani, Ph.D., 57, is President of Virginia Commonwealth University. He
is a director of Crestar Financial Corporation and Lawyers Title Corporation. He
is the beneficial owner of 124 shares of Heilig-Meyers Common Stock.
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CERTAIN DIFFERENCES IN THE RIGHTS OF HEILIG-MEYERS
AND RHODES SHAREHOLDERS
AT THE EFFECTIVE TIME, RHODES SHAREHOLDERS WILL BECOME SHAREHOLDERS OF
HEILIG-MEYERS, AND THEIR RIGHTS AS SHAREHOLDERS WILL BE DETERMINED BY
HEILIG-MEYERS' ARTICLES AND BYLAWS. IN ADDITION, RHODES IS A GEORGIA CORPORATION
GOVERNED BY THE GEORGIA BCC, AND HEILIG-MEYERS IS A VIRGINIA CORPORATION
GOVERNED BY THE VIRGINIA SCA. THE FOLLOWING IS A SUMMARY OF THE MATERIAL
DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS OF RHODES AND HEILIG-MEYERS. EXCEPT AS
SET FORTH BELOW, THERE ARE NO MATERIAL DIFFERENCES BETWEEN THE RIGHTS OF A
RHODES SHAREHOLDER UNDER RHODES' ARTICLES AND BY-LAWS AND THE GEORGIA BCC, ON
THE ONE HAND, AND THE RIGHTS OF A HEILIG-MEYERS SHAREHOLDER UNDER HEILIG-MEYERS'
ARTICLES AND BYLAWS AND THE VIRGINIA SCA, ON THE OTHER HAND. THIS SUMMARY DOES
NOT PURPORT TO BE A COMPLETE DISCUSSION OF, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO, THE GEORGIA BCC, THE VIRGINIA SCA AND THE ARTICLES AND BYLAWS OF
EACH CORPORATION. COPIES OF THE ARTICLES AND BYLAWS OF EACH CORPORATION ARE ON
FILE AT RHODES' AND HEILIG-MEYERS' RESPECTIVE PRINCIPAL EXECUTIVE OFFICES.
AUTHORIZED CAPITAL STOCK
HEILIG-MEYERS. The Heilig-Meyers Articles authorize 250,000,000 shares of
Heilig-Meyers Common Stock, of which 48,622,771 were outstanding as of October
31, 1996 and 3,000,000 shares of Heilig-Meyers Preferred Stock, par value $10.00
per share ("Heilig Meyers Preferred Stock"), of which no shares were outstanding
as of October 31, 1996. The Heilig-Meyers Board, without further action by the
shareholders, is authorized to designate and issue in series Heilig-Meyers
Preferred Stock and to fix as to any series the dividend rate, redemption
prices, preferences on dissolution, the terms of any sinking fund, conversion
rights, voting rights, and any other preferences or special rights and
qualifications. Shares of Heilig-Meyers Common Stock would be subject to the
preferences, rights and powers of any such shares of Heilig-Meyers Preferred
Stock as set forth in the Heilig-Meyers Articles and the resolutions
establishing one or more series of Heilig-Meyers Preferred Stock. Holders of the
Heilig-Meyers Preferred Stock, if and when issued, will be entitled to vote as
required under applicable Virginia law. Such law includes provisions for the
voting of the Heilig-Meyers Preferred Stock in the case of any amendment to the
Heilig-Meyers Articles affecting the rights of holders of the Heilig-Meyers
Preferred Stock, the payment of certain stock dividends, merger or
consolidation, sale of all or substantially all of Heilig-Meyers' assets and
dissolution. There are no agreements or understandings for the designation of
series of Heilig-Meyers Preferred Stock or the issuance of shares thereunder,
except pursuant to the Heilig-Meyers Shareholders' Rights Plan discussed below.
RHODES. The Rhodes Articles authorize the issuance of up to 20,000,000
shares of Rhodes Common Stock, of which 9,175,107 shares were outstanding as of
the Rhodes Record Date, 2,000 shares of Preferred Stock, without par value, of
which no shares are outstanding, and 1,000 shares of Class A Preferred Stock,
par value $.01 per share, of which no shares are outstanding.
SHAREHOLDER PREEMPTIVE RIGHTS
HEILIG-MEYERS. The Heilig-Meyers Articles provide that the holders of the
capital stock of Heilig-Meyers will have no preemptive or preferential rights to
purchase or subscribe to (i) any shares of capital stock of Heilig-Meyers, (ii)
any warrants, rights or options to purchase capital stock of Heilig-Meyers, or
(iii) any obligations convertible into such capital stock or into warrants,
rights or options to purchase such capital stock.
RHODES. The Rhodes Articles provide that no holder of shares of any class
of the capital stock of Rhodes shall have preemptive rights, and Rhodes shall
have the right to issue and to sell to any person or persons any shares of its
capital stock or any option rights or any securities having conversion or option
rights, without first offering such shares, rights, or securities to any holders
of the shares of any class of capital stock of Rhodes.
SHAREHOLDERS' RIGHTS PLAN
HEILIG-MEYERS. On February 17, 1988 the Heilig-Meyers Board declared a
dividend distribution of one preferred share purchase right (a "Right") on each
outstanding share of Heilig-Meyers Common Stock pursuant to a Shareholders'
Rights Plan. The Rights are exercisable only upon the attainment of, or the
commencement of a tender offer to attain, a specified ownership interest in
Heilig-Meyers by a person or group. When exercisable, each Right would entitle
its holder to purchase one-hundredth of a newly issued share of cumulative
participating Heilig-Meyers Preferred Stock, Series A, par value $10.00 per
share (the "SERIES A PREFERRED STOCK") at an exercise price of $75, subject to
adjustment. A total 750,000 shares of Series A Preferred Stock has been
reserved. Each share of Series A Preferred Stock will entitle the holder to 100
votes and has an aggregate dividend rate of 100 times the amount paid to holders
of Heilig-Meyers Common Stock. Upon occurrence of certain events, each holder of
a Right will become entitled to purchase shares of Heilig-Meyers Common Stock
having a
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value of twice the Right's then current exercise price in lieu of Series A
Preferred Stock. Each share of Heilig-Meyers Common Stock issued in the Merger
will have the one Right attached to it.
RHODES. Rhodes has not adopted a shareholders' rights plan.
DIRECTORS; VACANCIES
HEILIG-MEYERS. The Virginia SCA provides that the board of directors of a
Virginia corporation may consist of a number of individuals specified in or
fixed in accordance with the bylaws of the corporation or, if not specified or
fixed in accordance with the bylaws, then a number specified in or fixed in
accordance with the articles of incorporation of the corporation. The number of
directors may be increased or decreased by amendment to the bylaws of the
corporation, unless the articles of the corporation provide that such change may
be made only by amendment of the articles.
The Heilig-Meyers Bylaws, as amended August 28, 1996, provide that the
Heilig-Meyers Board will consist of 14 persons, none of whom need be residents
of Virginia or shareholders of Heilig-Meyers, and that the number of directors
may be increased by the Heilig-Meyers Board by not more than 30% of the number
of directors last elected by the shareholders. The Heilig-Meyers Bylaws provide
that any vacancy in the Heilig-Meyers Board may be filled by the majority vote
of the remaining directors, even though less than a quorum. The Heilig-Meyers
Bylaws state that any decrease in the number of directors created by amending
the Heilig-Meyers Bylaws may not change the term of any incumbent director.
At the 1996 annual meeting of shareholders of Heilig-Meyers, 11 directors
were elected to the Heilig-Meyers Board. At a regular meeting of the
Heilig-Meyers Board held on August 28, 1996, the Heilig-Meyers Board approved an
amendment to the Heilig-Meyers Bylaws that increased the size of the
Heilig-Meyers Board to 14 directors. At the same meeting the Heilig-Meyers Board
elected three new directors to serve until the next annual meeting of
shareholders. Consequently, no additional directors may be added to the
Heilig-Meyers Board without shareholder approval until after the next meeting of
shareholders at which directors are elected.
RHODES. The Rhodes Bylaws provide for a Board of Directors of not less than
five nor more than nine directors, the exact number of directors to be fixed
from time to time by the Board of Directors. The Rhodes Bylaws provide that the
directors shall be elected at the annual meeting of the shareholders and shall
serve until the next annual meeting and until their successors shall be elected
and qualified. The Georgia BCC provides that, unless otherwise provided in the
articles of incorporation, directors are elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present and that shareholders do not have a right to cumulate their
votes for directors unless the articles of incorporation so provide. The Rhodes
Articles do not provide for cumulative voting. The Rhodes Bylaws provide that
any vacancy occurring in the Board of Directors by reason of death, resignation
or incapacity to serve may be filled by the affirmative vote of a majority of
the remaining directors, or, if the vacancy is not so filled, by the
shareholders. The directors may fill a vacancy created by an increase in the
number of directors resulting from an amendment of the Rhodes Bylaws, but only
for a term of office continuing until the next annual election of directors by
the shareholders and the election and qualification of his successor.
REMOVAL OF DIRECTORS
HEILIG-MEYERS. The Heilig-Meyers Bylaws provide that a member of the
Heilig-Meyers Board may be removed with or without cause by a vote of the
holders of a majority of the number of shares entitled to vote at an election of
directors. The Virginia SCA provides that a director may be removed by
shareholders only at a meeting called expressly for that purpose at which a
quorum is present. The Virginia SCA provides that if a director is elected by a
voting group of shareholders, only the shareholders of that voting group may
participate in the vote to remove such director.
RHODES. The Rhodes Bylaws provide that, at any meeting of the shareholders,
any one or more directors may be removed from office, with or without cause, by
the affirmative vote of the holders of a majority of the shares of the
corporation entitled to vote at an election of directors. The Georgia BCC
provides that a director may be removed by the shareholders only at a meeting
called for the purpose of removing him. The Georgia BCC provides that if a
director is elected by a voting group of shareholders, only the shareholders of
that voting group may participate in the vote to remove him.
VOTING RIGHTS
HEILIG-MEYERS. The Heilig-Meyers Articles provide that holders of
Heilig-Meyers Common Stock are entitled to one vote for each share of
Heilig-Meyers Common Stock held by them with respect to all matters upon which
they are entitled to vote.
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RHODES. The Rhodes Articles provide that each share of Rhodes Common Stock
is entitled to one vote on each matter submitted to a vote of the shareholders
of Rhodes.
SHAREHOLDER MEETINGS
HEILIG-MEYERS. Under the Virginia SCA, special meetings of shareholders may
be called, in case of corporations with more than 35 shareholders, only by the
chairman of the board of directors, the president, the board of directors or
persons authorized by the articles of incorporation or bylaws. The Heilig-Meyers
Bylaws provide that special meetings of shareholders may be called by the
Chairman of the Board and Chief Executive Officer, the President, the Secretary
or the Heilig-Meyers Board.
RHODES. The Georgia BCC provides that a corporation shall hold a special
meeting of shareholders on call of its board of directors or the person or
persons authorized to do so by the articles of incorporation or bylaws or if the
holders of at least 25% or such greater or lesser percentage as may be provided
in the articles of incorporation or bylaws, of all the votes entitled to be cast
on any issue proposed to be considered at the proposed special meeting, deliver
to the corporation's secretary one or more written demands for the meeting
describing the purpose for which it is to be held. The Rhodes Bylaws provide
that special meetings of the shareholders or a special meeting in lieu of the
annual meeting of the shareholders may be called by the Chairman of the Rhodes
Board of Directors or upon the written request of the holders of not less than
25% of the outstanding shares of the corporation entitled to vote in an election
of directors.
NOMINATION OF DIRECTORS BY SHAREHOLDERS
HEILIG-MEYERS. The Heilig-Meyers Bylaws provide that a holder of
Heilig-Meyers capital stock entitled to vote in the election of directors may
nominate one or more persons for election as a director at an annual or special
meeting of shareholders only if written notice of such shareholder's intent to
make such nomination has been given either by personal delivery to the Secretary
of Heilig-Meyers not later than the close of business on the tenth day following
the date on which notice of such meeting is first mailed to shareholders or by
United States mail, postage prepaid, to the Secretary of Heilig-Meyers
postmarked not later than the tenth day following the date on which notice of
such meeting is first mailed to shareholders. Each notice must set forth: (1)
the name and address of the shareholder who intends to make the nomination; (2)
the name, address, and principal occupation of each proposed nominee; (3) a
representation that the shareholder is entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; and (4) the consent of each proposed nominee to
serve as a director of Heilig-Meyers if so elected. The Chairman of the meeting
may refuse to acknowledge the nomination of any person not made in compliance
with this procedure.
RHODES. Neither the Georgia BCC nor the Rhodes Bylaws specifically provide
for nomination of directors by shareholders.
AMENDMENT OF CERTIFICATE OR ARTICLES AND BYLAWS
HEILIG-MEYERS. The Heilig-Meyers Bylaws provide that the Heilig-Meyers
Bylaws may be repealed or changed, and new bylaws made, by the shareholders
entitled to vote at any annual or special meeting, or by the Heilig-Meyers Board
at any regular or special meeting. Bylaws made by the directors may be repealed
or changed by the shareholders; and bylaws made by the shareholders may be
repealed or changed by the directors, except as, and to the extent that, the
shareholders prescribe that the bylaws, or any specified bylaw, may not be
altered, amended or repealed by the directors.
The Heilig-Meyers Articles contain a provision that reduces the shareholder
vote required for amending the Heilig-Meyers Articles in certain circumstances
from the two-thirds vote generally applicable to a simple majority vote. The
majority vote will be applicable except when the effect of the amendment is (i)
to reduce the shareholder vote required to approve a merger, a statutory share
exchange, a sale of all or substantially all of the assets of Heilig-Meyers or
the dissolution of Heilig-Meyers, or (ii) to delete all or any part of such
provision. In addition, the vote required by other provisions of the Heilig-
Meyers Articles is necessary if such provisions require the approval of more
than a majority of the votes entitled to be cast.
RHODES. The Georgia BCC provides that, unless the articles of incorporation
provide otherwise, a corporation's board of directors may adopt one or more
amendments to the corporation's articles of incorporation without shareholder
action in order to extend the duration of the corporation, to delete the names
and addresses of the initial directors, to delete the name and address of the
initial registered agent or registered office, to delete the name and address of
each incorporator, to delete the mailing address of the initial principal office
of the corporation, to change each issued or each issued and unissued authorized
share of an outstanding class into a greater number of whole shares if the
corporation has only shares of that class outstanding, to change or eliminate
the par value of each issued and unissued share of an outstanding class if the
corporation
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has only shares of that class outstanding, or to change the corporate name. All
other amendments to the articles of incorporation must be recommended to the
shareholders by the board of directors (except under certain special
circumstances) and, unless the articles of incorporation or the board of
directors require a greater vote or a vote by voting groups, the amendment to be
adopted must be approved by a majority of the votes entitled to be cast on the
amendment by each voting group entitled to vote on the amendment. The Rhodes
Articles do not address the issue of amendment.
The Rhodes Articles provide that the Board of Directors may adopt, amend or
repeal the Bylaws of the Corporation in accordance with the provisions of the
Bylaws. The Rhodes Bylaws provide that the bylaws may be altered, amended,
repealed or added to or new bylaws may be adopted by the vote of the Board of
Directors at any regular or special meeting of the Board, except for any bylaw
altered, amended, repealed, added to or made by the shareholders of Rhodes if it
is expressly provided by the shareholders that such bylaws may be altered,
amended, repealed, added to or made only by the shareholders. The Rhodes Bylaws
may also be altered, amended, repealed or added to or new bylaws may be adopted
by the vote of the shareholders of Rhodes at any annual meeting or special
meeting.
DIRECTOR EXCULPATION AND INDEMNIFICATION
HEILIG-MEYERS. Under the Virginia SCA a director of a Virginia corporation
is not liable for any action taken as a director, or any failure to take any
action, if the director performed his duties as a director in accordance with
his good faith business judgment of the best interests of the corporation.
Unless a director has knowledge of information concerning the matter in question
that makes reliance unwarranted, a director is entitled to rely on information,
opinions, reports or statements, including financial statements and other
financial data, if prepared by (i) one or more officers or employees of the
corporation whom the director believes, in good faith, to be reliable and
competent in the matters presented, (ii) legal counsel, public accountants, or
other persons as to matters the director believes, in good faith, are within the
person's professional or expert competence, or (iii) a committee of the board of
directors of which the director is not a member if the director believes, in
good faith, that the committee merits confidence. The Heilig-Meyers Articles
provide that in every instance permitted by the Virginia SCA the liability of a
director of Heilig-Meyers to Heilig-Meyers or its shareholders arising out of a
single transaction, occurrence or course of conduct shall be eliminated.
The Heilig-Meyers Articles require Heilig-Meyers to indemnify any
individual who is, was or is threatened to be made a party to a proceeding
(including a proceeding by or in the right of Heilig-Meyers) because such
individual is or was a director of the Corporation or because such individual is
or was serving Heilig-Meyers or any other legal entity in any capacity at the
request of Heilig-Meyers while a director of Heilig-Meyers against all
liabilities and reasonable expenses incurred in the proceeding, except such
liability and expenses as are incurred because of such individual's willful
misconduct or knowing violation of criminal law.
RHODES. The Georgia BCC provides that a director shall discharge his duties
as a director, including his duties as a member of a committee, in a manner he
believes in good faith to be in the best interest of the corporation and with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances. In discharging his duties a director is entitled to rely
upon information, opinions, reports, or statements, including financial
statements and other financial data, if prepared or presented by one or more
officers or employees of the corporation whom the director reasonably believes
to be reliable and competent in the matters presented, legal counsel, public
accountants, investment bankers or other persons as to matters the director
reasonably believes are within the person's professional or expert competence or
a committee of the board of directors of which he is not a member if the
director reasonably believes the committee merits confidence but is not entitled
to so rely if he has knowledge concerning the matter in question that makes
reliance that would otherwise be so permitted unwarranted. A director is not
liable to the corporation or to its shareholders for any action taken as a
director, or any failure to take any action, if he performed the duties of his
office in compliance with the above provisions of the Georgia BCC. The Rhodes
Articles provide that a director of Rhodes shall not be liable to Rhodes or its
shareholders for monetary damages, for breach of duty of care or other duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the Georgia BCC.
The Georgia BCC provides that a corporation may indemnify an individual who
is a party to a proceeding because he or she is or was a director against
liability incurred in the proceeding if such individual conducted himself or
herself in good faith and such individual reasonably believed, in the case of
conduct in his or her official capacity, that such conduct was in the best
interests of the corporation, in all other cases, that such conduct was at least
not opposed to the best interests of the corporation and, in the case of any
criminal proceeding, that the individual had no reasonable cause to believe such
conduct was unlawful. As an exception to this rule, the Georgia BCC provides
that a corporation may not indemnify a director in connection with a proceeding
by or in the right of the corporation, except for reasonable expenses incurred
in connection with
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the proceeding if it is determined that the director has met the relevant
standard of conduct under the Georgia BCC or in connection with any proceeding
with respect to conduct for which he was adjudged liable on the basis that
personal benefit was improperly received by him, whether or not acting in his
official capacity. The Georgia BCC provides for mandatory indemnification of a
director who was wholly successful on the merits or otherwise in the defense of
any proceeding to which he or she was a party because he or she was a director
of the corporation against reasonable expenses incurred by the director in
connection with the proceeding.
The Georgia BCC provides that if authorized by the articles of
incorporation or a bylaw, contract or resolution approved or ratified by the
shareholders by a majority of the votes entitled to be cast, a corporation may
indemnify or obligate itself to indemnify a director made a party to a
proceeding including a proceeding brought by or in the right of the corporation,
without regard to the above limitations of the Georgia BCC, but shares owned or
voted under the control of a director who at the time does not qualify as a
disinterested director with respect to any existing or threatened proceeding
that would be covered by the authorization may not be voted on the
authorization. As an exception, the Georgia BCC provides that a corporation
shall not so indemnify a director for any liability incurred in a proceeding in
which the director is adjudged liable to the corporation or is subjected to
injunctive relief in favor of the corporation for any appropriation, in
violation of the director's duties, of any business opportunity of the
corporation, for acts or omissions which involve intentional misconduct or a
knowing violation of law, for unlawful distributions to shareholders or for any
transaction from which he received an improper personal benefit.
The Georgia BCC provides that a corporation may indemnify and advance
expenses to an officer of the corporation who is a party to a proceeding because
he or she is an officer of the corporation to the same extent as a director and,
if he or she is not a director (or, if he or she is also a director, if the sole
basis on which he or she is made a party to the proceeding is an act or omission
solely as an officer), to such further extent as may be provided by the articles
of incorporation, the bylaws, a resolution of the board of directors, or
contract except for liability arising out of conduct that constitutes
appropriation, in violation of his or her duties, of any business opportunity of
the corporation, acts or omissions which involve intentional misconduct or
knowing violation of law, for unlawful distributions to shareholders or for
receipt of an improper personal benefit. An officer who is not a director is
also entitled under the Georgia BCC to mandatory indemnification to the same
extent mandatory indemnification is required for a director. Under the Georgia
BCC, a corporation may also indemnify and advance expenses to an employee or
agent who is not a director to the extent, consistent with public policy, that
may be provided by its articles of incorporation, bylaws, general or specific
action of its board of directors, or contract.
The Rhodes Bylaws provide that Rhodes shall indemnify each person who is or
was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise to the fullest extent permitted under the Georgia BCC.
ACTIONS BY SHAREHOLDERS WITHOUT A MEETING
HEILIG-MEYERS. The Virginia SCA provides that any action required or
permitted to be taken at a shareholders meeting may be taken without a meeting
and without action by the board of directors if the action is taken by all the
shareholders entitled to vote on the action. The action must be evidenced by one
or more written consents describing the action taken, signed by all the
shareholders entitled to vote on the action, and delivered to the secretary of
the corporation for inclusion in the minutes or filing with the corporate
record.
RHODES. The Georgia BCC provides that action required or permitted by the
Georgia BCC to be taken at a shareholders' meeting may be taken without a
meeting if the action is taken by all the shareholders entitled to vote on the
action. The action must be evidenced by one or more written consents describing
the action taken, signed by shareholders entitled to take action without a
meeting and delivered to the corporation for inclusion in the minutes or filing
with the corporate records.
PAYMENT OF DIVIDENDS
HEILIG-MEYERS. Under the Virginia SCA, a corporation may pay dividends or
any other distribution to shareholders (i) unless, after the distribution, (a)
the corporation would not be able to pay its debts as they become due in the
usual course of business or (b) the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy any preferential rights upon dissolution, or (ii) unless otherwise
provided in the corporation's articles of incorporation. In addition, the
Virginia SCA provides that share dividends may be issued unless the articles of
incorporation provide otherwise. Shareholders of Heilig-Meyers Common Stock are
entitled to such dividends as may be declared by the Heilig-Meyers Board out of
funds legally available therefor after payment of dividends on any outstanding
Preferred Stock.
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RHODES. The Georgia BCC provides that a board of directors may authorize
and the corporation may make distributions to its shareholders subject to
restriction by the articles of incorporation and provided that no distribution
may be made if, after giving it effect, the corporation would not be able to pay
its debts as they become due in the usual course of business or the
corporation's total assets would be less than the sum of its total liabilities
plus (unless the articles of incorporation permit otherwise) the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. The Rhodes Articles provide that, in addition to the powers to
make distributions and purchase its own shares conferred generally by law,
Rhodes shall have the power to make distributions out of its capital surplus,
and to purchase Rhodes' own shares out of its unreserved and unrestricted
capital surplus. The Rhodes Bylaws provide that, before declaring any dividends
or making any distribution of profits, the Board of Directors may fix and set
aside from time to time such sums over and above paid-in capital of the
corporation as a reserve for any proper purpose, including expansion,
maintenance, or contingencies, as the Board may deem desirable, and the Board
may from time to time increase, diminish and vary any such sums to be set aside.
DISSOLUTION AND LIQUIDATION
HEILIG-MEYERS. The Virginia SCA provides that a corporation's board of
directors may propose dissolution of the corporation for submission to the
shareholders. Unless the board of directors requires a greater vote, dissolution
to be authorized must be approved by the holders of more than two-thirds of all
votes entitled to be cast on the proposal to dissolve. The Virginia SCA permits
a corporation to provide in its articles of incorporation for a greater or
lesser vote so long as the vote provided for is not less than a majority of all
votes cast on the proposed dissolution by each voting group entitled to vote on
the transaction at a meeting at which a quorum of the voting group exists. The
Heilig-Meyers Articles do not alter the statutory procedure or requirements for
dissolution or liquidation.
RHODES. The Georgia BCC provides that a corporation's board of directors
may propose dissolution for submission to the shareholders and that for a
proposal to be adopted, the shareholders entitled to vote must approve the
proposal to dissolve, unless the articles of incorporation or the board of
directors requires a greater vote or a vote by voting groups, by a majority of
all the votes entitled to be cast on that proposal. The Rhodes Articles do not
alter the statutory procedure or requirements for dissolution or liquidation.
MERGER, CONSOLIDATION, AND SALES OF ASSETS
HEILIG-MEYERS. The Virginia SCA provides that, with certain exceptions, a
merger, share exchange, and sale or other disposition of all or substantially
all of a corporation's assets other that in the ordinary course of business
requires the approval of each voting group entitled to vote group thereon by
more than two-thirds of all votes entitled to be cast by that voting group
unless a greater or lesser (but not less than a majority of votes cast by such
voting group) vote is required by the articles of incorporation or unless a
greater vote is required by the board of directors. Action by the shareholders
of the surviving corporation is not required if (i) articles of incorporation of
the surviving corporation will not differ significantly from its articles before
the merger; (ii) each shareholder of the surviving corporation whose shares were
outstanding before the merger will hold the same number of shares with identical
rights and preferences after the merger; and (iii) the number of voting or
participating shares outstanding immediately after the merger, plus the number
of voting or participating shares issuable as a result of the merger, either by
the conversion of shares issued pursuant to the merger or the exercise of
warrants issued pursuant to the merger, will not exceed by more than 20% the
total number of voting or participating shares, respectively, of the surviving
corporation outstanding immediately before the merger. The Heilig-Meyers
Articles do not alter the provisions of the Virginia SCA regarding shareholder
approval required in the event of a merger, share exchange, or sale or other
disposition of all or substantially all of the Heilig-Meyers' assets.
RHODES. The Georgia BCC provides that one or more corporations may merge
into another corporation if the board of directors of each corporation adopts a
plan of merger and the shareholders of each corporation approve the plan of
merger by (a) a majority of all the votes entitled to be cast on the plan by all
shares entitled to vote on the plan, voting as a single group, and (b) a
majority of all the votes entitled to be cast by holders of the shares of each
voting group entitled to vote separately on the plan as a voting group by the
articles of incorporation unless the Georgia BCC, the articles of incorporation,
the bylaws, or the board of directors requires a greater vote or a vote by
voting groups; PROVIDED, HOWEVER, that action by the shareholders of the
surviving corporation on a plan of merger is not required if (i) the articles of
incorporation of the surviving corporation will not differ (except for such
changes which are authorized by the Georgia BCC to be made without action of
shareholders) from its articles before the merger, (ii) each share of stock of
the surviving corporation outstanding immediately before the effective date of
the merger is to be an identical outstanding or reacquired share immediately
after the merger
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and (iii) the number and kind of shares outstanding immediately after the
merger, plus the number and kind of shares issuable as a result of the merger
and by the conversion of securities issued pursuant to the merger or the
exercise of rights and warrants issued pursuant to the merger, will not exceed
the total number and kind of shares of the surviving corporation authorized by
its articles of incorporation immediately before the merger. Similarly, a
corporation may sell, lease, exchange or dispose of all or substantially all of
the property of a corporation if approved by the board of directors and the
shareholders approve such transaction by a vote of at least a majority of all
votes entitled to be cast on the transaction. The Rhodes Articles do not provide
for any exceptions or additions to the Georgia BCC with respect to mergers or
with respect to the sale, lease, exchange or disposition of all or substantially
all of its property.
BUSINESS COMBINATIONS AND TRANSACTIONS WITH CERTAIN PERSONS
HEILIG-MEYERS. The Virginia SCA contains provisions governing "Affiliated
Transactions." These provisions, with several exceptions discussed below,
require approval of certain material transactions between a Virginia corporation
and any beneficial holder of more than 10% of any class of its outstanding
voting shares (an "Interested Shareholder") by the holders of at least
two-thirds of the remaining voting shares. Affiliated Transactions subject to
this approval requirement includes mergers, share exchanges, material
dispositions of corporate assets not in the ordinary course of business, any
dissolution of the corporation proposed by or on behalf of an Interested
Shareholder, or any reclassification, including reverse stock splits,
recapitalization or merger of the corporation with its subsidiaries which
increases the percentage of voting shares owned beneficially by an Interested
Shareholder by more than 5%.
For three years following the time that Interested Shareholder becomes an
owner of 10% of the outstanding voting shares, a Virginia corporation cannot
engage in an Affiliated Transaction with such Interested Shareholder without
approval of two-thirds of the voting shares other than those shares beneficially
owned by the Interested Shareholder, and majority approval of the "Disinterested
Directors". A Disinterested Director means, with respect to a particular
Interested Shareholder, a member of the Heilig-Meyers Board who was (1) a member
on the date on which an Interested Shareholder became an Interested Shareholder
and (2) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested Directors then
on the Board. At the expiration of the three year period, the statute requires
approval of Affiliated Transactions by two-thirds of the voting shares other
than those beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to
transactions proposed after the three year period has expired and require either
that the transaction be approved by a majority of the corporation's
Disinterested Directors or that the transaction satisfy the fair-price
requirements of the statute. In general, the fair-price requirements provide
that in a two-step acquisition transaction, the Interested Shareholder must pay
the shareholders in the second step either the same amount of cash or the same
amount and type of consideration paid to acquire the Virginia corporation's
shares in the first step.
None of the foregoing limitations and special voting requirements applies
to a transaction with an Interested Shareholder who has been an Interested
Shareholder since the effective date of the statute (January 26, 1988) or who
became an Interested Shareholder by gift or inheritance from such a person or
whose acquisition of shares making such person an Interested Shareholder was
approved by a majority of the Virginia's corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation can adopt an amendment to its articles of
incorporation or bylaws providing that the Affiliated Transactions provisions
will not apply to the corporation. Heilig-Meyers has not "opted out" of the
Affiliated Transactions provisions.
RHODES. Rhodes has elected in the Rhodes Bylaws to be subject to certain
optional provisions of the Georgia BCC which impose additional voting
requirements and substantive and procedural restrictions on the ability of
Rhodes to enter into certain transactions with persons who are deemed to be
"interested shareholders." These provisions fall into two categories: (i) fair
price provisions which are focused on the substantive fairness of transactions
consummated between a corporation and an interested shareholder and (ii)
provisions which are designed to encourage any person, before acquiring 10% of
voting stock of a resident domestic corporation, to seek approval of its board
of directors for the terms of any contemplated business combination.
Rhodes has elected in the Rhodes Bylaws to be subject to certain provisions
of the Georgia BCC which subject "business combinations" (as defined in the
Georgia BCC) involving "interested shareholders" (generally, a 10% or greater
shareholder) to certain additional restrictions and "fair price" requirements.
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The Georgia BCC provides that, unless certain "fair price" requirements and
procedures are followed (as described below), a "business combination" shall, in
addition to any vote otherwise required by law or the articles of incorporation
of the corporation, be unanimously approved by the "continuing directors"
(defined as a director who is not an affiliate or associate of an interested
shareholder or any of its affiliates, other than the corporation, and who was a
director of the corporation prior to the date an interested shareholder first
became an interested shareholder) provided that the continuing directors
constitute at least three members of the board of directors at the time of such
approval, or recommended by at least two-thirds of the continuing directors and
approved by a majority of the votes entitled to be cast by holders of voting
shares, other than voting shares beneficially owned by the interested
shareholder who is, or whose affiliate is, a party to the business combination.
The additional vote described above is not required for business
combinations in which (a) the consideration per share to be received by
shareholders of the corporation is at least equal to the greater of (i) the
highest per share price paid by the interested shareholder for shares acquired
within two years prior to the announcement date of the business combination or
in the transaction in which it became an interested shareholder, whichever is
higher or (ii) the "fair market value" per share of the shares owned by such
shareholders, as determined with reference to the announcement date of the
business combination or the highest closing price of such securities on the date
and within a 29 day period preceding the date on which the interested
shareholder became an interested shareholder, (b) the consideration to be
received by holders of any class or series of outstanding shares is to be in
cash or in the same form as the interested shareholder has previously paid for
shares of the same class or series, (c) after the interested shareholder has
become an interested shareholder and prior to the consummation of such business
combination, unless approved by a majority of the continuing directors, there
shall not have been (i) certain specified changes to the dividends paid by the
corporation (unless the interested shareholder did not vote as a director in
favor of certain of such changes and disapproved in writing thereof), (ii) an
increase in the interested shareholder's percentage ownership of any class or
series of shares of the corporation by more than 1% in any 12 month period, and
(d) after the interested shareholder has become an interested shareholder, the
interested shareholder has not received the benefit, except proportionately as a
shareholder, of any loans, advances, guarantees, pledges or other financial
assistance or tax advantages provided by the corporation or any of its
subsidiaries.
In addition to the above additional voting requirements, Rhodes has elected
in its bylaws to be subject to provisions of the Georgia BCC which provide that
a resident domestic corporation (the definition of which includes Rhodes) may
not engage in any business combination with any interested shareholder for a
period of five years following the time that such shareholder became an
interested shareholder unless (i) prior to such time the resident domestic
corporation's board of directors approved either the business combination or the
transaction which resulted in the shareholder becoming an interested
shareholder, (ii) in the transaction which resulted in the shareholder becoming
an interested shareholder the interested shareholder became the beneficial owner
of at least 90% (excluding shares owned by directors, officers, subsidiaries and
certain employee stock ownership plans) of the voting stock of the resident
domestic corporation outstanding at the time the transaction commenced, or (iii)
subsequent to becoming an interested shareholder, such shareholder acquired
additional shares resulting in the interested shareholder being the beneficial
owner of at least 90% (excluding shares owned by directors, officers,
subsidiaries and certain employee stock ownership plans) of the outstanding
voting stock of the resident domestic corporation, and the business combination
was approved at an annual or special meeting of the shareholders by the holders
of a majority of the voting stock entitled to vote thereon, excluding from such
vote the voting stock beneficially owned by the interested shareholder or by
directors, officers, subsidiaries, and certain employee stock ownership plans.
CONTROL SHARE ACQUISITIONS
HEILIG-MEYERS. The Virginia SCA provides that shares acquired in a
transaction that would cause the acquiring person's voting strength to meet or
exceed any of three thresholds (20%, 33-1/3% or 50%) have no voting rights
unless granted by a majority vote of shares not owned by the acquiring person or
any officer or employee-director of the Virginia corporation. This provision
empowers an acquiring person to require the Virginia corporation to hold a
special meeting of shareholders to consider the matter within 50 days of its
request. The board of directors of Virginia corporation can opt out of this
provision at any time before four days after receipt of a control share
acquisition notice.
RHODES. The Georgia BCC does not contain any "control share acquisition"
provisions.
DISSENTERS' RIGHTS OF APPRAISAL
HEILIG-MEYERS. Under the Virginia SCA, a shareholder of a Virginia
corporation is entitled to dissent from, and to receive payment of the "fair
value" of his shares in the event of, any of the following corporate
transactions;
59
<PAGE>
(a) consummation of a merger to which the corporation is a party, provided that
either (i) shareholder approval is required for the merger pursuant to the
Virginia SCA or the corporation's articles of incorporation and the shareholder
is entitled to vote or (ii) the corporation is a subsidiary being merged with
its parent pursuant to a particular Virginia SCA provision for such
transactions; (b) consummation of a plan of share exchange to which the
corporation is a party as the party whose shares will be acquired, provided that
the shareholder is entitled to vote on the plan; (c) consummation of the sale or
exchange of all or substantially all the property of the corporation, if the
shareholder is entitled to vote on the transaction or the transaction is in
furtherance of a dissolution of which the shareholder is entitled to vote, and
provided that the transaction is neither (i) a transaction pursuant to court
order nor (ii) a transaction for cash pursuant to a plan by which all or
substantially all of the net proceeds will be distributed to shareholders within
one year, or (d) any corporate action taken pursuant to a shareholder vote, to
the extent that the articles of incorporation, the bylaws or a resolution of the
board of directors provides that voting and nonvoting shareholders are entitled
to dissent and obtain payment for their shares.
With respect to shares of any class or series that are either listed on a
national securities exchange or on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or held by at least 2,000 record
shareholders, dissenters' rights are not available to the holders of such shares
by reason of a merger, share exchange or sale or exchange or property unless:
(a) the articles of incorporation of the corporation issuing such shares provide
otherwise; (b) in the case of a merger or share exchange, the holders of such
shares are required to accept anything other than (i) cash, (ii) shares or
membership interests of the surviving or acquiring corporation or limited
liability company or shares or membership interests of any other corporation or
limited liability company that are either listed subject to notice of issuance
on a national securities exchange or held by more than 2,000 record shareholders
or members or (iii) a combination of cash and such shares or membership
interests; or (c) the transaction is an Affiliated Transaction and has not been
approved by a majority of the Disinterested Directors as defined in the Virginia
SCA.
A shareholder who has the right to dissent from a transaction and receive
payment of the "fair value" of his shares must follow specific procedural
requirements as set forth in the Virginia SCA in order to maintain such right
and obtain such payment.
RHODES. The Georgia BCC provides that a record shareholder of a corporation
is entitled to dissent from, and obtain payment of the fair value of his shares
in the event of, consummation of a plan of merger to which the corporation is a
party if approval of the shareholders of the corporation is required for the
merger and the shareholder is entitled to vote on the merger or if the
corporation is a subsidiary that is merged with its parent, consummation of a
plan of share exchange to which the corporation is a party as the corporation
whose shares will be acquired, if the shareholder is entitled to vote on the
plan, consummation of a sale or exchange of all or substantially all of the
property of the corporation if a shareholder vote is required on the sale or
exchange, or certain amendments to the articles of incorporation that materially
and adversely affect certain rights in respect of a dissenter's shares. A
shareholder entitled to dissent and obtain payment for his shares under the
Georgia BCC may not challenge the corporate action creating his entitlement
except for failure to comply with the procedural requirements of the Georgia BCC
or the corporation's articles of incorporation or bylaws or in cases of fraud or
deception. The Georgia BCC provides that there shall be no right of dissent in
favor of the holder of shares of any class or series which were either listed on
a national securities exchange or held of record by more than 2,000 shareholders
unless, in the case of a plan of merger or share exchange, the holders of shares
of the class or series are required under the plan of merger or share exchange
to accept for their shares anything except shares of the surviving corporation
or another publicly held corporation which at the effective date of the merger
or share exchange are either listed on a national securities exchange or held of
record by more than 2,000 shareholders except for scrip or cash payments in lieu
of fractional shares, or the articles of incorporation or a resolution of the
board of directors approving the transaction provides otherwise.
INTERESTED DIRECTOR TRANSACTIONS
HEILIG-MEYERS. The Virginia SCA provides that a transaction with a
corporation in which a director of the corporation has a direct or indirect
personal interest (a "CONFLICT OF INTERESTS TRANSACTION") is not voidable by the
corporation if (i) the material facts of the transaction and the director's
interest were disclosed or known to the board of directors or a committee of the
board of directors and a majority of the disinterested directors on the board of
directors or a committee of the board of directors authorized, approved or
ratified the transaction, (ii) the material facts of the transaction and the
director's interest were disclosed or known to the shareholders entitled to vote
and they authorized, approved, or ratified the transaction, or (iii) the
transaction was fair to the corporation. The Virginia SCA states that a director
of a corporation has an indirect personal interest in a transaction if (a)
another entity in which he has a material financial interest or in which he is a
general partner is a party to the transaction or (b) another entity of which he
is a director, officer or trustee is a party to the transaction and the
transaction is or should be considered by the board of directors of the
corporation. Shares owned by or voted under
60
<PAGE>
the control of the director who has a direct or indirect personal interest in
the transaction, and shares owned by or voted under the control of an entity in
which such director has a material financial interest or in which he is a
general partner may not be counted to determine whether to authorize, approve,
or ratify a conflict of interests transaction; however, such shares will be
counted in determining whether the transaction is approved under other sections
of the Virginia SCA.
RHODES. The Georgia BCC provides that a transaction effected or proposed to
be effected by a corporation that is not a "director's conflicting interest
transaction" may not be enjoined, set aside or give rise to an award of damages
or other sanctions in an action by a shareholder on the ground of an interest in
the transaction of a director or any other person with whom he has an economic,
personal or other association. A "director's conflicting interest transaction"
means a transaction effected or proposed to be effected by the corporation
respecting which a director of the corporation has a "conflicting interest."
The Georgia BCC defines "conflicting interest" as the interest a director
of the corporation has respecting a transaction effected or proposed to be
effected by the corporation if (a) whether or not the transaction is brought
before the board of directors of the corporation for action, to the knowledge of
the director at the time when the transaction is consummated or when the
corporation becomes contractually obligated to effect the transaction (the "time
of commitment") he or a "related person" (immediate family member, housemate,
trust or estate of which director is beneficiary or trust, estate, incompetent,
conservatee or minor of which the director is a fiduciary) is a party to the
transaction or has a beneficial financial interest in or so closely linked to
the transaction and of such financial significance to the director or a related
person that it would reasonably be expected to exert an influence on the
director's judgment if he were called upon to vote on the transaction or (b) the
transaction is brought (or is of the type that would normally be brought) before
the board of directors of the corporation for action and to the knowledge of the
director at the time of commitment any of the following persons is either a
party to the transaction or has a beneficial financial interest so closely
linked to the transaction and of such financial significance to that person that
it would reasonably be expected to exert an influence on the director's judgment
if he were called to vote on the transaction: (i) an entity (other than the
corporation) of which the director is a director, general partner, agent or
employee, (ii) a person that controls one or more of such entities or an entity
that is controlled by, or is under common control with, one or more of such
entities, or (iii) an individual who is a general partner, principal or employer
of the director.
The Georgia BCC provides that a director's conflicting interest transaction
may not be enjoined, set aside, or give rise to an award of damages or other
sanctions in an action by a shareholder if the transaction received the
affirmative vote of a majority (but not less than two) of those independent
directors on the board of directors or on a duly empowered committee thereof who
voted on the transaction after disclosure of the conflicting interest to them.
The Georgia BCC also provides that a director's conflicting interest transaction
may not be enjoined, set aside or give rise to an award of damages or other
sanctions in an action by a shareholder if (a) the transaction, judged in the
circumstances at the time of commitment, is established to have been fair to the
corporation or (b) a majority of the votes entitled to be cast by disinterested
shareholders were cast in favor of the transaction after disclosure of the
conflicting interest.
EXPERTS
The financial statements and the related financial statement schedule
incorporated in this Proxy Statement/Prospectus by reference from the
Heilig-Meyers Company's Annual Report on Form 10-K for the year ended February
29, 1996 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Rhodes as of February 29, 1996 and
February 28, 1995 and for the three years ended February 29, 1996 included in
this Proxy Statement/Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon such report given upon the
authority of said firm as experts in giving said report.
The financial statements of the Weberg Division as of December 1994 and for
the year then ended included in this Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
Representatives of Rhodes' independent public accountants, Arthur Andersen
LLP, will be present at the Special Meeting to respond to appropriate questions
and will have the opportunity to make a statement if they desire to do so.
61
<PAGE>
LEGAL MATTERS
The legality of the shares of Heilig-Meyers Common Stock being offered
hereby is being passed upon for Heilig-Meyers by McGuire, Woods, Battle &
Boothe, L.L.P, Richmond, Virginia.
As of November 1, 1996, partners and associates of McGuire, Woods, Battle &
Boothe, L.L.P., who performed services in connection with the offering made by
this Proxy Statement/Prospectus, owned of record and beneficially 3,574 shares
of Heilig-Meyers Common Stock. Robert L. Burrus, Jr., a director of
Heilig-Meyers, is a partner of that firm.
SHAREHOLDER PROPOSALS
If the Merger is not consummated, Rhodes will hold a 1997 Annual Meeting of
Shareholders. As noted in Rhodes' proxy statement relating to the 1996 Annual
Meeting of Shareholders, any Shareholder proposals intended to be presented at
Rhodes' 1997 Annual Meeting of Shareholders, if the Merger is not consummated
prior thereto, must be received by Rhodes on or before February 12, 1997 to be
eligible for inclusion in the Proxy Statement and form of proxy to be
distributed by the Rhodes Board of Director in connection with such meeting.
OTHER MATTERS
As of the date of this Proxy Statement/Prospectus, the Board of Directors
of Rhodes knows of no matters that will be presented for consideration at the
Special Meeting other than as described in this Proxy Statement/Prospectus.
However, if any other matter shall come before the Special Meeting or any
adjournments or postponements thereof and shall be voted upon, the proposed
proxy will be deemed to confer authority to the individuals named as authorized
therein to vote the shares represented by such proxy as to any such matters that
fall within the purposes set forth in the Notice of such Special Meeting as
determined by a majority of the Board of Directors of Rhodes, as applicable.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
RHODES, INC.
Report of Independent Public Accountants............................................................................... F-2
Consolidated Balance Sheets at August 31, 1996 (unaudited),
February 29, 1995 and February 28, 1995.............................................................................. F-3
Consolidated Statements of Operations for the six months ended
August 31, 1996 and August 31, 1995 (unaudited) and the Fiscal
Years ended February 29, 1996, February 28, 1995 and
February 28, 1994.................................................................................................... F-4
Consolidated Statements of Shareholders' Equity
for the six months ended August 31, 1996 (unaudited)
and for the Fiscal Years ended February 29, 1996,
February 28, 1995 and February 28, 1994.............................................................................. F-5
Consolidated Statements of Cash Flows for the six
months ended August 31, 1996 and August 31,
1995 (unaudited) and for the Fiscal Years ended
February 29, 1996, February 28, 1995 and
February 28, 1994.................................................................................................... F-6
Notes to Consolidated Financial Statements for the six
months ended August 31, 1996 (unaudited) and for
the Fiscal Years ended February 29, 1996,
February 28, 1995 and February 28, 1994.............................................................................. F-7
WEBERG DIVISION (A DIVISION OF WEBERG ENTERPRISES, INC.)
Independent Auditors' Report........................................................................................... F-19
Balance Sheet at December 31, 1994..................................................................................... F-20
Statement of Income for the Year Ended
December 31, 1994.................................................................................................... F-21
Statement of Cash Flows for the Year Ended
December 31, 1994.................................................................................................... F-22
Notes to Financial Statements.......................................................................................... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
THE SHAREHOLDERS OF RHODES, INC.
We have audited the accompanying consolidated balance sheets of Rhodes,
Inc. (a Georgia corporation) and subsidiaries as of February 29, 1996 and
February 28, 1995 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended February 29, 1996. These financial statements are the responsibility of
Rhodes' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rhodes, Inc. and
subsidiaries as of February 29, 1996 and February 28, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended February 29, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 25, 1996
F-2
<PAGE>
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, 1996 FEBRUARY 29, FEBRUARY 28,
ASSETS (UNAUDITED) 1996 1995
--------------- ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
CURRENT ASSETS:
Cash.......................................................................... $ 716 $ 312 $ 3,268
Accounts receivable........................................................... 7,838 5,212 3,398
Inventories at LIFO cost...................................................... 85,052 87,965 54,386
Prepaid expenses and other.................................................... 8,034 10,072 5,356
Deferred tax assets........................................................... 6,152 2,157 861
--------------- ------------ ------------
TOTAL CURRENT ASSETS..................................................... 107,792 105,718 67,269
--------------- ------------ ------------
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization
of $43,440 at August 31, 1996, $39,007 at February 29, 1996 and $34,007 at
February 28, 1995............................................................. 80,563 75,951 55,142
--------------- ------------ ------------
CAPITALIZED REAL ESTATE LEASES, at cost, less accumulated amortization of $6,019
at August 31, 1996 , $5,640 at February 29, 1996 and $4,882 at February 28,
1995.......................................................................... 5,925 6,304 7,062
--------------- ------------ ------------
INTANGIBLE ASSETS, net
Goodwill...................................................................... 61,849 62,482 60,319
Favorable leases.............................................................. 2,666 2,962 3,825
Other intangibles............................................................. 2,602 2,488 2,387
--------------- ------------ ------------
TOTAL INTANGIBLE ASSETS.................................................. 67,117 67,932 66,531
--------------- ------------ ------------
OTHER ASSETS.................................................................... 5,380 5,854 2,406
--------------- ------------ ------------
TOTAL ASSETS............................................................. $ 266,777 $261,759 $198,410
--------------- ------------ ------------
--------------- ------------ ------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Notes and Loans Payable....................................................... $ 3,171 -- --
Current maturities of long-term debt and capital lease obligations............ 14,945 $ 12,695 $ 967
Accounts payable.............................................................. 47,916 47,745 35,403
Accrued interest.............................................................. 1,241 1,000 781
Accrued liabilities........................................................... 27,919 25,912 19,374
Deferred income............................................................... 12,236 11,247 9,795
Current portion deferred gain -- sale/leasebacks.............................. 541 318 318
Current income taxes payable.................................................. -- -- 460
--------------- ------------ ------------
TOTAL CURRENT LIABILITIES................................................ 107,969 98,917 67,098
--------------- ------------ ------------
DEFERRED INCOME TAXES........................................................... 6,862 6,862 7,070
--------------- ------------ ------------
LONG-TERM DEBT, less current maturities......................................... 72,390 70,642 40,000
--------------- ------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES................................................ 12,855 12,928 14,035
--------------- ------------ ------------
DEFERRED GAIN -- SALE/LEASEBACKS................................................ 1,895 2,390 2,707
--------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common Stock, no par value, 20,000 shares authorized and 9,150, 9,134 and
9,463 shares outstanding at August 31, 1996, February 29, 1996 and February
28, 1995, respectively..................................................... -- -- --
Paid-in Capital............................................................... 99,838 99,709 103,179
Accumulated deficit........................................................... (35,032) (29,689) (35,679)
--------------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY...................................................... 64,806 70,020 67,500
--------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 266,777 $261,759 $198,410
--------------- ------------ ------------
--------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheets
F-3
<PAGE>
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
------------------------ ----------------------------
<S> <C> <C> <C> <C>
AUGUST 31, AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
---------- ---------- ------------ ------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................................. $238,764 $184,818 $430,193 $361,238
COST OF GOODS SOLD........................................ 131,244 96,161 225,953 185,995
---------- ---------- ------------ ------------
GROSS PROFIT.............................................. 107,520 88,657 204,240 175,243
---------- ---------- ------------ ------------
FINANCE CHARGES AND INSURANCE
COMMISSIONS............................................. 3,397 3,094 5,822 4,935
---------- ---------- ------------ ------------
OPERATING EXPENSES
Selling................................................. 40,555 30,356 72,104 57,720
General and administrative.............................. 72,672 49,321 115,809 93,391
Provision for credit losses............................. 211 42 167 164
Amortization of intangibles............................. 1,597 1,444 2,933 3,074
Other expense (income), net............................. (35) (105) (401) 197
Nonrecurring charge..................................... -- -- 2,400 --
---------- ---------- ------------ ------------
115,000 81,058 193,012 154,546
---------- ---------- ------------ ------------
OPERATING INCOME (LOSS)................................... (4,083) 10,693 17,050 25,632
Interest expense, net................................... 4,973 3,107 6,898 6,109
---------- ---------- ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM......... (9,056) 7,586 10,152 19,523
PROVISION (BENEFIT) FOR INCOME TAXES...................... (3,713) 3,110 4,162 8,004
---------- ---------- ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............... (5,343) 4,476 5,990 11,519
Extraordinary Item-Early Retirement of Debt, Net of Income
Tax Effect (Note 10).................................... -- -- -- --
---------- ---------- ------------ ------------
NET INCOME (LOSS)......................................... $ (5,343) $ 4,476 $ 5,990 $ 11,519
---------- ---------- ------------ ------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK BEFORE
EXTRAORDINARY ITEM...................................... $ (0.58) $ 0.48 $ 0.64 $ 1.18
EXTRAORDINARY ITEM PER SHARE OF COMMON STOCK.............. -- -- -- --
---------- ---------- ------------ ------------
NET INCOME (LOSS) PER SHARE............................... $ (0.58) $ 0.48 $ 0.64 $ 1.18
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING............................................. 9,150 9,355 9,304 9,760
<CAPTION>
FEBRUARY 28,
1994
------------
<S> <C>
NET SALES................................................. $325,255
COST OF GOODS SOLD........................................ 168,425
------------
GROSS PROFIT.............................................. 156,830
------------
FINANCE CHARGES AND INSURANCE
COMMISSIONS............................................. 4,892
------------
OPERATING EXPENSES
Selling................................................. 51,865
General and administrative.............................. 84,404
Provision for credit losses............................. 213
Amortization of intangibles............................. 3,132
Other expense (income), net............................. 8
Nonrecurring charge..................................... --
------------
139,622
------------
OPERATING INCOME (LOSS)................................... 22,100
Interest expense, net................................... 11,545
------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM......... 10,555
PROVISION (BENEFIT) FOR INCOME TAXES...................... 4,508
------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM............... 6,047
Extraordinary Item-Early Retirement of Debt, Net of Income
Tax Effect (Note 10).................................... (2,727)
------------
NET INCOME (LOSS)......................................... $ 3,320
------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK BEFORE
EXTRAORDINARY ITEM...................................... $ 0.83
EXTRAORDINARY ITEM PER SHARE OF COMMON STOCK.............. (0.38)
------------
NET INCOME (LOSS) PER SHARE............................... $ 0.45
------------
------------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK
OUTSTANDING............................................. $ 7,302
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-4
<PAGE>
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK,
CUMULATIVE COMMON
DIVIDENDS, STOCK, PAID-IN ACCUMULATED
NO PAR VALUE NO PAR VALUE CAPITAL DEFICIT
---------------- ------------ -------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE, February 28, 1993............................ $ 14,181 $ -- $ 12,487 $ (50,518)
Net income.......................................... -- -- -- 3,320
Accrual of cumulative dividends on Series A
Preferred Stock.................................. 479 -- (479) --
Issuance of Common Stock, net of issuance
expenses......................................... -- -- 45,499 --
Exchange of long-term debt for Common Stock......... -- -- 34,309 --
Exchange of preferred sock and accumulated dividends
for Common Stock................................. (14,660) -- 14,660 --
Issuance of Common Stock, from exercise of stock
options.......................................... -- -- 631 --
---------------- ------------ -------- -----------
BALANCE, February 28, 1994............................ -- -- 107,107 (47,198)
Net income.......................................... -- -- -- 11,519
Registration expenses incurred in secondary
offering......................................... -- -- (262) --
Repurchase of Common Stock.......................... -- -- (3,684) --
Issuance of Common Stock, from exercise of stock
options.......................................... -- -- 18 --
---------------- ------------ -------- -----------
BALANCE, February 28, 1995............................ -- -- 103,179 (35,679)
Net income.......................................... -- -- -- 5,990
Issuance of Common Stock, from employee stock
purchase plan.................................... -- -- 350 --
Repurchase of Common Stock.......................... -- -- (3,820) --
---------------- ------------ -------- -----------
BALANCE, February 29, 1996............................ $ -- $ -- $ 99,709 $ (29,689)
---------------- ------------ -------- -----------
Net loss (unaudited)................................ -- -- -- (5,343)
Issuance of Common Stock, from employee stock
purchase plan (unaudited)........................ -- -- 129 --
---------------- ------------ -------- -----------
BALANCE, August 31, 1996 (unaudited).................. $ -- $ -- $ 99,838 $ (35,032)
---------------- ------------ -------- -----------
---------------- ------------ -------- -----------
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
BALANCE, February 28, 1993............................ $ (23,850)
Net income.......................................... 3,320
Accrual of cumulative dividends on Series A
Preferred Stock.................................. --
Issuance of Common Stock, net of issuance
expenses......................................... 45,499
Exchange of long-term debt for Common Stock......... 34,309
Exchange of preferred sock and accumulated dividends
for Common Stock................................. --
Issuance of Common Stock, from exercise of stock
options.......................................... 631
-------------
BALANCE, February 28, 1994............................ 59,909
Net income.......................................... 11,519
Registration expenses incurred in secondary
offering......................................... (262)
Repurchase of Common Stock.......................... (3,684)
Issuance of Common Stock, from exercise of stock
options.......................................... 18
-------------
BALANCE, February 28, 1995............................ 67,500
Net income.......................................... 5,990
Issuance of Common Stock, from employee stock
purchase plan.................................... 350
Repurchase of Common Stock.......................... (3,820)
-------------
BALANCE, February 29, 1996............................ $ 70,020
-------------
Net loss (unaudited)................................ (5,343)
Issuance of Common Stock, from employee stock
purchase plan (unaudited)........................ 129
-------------
BALANCE, August 31, 1996 (unaudited).................. $ 64,806
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-5
<PAGE>
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
------------------------ ----------------------------
AUGUST 31, AUGUST 31, FEBRUARY 29, FEBRUARY 28,
1996 1995 1996 1995
---------- ---------- ------------ ------------
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (5,343) $ 4,476 $ 5,990 $ 11,519
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item-early retirement of debt............. -- -- -- --
Depreciation and amortization........................... 5,409 3,765 8,439 6,722
Change in deferred income taxes......................... (3,995) -- (1,504) 735
Amortization of intangibles............................. 1,597 1,444 2,933 3,074
Noncash interest expense................................ -- -- -- --
Amortization of gain-sale/leasebacks.................... (272) (159) (317) (318)
Write-off of intangible assets.......................... -- 85 90 --
Changes in current assets and liabilities, net of
acquisitions:
Receivables, net...................................... (2,626) (697) (1,814) (1,325)
Inventories........................................... 2,913 (6,041) (3,308) (6,199)
Prepaid expenses and other............................ 2,607 169 (3,851) (981)
Accounts payable and accrued liabilities.............. 2,419 2,186 15,141 11,644
Deferred income on warranties and undelivered sales... 989 787 1,452 1,063
---------- ---------- ------------ ------------
Net cash provided by operating activities........... 3,698 6,015 23,251 25,934
---------- ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net.............. 182 771 1,319 1,079
Purchase of Weberg, net of cash acquired................ -- -- (30,711) --
Purchase of Glick's, net of cash acquired............... -- -- (10,742) --
Additions to property and equipment..................... (9,802) (13,299) (23,477) (14,101)
Additions to intangible assets.......................... (782) -- (437) (54)
Decrease (increase) in other assets..................... (117) 574 48 (68)
---------- ---------- ------------ ------------
Net cash used in investing activities................. (10,592) (12,511) (64,000) (13,144)
---------- ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt, net....................... -- -- -- (2,471)
Repayment of long-term debt............................. -- (222) -- (2,568)
(Decrease) increase in obligations under capital
leases................................................ (73) (557) (1,029) (790)
Prepayment penalty for early retirement of debt......... -- -- -- --
Proceeds from the Senior Secured Financing.............. -- -- -- --
Proceeds from issuance of long-term debt................ 3,998 -- 42,292 --
Proceeds from short-term debt........................... 3,171 6,593 -- --
Expenses incurred for stock registration................ -- -- -- (262)
Repurchase of stock..................................... -- (2,490) (3,820) (3,684)
Proceeds from sale of stock-employee purchase plan...... 129 178 350 --
Proceeds from sale of stock............................. -- -- -- --
Exercise of stock options............................... -- -- -- 18
---------- ---------- ------------ ------------
Net cash provided by (used in) financing activities... 7,298 4,059 37,793 (9,757)
---------- ---------- ------------ ------------
INCREASE (DECREASE) IN CASH............................... 404 (2,437) (2,956) 3,033
CASH AT BEGINNING OF PERIOD............................... 312 3,268 3,268 235
---------- ---------- ------------ ------------
CASH AT END OF PERIOD..................................... $ 716 $ 831 $ 312 $ 3,268
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest................................................ $ 4,973 $ 3,107 $ 6,898 $ 6,109
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Income taxes............................................ $ 62 $ 2,332 $ 7,580 $ 6,689
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Reduction of long-term debt in stock for debt
exchange.............................................. $ -- $ -- $ -- $ --
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Exchange of preferred stock and accumulated dividends
for Common Stock...................................... $ -- $ -- $ -- $ --
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
<CAPTION>
FEBRUARY 28,
1994
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ 3,320
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item-early retirement of debt............. 3,527
Depreciation and amortization........................... 6,399
Change in deferred income taxes......................... 2,373
Amortization of intangibles............................. 3,132
Noncash interest expense................................ 2,626
Amortization of gain-sale/leasebacks.................... (318)
Write-off of intangible assets.......................... --
Changes in current assets and liabilities, net of
acquisitions:
Receivables, net...................................... 840
Inventories........................................... (10,861)
Prepaid expenses and other............................ (223)
Accounts payable and accrued liabilities.............. 8,206
Deferred income on warranties and undelivered sales... 423
------------
Net cash provided by operating activities........... 19,444
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net.............. 97
Purchase of Weberg, net of cash acquired................ --
Purchase of Glick's, net of cash acquired............... --
Additions to property and equipment..................... (6,860)
Additions to intangible assets.......................... (1,407)
Decrease (increase) in other assets..................... (1,511)
------------
Net cash used in investing activities................. (9,681)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt, net....................... (4,976)
Repayment of long-term debt............................. (88,363)
(Decrease) increase in obligations under capital
leases................................................ 147
Prepayment penalty for early retirement of debt......... (2,624)
Proceeds from the Senior Secured Financing.............. 40,000
Proceeds from issuance of long-term debt................ --
Proceeds from short-term debt........................... --
Expenses incurred for stock registration................ --
Repurchase of stock..................................... --
Proceeds from sale of stock-employee purchase plan...... --
Proceeds from sale of stock............................. 45,499
Exercise of stock options............................... 631
------------
Net cash provided by (used in) financing activities... (9,686)
------------
INCREASE (DECREASE) IN CASH............................... 77
CASH AT BEGINNING OF PERIOD............................... 158
------------
CASH AT END OF PERIOD..................................... $ 235
------------
------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest................................................ $ 8,919
------------
------------
Income taxes............................................ $ 1,320
------------
------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Reduction of long-term debt in stock for debt
exchange.............................................. $ 34,309
------------
------------
Exchange of preferred stock and accumulated dividends
for Common Stock...................................... $ 14,660
------------
------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-6
<PAGE>
RHODES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND FEBRUARY 28, 1994
(AMOUNTS AND DISCLOSURES APPLICABLE TO AUGUST 31, 1996 AND 1995 ARE UNAUDITED)
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
INTRODUCTION
Rhodes is one of the largest specialty furniture retailers in the United
States. Founded in 1875, Rhodes operated 107 stores at August 31, 1996 in
metropolitan areas of 15 contiguous Southern, Midwestern and Western states and
for many years has focused on selling brand name residential furniture to
middle-income customers.
On September 20, 1988, Rhodes Acquisition Corp., a wholly owned subsidiary
of RHD Holdings Corp, ("RHD Holdings" or "RHD"), was merged with and into
Rhodes, Inc. ("Rhodes" or the "Company"), in which merger (the "Acquisition")
Rhodes was the surviving corporation. As a result of the Acquisition, Rhodes
became a wholly owned subsidiary of RHD Holdings. For financial statement
purposes, the Acquisition was accounted for by the purchase method of accounting
effective September 21, 1988. Upon approval by the board of directors of Rhodes
and RHD Holdings on June 11, 1991, Rhodes and RHD Holdings entered into an
Agreement and Plan of Merger, which provided for the merger of RHD Holdings with
and into Rhodes. Rhodes was the surviving corporation in the 1991 Merger.
INITIAL PUBLIC OFFERING
In April 1993, Rhodes' board of directors approved a plan of
recapitalization (the "Recapitalization") whereby it would offer a certain
number of shares of Common Stock for sale to the public (the "Offering") and
Green Capital Investors, L.P. ("Green Capital") would exchange its Class A
Preferred Stock (including accumulated, unpaid dividends) and Junior Discount
Subordinated Redeemable Debentures Due 2000 for Common Stock of Rhodes (the
"Exchange"), at an exchange price equal to the stock price in an initial public
offering. Rhodes effected a 1.8-for-1 stock split of Rhodes' Common Stock prior
to the Offering. As a part of the Recapitalization, Rhodes also refinanced and
repaid certain of its outstanding debt.
In conjunction with the above, Rhodes also increased the number of
authorized shares of Common Stock to 20,000,000.
BASIS OF PRESENTATION
The consolidated financial statements of Rhodes include the accounts of
Rhodes and all subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications of prior years' amounts have been made to conform
with the current year's presentation.
BUSINESS SEGMENT
Rhodes has one business segment consisting of the retail sale of home
furnishings.
INSTALLMENT RECEIVABLES AND REVENUE RECOGNITION
All merchandise sales are recorded upon delivery of furniture. Pursuant to
an ongoing merchant agreement, Beneficial National Bank USA ("BNB") provides
Rhodes with its private label credit facility for credit sales. This arrangement
eliminates the risks associated with credit losses and interest fluctuations on
its accounts receivables portfolio. Accounts receivable consists primarily of
miscellaneous receivables from customers and amounts awaiting funding from BNB.
Finance commissions are recognized for the sale of certain installment
contracts to BNB.
F-7
<PAGE>
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- Continued
Rhodes offers credit insurance coverage through third parties in connection
with its furniture sales and earns monthly commissions.
INVENTORIES
Inventories are stated at the lower of cost (last in, first out
method -- LlFO) or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Rhodes' financial instruments are stated at their fair value in the
accompanying financial statements at February 29, 1996 and February 28, 1995
with the exception of long-term debt (see Note 3).
PROPERTY AND EQUIPMENT
Depreciation is provided using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The ranges of annual
depreciation percentages, which reflect estimated useful lives, are as follows:
buildings -- 2% to 4% and equipment and other assets -- 10% to 25%. Capitalized
real estate leases are amortized on a straight-line basis over the terms of the
leases which range from 18 to 25 years. Leasehold improvements are amortized
over the life of the asset or the lease term, whichever is shorter. Repair and
maintenance costs are expensed as incurred.
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Land...................................................................... $ 8,036 $ 8,416
Buildings................................................................. 31,807 30,045
Leasehold improvements, equipment and other............................... 75,115 50,688
------------ ------------
$114,958 $ 89,149
Less accumulated depreciation and amortization............................ (39,007) (34,007)
------------ ------------
$ 75,951 $ 55,142
------------ ------------
------------ ------------
</TABLE>
Capitalized real estate leases are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Land...................................................................... $ 2,267 $ 2,267
Buildings................................................................. $ 9,677 $ 9,677
------------ ------------
$ 11,944 $ 11,944
Less accumulated amortization........................................ $ (5,640) $ (4,882)
------------ ------------
$ 6,304 $ 7,062
------------ ------------
------------ ------------
</TABLE>
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over identifiable
assets acquired and is being amortized on a straight-line basis over 40 years.
Amortization expense for goodwill totaled $1,824,000 for fiscal 1996, and
$1,798,000 for fiscal 1995 and 1994. Accumulated amortization for goodwill
totaled $13,413,000 and $11,590,000 as of February 29,1996 and February 28,1995,
respectively. Rhodes continually evaluates whether events and circumstances have
occurred which would indicate the remaining estimated useful life of goodwill
may warrant revision. When factors indicate that goodwill should be evaluated
for possible impairment, Rhodes uses an estimate of undiscounted net income over
the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
Favorable leases represent the difference between market rates and contract
rates of store leases as of the time of the Acquisition and are being amortized
over the remaining terms of the leases. Amortization expense for favorable
leases totaled $773,000, $953,000 and $1,091,000 for fiscal 1996, 1995, and
1994, respectively. Accumulated amortization for favorable leases totaled
$8,384,000 and $7,646,000 as of February 29, 1996 and February 28, 1995,
respectively.
F-8
<PAGE>
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS -- Continued
Other intangibles include deferred loan costs incurred in connection with
the Acquisition and subsequent refinancing, which are being amortized over the
terms of the applicable debt. Amortization expense for these items (exclusive of
the fiscal 1994 writeoff of loan costs related to the Recapitalization (see Note
10)) for fiscal 1996, 1995, and 1994, totaled approximately $336,000, $323,000
and $190,000, respectively. Accumulated amortization for other intangibles
totaled $908,000 and $690,000 as of February 29, 1996 and February 28, 1995,
respectively.
WARRANTY CONTRACTS
Rhodes markets extended warranty contracts to its customers on certain
merchandise at the time of the initial sale. Extended warranty contract revenue
is deferred and recognized over the contract period on a straight-line or other
reasonable basis. Rhodes is recognizing such income based on its historical data
on service and repair claims. Historical data on service and repair claims is
updated periodically and the income recognition on warranties is adjusted
accordingly. As a result, net warranty sales of $1,154,000, $1,878,000 and
$1,587,000, less net direct expenses of $253,000, $413,000 and $349,000,
respectively, were deferred to future periods in fiscal 1996, 1995 and 1994,
respectively.
EARNINGS PER SHARE
The historical net income per common share is calculated by dividing net
income applicable to Common Stock by the weighted average shares of Common Stock
outstanding. Most stock options were antidilutive for earnings per share
calculations for fiscal 1996, 1995 and 1994.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements and the related notes thereto for the
six months ended August 31, 1996 and 1995 include, in the opinion of management,
all normal and recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows of the Company and are prepared
on the same basis as the audited annual statements.
2. FEDERAL AND STATE INCOME TAXES
Rhodes follows Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes." SFAS No. 109 requires the determination of
deferred income taxes using the liability method under which deferred tax assets
and liabilities are determined based on the differences between the financial
accounting and tax basis of assets and liabilities. Deferred tax assets or
liabilities at the end of each period are determined using the currently enacted
tax rate expected to apply to taxable income in the periods in which the
deferred tax asset or liability is expected to be settled or realized.
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Total deferred tax liabilities............................................ $ 16,780 $ 16,403
Total deferred tax assets................................................. (15,005) (13,124)
Valuation allowance....................................................... 2,930 2,930
------------ ------------
Net deferred tax liabilities.............................................. $ 4,705 $ 6,209
------------ ------------
------------ ------------
</TABLE>
The net deferred tax liabilities are classified on Rhodes' balance sheet as
follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
Net current deferred tax assets........................................... $ (2,157) $ (861)
Net non-current deferred income taxes..................................... 6,862 7,070
------------ ------------
Net deferred tax liabilities.............................................. $ 4,705 $ 6,209
------------ ------------
------------ ------------
</TABLE>
F-9
<PAGE>
2. FEDERAL AND STATE INCOME TAXES -- Continued
The sources of the difference between the financial accounting and tax
basis of Rhodes' assets and liabilities which give rise to the deferred tax
liabilities and deferred tax assets and the tax effects of each are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
DEFERRED TAX LIABILITIES:
Stepped-up basis in fixed assets........................................ $ 5,864 $ 6,263
Favorable leases........................................................ 1,155 1,492
Acquisition costs....................................................... 696 1,340
Depreciation............................................................ 3,974 3,108
Inventories............................................................. 4,148 3,491
Other................................................................... 943 709
------------ ------------
$ 16,780 $ 16,403
------------ ------------
------------ ------------
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Capitalized leases...................................................... $ 2,779 $ 2,763
Gain-Sale/leaseback..................................................... 932 1,056
Gain on Property disposals.............................................. 1,325 1,395
Deferred rent........................................................... 852 692
Accrued expenses........................................................ 2,731 1,792
Deferred revenues....................................................... 2,481 2,049
Uniform inventory cost capitalization................................... 1,296 848
Net operating loss carryforwards........................................ -- 2,404
Other................................................................... 2,609 125
------------ ------------
$ 15,005 $ 13,124
------------ ------------
------------ ------------
</TABLE>
Rhodes has established a valuation allowance of $2.9 million as of February
29, 1996 and February 28, 1995 because of the uncertainty regarding the
realizability of certain deferred tax assets.
The consolidated provision for income taxes before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Current.................................................... $ 5,407 $7,269 $1,335
Deferred................................................... (1,245) 735 3,173
------------ ------------ ------------
$ 4,162 $8,004 $4,508
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
2. FEDERAL AND STATE INCOME TAXES -- Continued
The tax provision differed from the amounts resulting from multiplying the
income before income taxes and extraordinary item by the statutory federal
income tax rates. The reasons for these differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Federal income tax provision at statutory rates............ $ 3,553 $6,833 $3,694
State income tax provision, net of federal income tax
benefit.................................................. 406 780 422
Amortization of intangible assets not deductible for tax
purposes................................................. 717 701 717
Tax reserve adjustment..................................... (645) -- --
Increase of net deferred tax liabilities from fiscal 1994
tax rate change.......................................... -- -- 31
Other...................................................... 131 (310) (356)
------------ ------------ ------------
$ 4,162 $8,004 $4,508
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
SENIOR SECURED NOTES:
Tranche A, 9%, due June 15, 1999.......................................... $ 29,778 $ 30,000
Tranche B, 10%, due June 15, 2000......................................... 10,000 10,000
Unsecured Notes payable at prime rate plus 3.0% with quarterly
installments of $100,000 beginning March 31,1996........................ 2,000 --
Revolving Note with maximum availability of $45 million or 50% of eligible
inventory expiring January 12, 1999..................................... 21,764 --
Secured Term Loan payable in quarterly installments beginning March 1,
1996, with the final installments due January, 1999..................... 18,750 --
------------ ------------
82,292 40,000
Less current portion...................................................... 11,650 --
------------ ------------
$ 70,642 $ 40,000
------------ ------------
------------ ------------
</TABLE>
The aggregate annual payments required for the above notes during each of
the next five years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1997.................................................................................. $ 11,650
1998.................................................................................. $ 14,900
1999.................................................................................. $ 37,664
2000.................................................................................. $ 7,678
2001.................................................................................. $ 10,400
</TABLE>
FAIR VALUE OF DEBT
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Investments," the fair value of short-term debt is estimated to be its carrying
value. The fair value of long-term debt is estimated based on approximate market
interest rates for similar issues. The estimated fair value of long-term debt at
February 29, 1996 was approximately $83,607,000 and at February 28,1995 was
approximately $41,300,000.
TERMS
The Senior Secured Notes consist of two tranches: (i) Tranche A Notes in
the aggregate principal amount of $29.8 million which mature in June 1999
(subject to mandatory annual redemption payments of $7.5 million per year
commencing
F-11
<PAGE>
3. LONG-TERM DEBT -- Continued
in June 1996) and bear interest at a rate of 9% per annum, payable semiannually;
and (ii) Tranche B Notes in the aggregate principal amount of $10 million, which
mature in June 2000 and bear interest at a rate of 10% per annum, payable
semiannually. The Senior Secured Notes are secured by all real property owned by
Rhodes.
On January 12, 1996, Rhodes renewed its Revolving Credit Agreement with
Wachovia National Bank of Georgia for the lessor of $45.0 million or 50% of
eligible inventory. The loan agreement also included a three year term loan of
$20.0 million dollars with quarterly principal payments beginning March 1, 1996.
The terms of the revolving loan and three year term loan (see Note 8) and
the Senior Secured Notes impose restrictions that affect, among other things,
Rhodes' ability to (i) incur certain additional indebtedness, (ii) create liens
on assets, (iii) sell assets, (iv) engage in mergers or consolidations, (v) make
investments, (vi) pay dividends and make distributions and (vii) engage in
certain transactions with affiliates and subsidiaries. The revolving loan and
the Senior Secured Notes also require Rhodes to comply with certain specified
financial ratios and tests. Rhodes was in compliance with the restrictive
covenants at February 29, 1996, except for the limitation on capital
expenditures which was waived.
4. INVENTORIES
Rhodes uses the LlFO method for valuing inventories in order to more
closely match current costs with related revenue. Under this method, current
costs are charged to cost of sales through application of Department Store Price
Indices published by the Bureau of Labor Statistics. If LIFO inventories were
valued at current costs, the inventory amounts would have been $2,932,000 and
$2,383,000 higher than those reported as of February 29, 1996 and February 28,
1995, respectively.
As discussed in Note 8, Rhodes has a revolving loan with a bank, which is
secured by a priority lien on Rhodes' inventories.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Rhodes leases certain store locations under operating lease agreements with
various expiration dates through 2021. Rentals under all store leases were
approximately $16,980,000, $11,901,000 and $10,464,000 for fiscal 1996, 1995,
and 1994, respectively. As of February 29, 1996, the minimum obligations under
lease commitments with original terms beyond one year are as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-----------------
<S> <C>
(IN THOUSANDS)
1997............................................................................... $ 24,975
1998............................................................................... 24,535
1999............................................................................... 23,334
2000............................................................................... 21,661
2001............................................................................... 20,303
After 2001......................................................................... 178,094
</TABLE>
Certain of the leases above are renewable at Rhodes' option, and some
contain clauses requiring payment of contingent rentals based upon sales in
excess of specified amounts. Contingent rental amounts based on sales are
immaterial.
CONTINGENCIES
On April 17, 1995, several individuals, as members of a purported plaintiff
class of customers, filed suit in the Circuit Court of Jefferson County, Alabama
against Rhodes and certain other defendants alleging improper practices relating
to extended warranty contracts. The plaintiffs seek damages equal to all
principal and finance charges under the credit agreements in question, a
judgment voiding the credit agreements, injunctive relief, the reimbursement of
all costs associated with the action, other compensatory damages and unspecified
punitive damages. Rhodes believes that its practices with respect to extended
service contracts comply with Alabama law and it intends to vigorously defend
this action.
Rhodes is subject to claims and lawsuits arising in the normal course of
business. It is the opinion of management that any such claims will not have a
material adverse effect on the financial position or results of operations of
Rhodes.
F-12
<PAGE>
5. COMMITMENTS AND CONTINGENCIES -- Continued
Rhodes has a compensation (change in control) agreement with its Chairman
and Chief Executive Officer. Under such agreement, severance payments and
benefits would become payable under certain events, such as a change of control
(as defined in such agreement) of Rhodes. Rhodes also has compensation (change
of control) agreements with the President and Chief Operating Officer and the
Chief Financial Officer whereby severance would become payable under certain
events, such as a change of control (as defined in such agreements) of Rhodes.
The maximum contingent liability under these agreements of Rhodes at February
29,1996 is approximately $2.9 million.
6. CAPITAL LEASES
Certain of the property and equipment used in Rhodes' business is leased
under capital leases. In prior years, Rhodes completed sale and leaseback
agreements on nine stores previously owned and operated by Rhodes with terms
ranging from 18 to 25 years and options to renew for additional periods.
Equipment leases are for terms of up to seven years.
The following is a schedule by fiscal year of the future minimum lease
payments on these leases together with the present value of net minimum lease
payments as of February 29,1996:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-----------------
<S> <C>
(IN THOUSANDS)
1997............................................................................... $ 2,699,000
1998............................................................................... 2,691,000
1999............................................................................... 2,602,000
2000............................................................................... 2,620,000
2001............................................................................... 2,754,000
After 2001......................................................................... 9,683,000
-----------------
Total minimum lease payments....................................................... 23,049,000
Less amount representing interest at rates of 11.89% to 12.83%..................... (9,076,000)
-----------------
Present value of total minimum obligation.......................................... 13,973,000
Less current portion............................................................... (1,045,000)
-----------------
Long-term obligations under capital leases......................................... $12,928,000
-----------------
-----------------
</TABLE>
7. EMPLOYEE BENEFIT PLANS
Rhodes has an employee discount stock purchase plan for all eligible
employees of Rhodes, Inc. and designated subsidiaries. Participants may use up
to $12,500 each six month purchase period to purchase through payroll deductions
Rhodes' common stock for 85% of the lower of the closing stock price on the
first or last day of each stock purchase period. At February 29, 1996, there
were 209,875 shares of stock reserved for issuance under this plan.
On March 1, 1995, Rhodes established a non-qualified Supplemental Pension
Plan (the "Plan"), which is an unfunded defined benefit plan. The Plan provides
benefits to certain officers who earn compensation in excess of the compensation
limits imposed by the Internal Revenue Tax Code ("Code"). Under the Plan,
participants are paid an amount equal to the difference between (i) the monthly
benefit that would be paid without regard to Code limitations (ii) and the
monthly retirement benefit payable under the pension Plan. The projected benefit
obligation of the unfunded plan totaled $834,000 at February 29, 1996. Net
periodic pension expense for fiscal 1996 was $199,000.
Rhodes has a defined benefit pension plan covering substantially all
employees. Rhodes' policy is to fund amounts necessary to satisfy the
requirements of the Employee Retirement Income Security Act of 1974.
F-13
<PAGE>
7. EMPLOYEE BENEFIT PLANS -- Continued
The pension cost for the defined benefit plan for fiscal 1996, 1995, and
1994 includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(IN THOUSANDS)
Service cost for benefits earned during the period........ $ 484,000 $ 502,000 $ 660,000
Interest cost on projected benefit obligation............. 1,014,000 857,000 916,000
Actual return on assets................................... (1,634,000) 467,000 (786,000)
Net amortization and deferral............................. 564,000 (1,596,000) (390,000)
------------ ------------ ------------
Net pension expense for period............................ $ 428,000 $ 230,000 $ 400,000
------------ ------------ ------------
</TABLE>
The funded status of the defined benefit plan as of February 29,1996 and
February 28, 1995 is as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(IN THOUSANDS)
ACTUARIAL PRESENT VALUE OF:
Vested benefits...................................................... $ 12,508,000 $ 9,428,000
Nonvested benefits................................................... 331,000 297,000
------------ ------------
Accumulated benefit obligation......................................... 12,839,000 9,725,000
Effect of projected future compensation levels......................... 1,007,000 675,000
------------ ------------
Projected benefit obligation........................................... 13,846,000 10,400,000
Plan assets at fair value.............................................. (12,063,000) (10,451,000)
------------ ------------
Plan assets (less than) in excess of projected benefit obligation...... (1,783,000) 51,000
Unrecognized prior service cost........................................ 60,000 70,000
Unrecognized net (gain) loss........................................... 845,000 (961,000)
Unrecognized net asset from initial application of SFAS No. 87......... (1,453,000) (1.650.000)
------------ ------------
Pension liability recognized In the balance sheet...................... $ (2,331,000) $ (2,490,000)
------------ ------------
------------ ------------
</TABLE>
The projected benefit obligation was calculated using a 7.75% and 8.75%
assumed discount rate as of February 29, 1996 and February 28, 1995,
respectively, and an assumed long-term compensation increase rate of 4.9% in
fiscal 1996 and fiscal 1995. Pension expense was determined using an 8.5% and
8.0% assumed long-term rate of return on plan assets for the years ended
February 29, 1996 and February 28, 1995, respectively. At February 29, 1996,
plan assets consisted primarily of equity securities 68%, fixed income
securities 27% and money market instruments 5%.
Rhodes has an employees' savings plan. Under the provisions of this plan,
Rhodes will match 50% of employee contributions which are limited to a maximum
of 6% of pay. Rhodes' savings plan expense was $445,000, $400,000 and $345,000
in fiscal 1996, 1995 and 1994, respectively.
Prior to the consummation of the Acquisition, the board of directors and
shareholders of RHD Holdings adopted a non-qualified restricted stock option
plan (the "Stock Option Plan") which provided for the granting of options to
officers and key employees of RHD Holdings and its subsidiaries to acquire an
aggregate of up to 300,000 shares of RHD Holdings' common stock at an exercise
price of not less than $0.01 per share. Upon consummation of the 1991 Merger,
all options outstanding under the Stock Option Plan (options to purchase 284,800
shares of RHD common stock (the "Plan Options")), along with options to purchase
an aggregate of 23,095 shares of RHD common stock granted outside the Stock
Option Plan (the "Substitution Options"; the Substitution Options and the Plan
Options are referred to collectively as the "Options") at an exercise price of
$0.08 per share, were assumed by Rhodes and converted into options to purchase
an adjusted amount of 53,702 shares of Common Stock at an exercise price of
$0.04 per share. No additional options may be granted under the Stock Option
Plan. An expense in the amount of $150,000, net of canceled options, is recorded
for the accretion of the value of these Plan Options in each year over the
five-year period during which they become exercisable. All options under the
Stock Option Plan were exercised during fiscal 1994.
F-14
<PAGE>
7. EMPLOYEE BENEFIT PLANS -- Continued
1991 STOCK OPTION PLAN
On June 11, 1991, Rhodes' Board of Directors adopted the Rhodes, Inc. Stock
Option Plan (the "1991 Stock Option Plan"), pursuant to which options to
purchase Common Stock ("1991 Options") may be granted to eligible employees. The
purpose of the 1991 Stock Option Plan is to provide an incentive for such
employees to work to increase the value of Rhodes' capital stock and to provide
such employees with a stake in the future of Rhodes which corresponds to the
stake of each of Rhodes' shareholders.
As of February 29, 1996, a maximum of 700,000 shares of Common Stock,
respectively, may be issued under the 1991 Stock Option Plan. The Plan allows
for the grant of either qualified incentive stock options ("ISO", as defined by
the Code) or non-qualified options ("Non-ISO"). At February 29, 1996, options to
acquire 681,500 shares of common stock were outstanding under the 1991 Stock
Option Plan.
The option price of each 1991 Option is set by a committee of the Rhodes'
Board of Directors subject to certain limitations. The option price for an ISO
may not be less than the fair market value (or for a shareholder holding stock
possessing more than 10% of the total combined voting power of all classes of
stock of Rhodes (a "Ten Percent Shareholder"), 110% of the fair market value) of
Common Stock on the date the ISO is granted. The option price for a Non-ISO may
be more than, less than or equal to the fair market value of such stock on the
date the Non-ISO is granted but may not be less than an amount which the
committee determines to be adequate consideration. The options carry a 5 year
vesting period.
Also, options to purchase an additional 15,000 shares of Common Stock have
been granted to certain directors of Rhodes.
The following table details Rhodes stock option activity for the past three
fiscal years:
<TABLE>
<CAPTION>
OPTION
OPTIONS OUTSTANDING AT: OPTIONS PRICE
------- -------------
<S> <C> <C>
February 28, 1993......................................................... 53,702 $ .04
Options Granted........................................................... 660,000 $12.00-$18.25
Options Exercised......................................................... (53,702) $ .04
------- -------------
OPTIONS OUTSTANDING AT:
February 28, 1994......................................................... 660,000 $12.00-$18.25
Options Granted........................................................... 71,000 $11.88-$16.00
Options Exercised......................................................... (1,500) $ 12.00
Options Canceled or Terminated............................................ (20,500) $12.00-$18.25
------- -------------
OPTIONS OUTSTANDING AT:
February 28, 1995......................................................... 709,000 $11.88-$18.25
Options Granted........................................................... 35,000 $ 9.00
Options Exercised......................................................... -- --
Options Canceled or Terminated............................................ (47,500) 12.00
------- -------------
OPTIONS OUTSTANDING AT:
February 29, 1996......................................................... 696,500 $ 9.00-$18.25
------- -------------
OPTIONS EXERCISABLE AT:
February 29, 1996......................................................... 352,000 $ 9.00-$18.25
------- -------------
</TABLE>
8. SHORT-TERM DEBT
NOTES AND LOANS PAYABLE
At February 28, 1993, Rhodes had a revolving credit facility with Security
Pacific Business Credit, Inc. ("SPBC"), which was secured by a priority lien on
Rhodes' inventory. Effective December 7, 1992, Rhodes and SPBC agreed to the
extension of the revolving loan agreement until November 30, 1994 with automatic
annual renewals thereafter unless 60 days' written notice of non-renewal was
given by either party.
F-15
<PAGE>
8. SHORT-TERM DEBT -- Continued
On February 24, 1994, Rhodes canceled its revolving credit facility with
SPBC and entered into a revolving credit agreement with Wachovia Bank of
Georgia, N.A. ("Wachovia"). On January 12, 1996, Rhodes entered into a revised
loan and security agreement with Wachovia and the Fleet Capital Corporation
which provides a term loan of $20 million and a revolving credit facility (the
"Revolving Credit Facility") of the lesser of $45 million or 50% of eligible
inventory. The Revolving Credit Agreement is secured by substantially all of the
inventory of Rhodes. Loans outstanding under the Revolving Credit Agreement
generally will bear interest at one of two interest rate options selected by
Rhodes: (i) Prime Rate or (ii) a quoted LIBOR plus 1.75% per annum for specified
interest periods. On any day that the loans outstanding including the term loan
exceeds 50% of eligible inventory, additional interest of 1.00% per annum will
apply. Rhodes is required to pay a commitment fee of 0.50% per annum of the
average daily unused portion of the Senior Lender's commitment under the
Revolving Credit Agreement. The Revolving Credit Agreement is scheduled to
terminate in January 12, 1999. At February 29, 1996, Rhodes had $21,764,000
outstanding, under the Revolving Credit Facility and the amount available under
the Revolving Credit Agreement at February 29, 1996 was $15,518,000. The balance
outstanding at February 29, 1996 on the term loan was $18,750,000.
The revolving loan has, among other restrictions, covenants whereby Rhodes
must meet certain goals with respect to cash interest coverage, fixed charge
coverage, and profit after taxes plus amortization of intangibles. These goals,
expressed in terms of defined minimum ratios and amounts, become more
restrictive over the term of the loan agreement. The agreement also provides,
among other things, limitations on Rhodes' ability to incur debt (including
lease obligations); to make capital expenditures; to enter into transactions
involving mergers, consolidations, acquisitions or sales; or to declare, pay or
make any dividend or other distribution of property with respect to its capital
stock.
Because Rhodes had no short term debt at the year ended February 29, 1996,
none of the interest expense of $6,898,000 for fiscal 1996 set forth is short
term interest.
9. RELATED-PARTY TRANSACTIONS
In June 1993, Rhodes consummated the Recapitalization, pursuant to which
Rhodes issued 2,859,115 shares of Common Stock to Green Capital, L.P. ("Green
Capital"), an affiliate of Holcombe T. Green, Jr., in exchange for outstanding
indebtedness of Rhodes to Green Capital having an accredited value of $34.3
million. Rhodes also issued 1,221,666 shares of Common Stock to Green Capital in
exchange for preferred stock of Rhodes with a stated value of $10.0 million and
accrued and unpaid dividends aggregating $4.7 million. In addition, Green
Capital purchased 250,000 shares in the public offering which was part of the
Recapitalization.
Green Capital previously maintained an unsecured line of credit for Rhodes
of up to $10.0 million for working capital purposes, and has advanced funds to
Rhodes from time to time to meet short-term cash needs. Interest is payable
monthly at a floating interest rate equal to the prime rate plus 2%. The line of
credit was terminated upon execution by Rhodes of the Revolving Credit Agreement
on February 24,1994. The maximum amount outstanding in the period beginning
March 1, 1991 and ending February 24, 1994 was $7.8 million and total interest
paid to Green Capital during such period was $478,000.
In December, 1993, January, February, and December, 1994 and January, 1995,
Rhodes had outstanding advances to Green Capital in varying amounts, with the
largest principal amount outstanding at any time being $3.0 million. Interest
accrued on outstanding principal at a rate of 8% or 10% per annum, and total
interest paid by Green Capital to Rhodes for these advances was approximately
$22,000. No advances were outstanding as of February 29, 1996 or February 28,
1995.
On June 28, 1990, Rhodes entered into a $40.0 million secured term loan
with Jackson National Life Insurance Company ("Jackson National"), secured by
all real estate and certain other personal property of Rhodes, excluding
inventories. Interest accrued on the outstanding principal at a rate of 12% per
annum. At the time of the loan, Jackson National owned more than 5% of the
common stock of Rhodes and $35.0 million of the $40.0 million outstanding 15%
Senior Subordinated Notes due September 20, 1998 of Rhodes (the "15% Notes"). In
connection with the Recapitalization, the 12% Secured Term Loan and 15% Notes
were repaid and Jackson National and the other holders of the 15% Notes
consented to the prepayment of the 15% Notes in consideration of $2.6 million of
prepayment penalties, $2.3 million of which was paid to Jackson National (see
Note 10).
For the period from July 1990 through the date of the Recapitalization,
Rhodes had paid RHD Investors a monthly fee of $33,333 for management services,
including financial and strategic planning. Prior to July 1990, the monthly
management
F-16
<PAGE>
9. RELATED-PARTY TRANSACTIONS -- Continued
fee was $20,833. Although Holcombe T. Green, Jr., who through affiliates
controls RHD Investors, personally devoted substantial efforts on Rhodes' behalf
in his capacity as Chairman of the Board of Directors of Rhodes, Mr. Green
received no directors' fees or other compensation from Rhodes. Payment of the
monthly management fee terminated effective upon consummation of the
Recapitalization. Upon Mr. Lowenstein becoming Chairman of the Board of
Directors in July, 1994, Mr. Green began to receive the same remuneration as the
other outside directors.
On March 24, 1994 affiliates of Mr. Holcombe T. Green, Jr., at the time
Chairman of the Board of Directors and beneficial owner of 52.8% of the
outstanding common stock of Rhodes, sold 2,240,494 shares in a secondary
offering at $18.50 per share. Jackson National Life sold 248,880 shares in the
same offering. Consummation of the sale reduced Mr. Green's beneficial ownership
to 29.8%. No shares were sold by Rhodes in this offering. Upon consummation of
the secondary offering, Rhodes became listed on the New York Stock Exchange.
10. EXTRAORDINARY ITEM
During fiscal 1994, Rhodes expensed certain charges incurred principally in
connection with the Recapitalization (see Note 1). These extraordinary items
represent nonrecurring prepayment penalties of $2,624,000 for early retirement
of debt and write-off of $903,000 in related deferred loan costs, less an income
tax benefit of $800,000.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited results
of operations for the six months ended August 31, 1996 and for the years ended
February 29, 1996 and February 28, 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
AUGUST 31, 1996
--------------------
TOTAL COMPANY 1ST QTR. 2ND QTR.
---------------- -------- --------
<S> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Net Sales..................................................................... $119,726 $119,038
Gross Profit.................................................................. $ 54,225 $ 53,295
Net Income.................................................................... $ (2,660) $ (2,683)
PER COMMON SHARE DATA:
Net Income.................................................................... $ (0.29) $ (0.29)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1995
------------------------------------------ ----------------------------------------
1ST 2ND 1ST 2ND 3RD 4TH
TOTAL COMPANY QTR. QTR. 3RD QTR. 4TH QTR. QTR. QTR. QTR. QTR.
---------------- ------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Sales.......................... $89,439 $95,379 $111,725 $133,650 $82,865 $88,809 $95,785 $93,779
Gross Profit....................... $43,095 $45,562 $ 54,159 $ 61,424 $41,267 $43,140 $45,801 $45,035
Net income......................... $ 1,807 $ 2,669 $ 1,155 $ 359 $ 1,756 $ 2,616 $ 4,591 $ 2,556
PER COMMON SHARE DATA:
Net income......................... $ 0.19 $ 0.29 $ 0.12 $ 0.04 $ 0.18 $ 0.27 $ 0.47 $ 0.26
</TABLE>
12. NON-RECURRING CHARGE
In the quarter ended November 30, 1995 Rhodes recorded a non-recurring
charge to reflect the cost of changing the names of 33 stores to "Rhodes", and
the cost of closing four stores in the fourth quarter of fiscal 1996. The
aggregate amount of the charge was $2,400,000, less income tax benefit of
$984,000, for a net charge of $1,416,000, or approximately $.15 per share.
13. ACQUISITIONS
On November 1, 1995, Rhodes completed its acquisition of 21 store
operations and two distribution center operations from Weberg for approximately
$31 million. The acquisition was accounted for as a purchase transaction and,
accordingly, the results of operations of Weberg have been included in the
accompanying financial statements since November 1, 1995. The purchase price was
allocated to the assets and liabilities based upon their estimated fair value as
of the date of acquisition. The excess of the consideration paid over the
estimated fair value of net assets acquired of $3,399,000 has been
F-17
<PAGE>
13. ACQUISITIONS -- Continued
recorded as goodwill and is being amortized on a straight line basis over 40
years. The fair value of assets acquired and liabilities assumed was $29,866,000
and $2,531,000, respectively.
On December 15, 1995, Rhodes completed its acquisition of The Glick
Furniture Company ("Glick's") for approximately $10,742,000. The acquisition was
accounted for as a purchase transaction and, accordingly, the results of
operations of Glick's have been included in the accompanying financial
statements since December 15, 1995. The purchase price was allocated to the
assets and liabilities based upon their estimated fair value as of the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $588,000 has been recorded as goodwill and is being
amortized on a straight line basis over 40 years. The fair value of assets
acquired and liabilities assumed was $11,121,000 and $967,000, respectively.
The following table summarizes on a pro forma basis the consolidated
results of operations as though Weberg and Glick's had been acquired on March 1
of each year presented (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net Sales.............................................................. $533,292 $514,355
Net Income............................................................. $ 4,611 $ 12,346
Earnings Per Share..................................................... $ 0.50 $ 1.26
</TABLE>
This pro forma information is not necessarily indicative of the results of
operations that would have been attained had the acquisition been consummated on
March 1 of each year presented or that may be attained in the future.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
WEBERG ENTERPRISES, INC.:
We have audited the accompanying balance sheet of the Weberg Division
(Division) (a division of Weberg Enterprises, Inc. (Company)) as of December 31,
1994, and the related statements of income and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Division as of December 31, 1994, and
the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Division changed
its method of accounting for inventory costs effective January 1, 1994.
The accompanying financial statements have been prepared from the separate
records maintained by the Division and may not necessarily be indicative of the
conditions that would have existed or the results of operations if the Division
had been operated as an unaffiliated company. Portions of certain income and
expenses represent allocations made from items applicable to the Company as a
whole.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 5, 1996
F-19
<PAGE>
WEBERG DIVISION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
CURRENT ASSETS:
Cash................................................................................................ $ 176
Trade receivables, net of allowance of $2........................................................... 1,026
Other receivables................................................................................... 25
Inventories (Notes 2, 3 and 4)...................................................................... 23,651
Prepaid expenses.................................................................................... 323
Deferred income taxes (Note 7)...................................................................... 341
----------
TOTAL CURRENT ASSETS............................................................................. 25,542
----------
PROPERTY AND EQUIPMENT -- AT COST (Notes 5 and 6):
Land................................................................................................ 443
Buildings........................................................................................... 3,321
Fixtures, equipment and leasehold improvements...................................................... 12,554
----------
TOTAL............................................................................................ 16,318
Less accumulated depreciation and amortization...................................................... 8,572
----------
NET PROPERTY AND EQUIPMENT....................................................................... 7,746
----------
DEFERRED INCOME TAXES (Note 7)........................................................................ 659
----------
TOTAL ASSETS.......................................................................................... $ 33,947
----------
----------
LIABILITIES AND INVESTMENT BY AND ADVANCES FROM WEBERG ENTERPRISES
CURRENT LIABILITIES:
Long-term debt -- current portion (Note 5).......................................................... $ 244
Accounts payable.................................................................................... 2,443
Accrued property and sales taxes.................................................................... 1,424
Advances from customers............................................................................. 1,236
Accrued payroll and benefits........................................................................ 1,229
Accrued advertising................................................................................. 955
Other accrued expenses.............................................................................. 548
----------
TOTAL CURRENT LIABILITIES........................................................................ 8,079
----------
LONG-TERM DEBT (Note 5)............................................................................... 1,873
----------
DEFERRED GAIN (Note 6)................................................................................ 281
----------
TOTAL LIABILITIES................................................................................ 10,233
----------
INVESTMENT BY AND ADVANCES FROM WEBERG ENTERPRISES (Note 3)........................................... 23,714
----------
TOTAL LIABILITIES AND INVESTMENT BY AND ADVANCES FROM WEBERG ENTERPRISES......................... $ 33,947
----------
----------
</TABLE>
F-20
<PAGE>
WEBERG DIVISION
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
SALES................................................................................................. $112,921
COST OF SALES......................................................................................... 67,400
-----------
GROSS PROFIT.......................................................................................... 45,521
-----------
OPERATING EXPENSES (Notes 6, 8 and 9):
Personnel........................................................................................... 18,731
Non-Personnel....................................................................................... 14,210
Advertising......................................................................................... 9,202
Credit promotion fees............................................................................... 664
-----------
Total operating expenses......................................................................... 42,807
-----------
OPERATING INCOME...................................................................................... 2,714
INTEREST EXPENSE...................................................................................... (803)
-----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INVENTORIES.............. 1,911
-----------
INCOME TAXES (Note 7):
Current provision................................................................................... (799)
Deferred benefit.................................................................................... 26
-----------
(773)
-----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INVENTORIES............................... 1,138
-----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INVENTORIES,
NET OF TAXES OF $228 (Note 2)....................................................................... 380
-----------
NET INCOME............................................................................................ 1,518
INVESTMENT BY AND ADVANCES FROM WEBERG ENTERPRISES, BEGINNING OF YEAR................................. 19,653
ADVANCES.............................................................................................. 6,251
REPAYMENTS............................................................................................ (3,708)
-----------
INVESTMENTS BY AND ADVANCES FROM WEBERG ENTERPRISES, END OF YEAR...................................... $ 23,714
-----------
-----------
</TABLE>
F-21
<PAGE>
WEBERG DIVISION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
----------------------
<S> <C>
(AMOUNTS IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................................... $ 1,518
Adjustments to reconcile net income to net cash used in
operating activities:
Deferred gain recognized......................................................................... (56)
Depreciation and amortization.................................................................... 815
Deferred income taxes............................................................................ (26)
Change in accounting for inventories............................................................. (380)
Net change in operating assets and liabilities:
Trade receivables................................................................................ (311)
Other receivables................................................................................ (25)
Inventories...................................................................................... (1,169)
Prepaid expenses................................................................................. (118)
Accounts payable................................................................................. (287)
Accrued expenses................................................................................. 275
Advances from customers.......................................................................... (252)
--------
Net cash used in operating activities.......................................................... (16)
--------
CASH FLOWS FROM INVESTING ACTIVITIES --
Payments for property and equipment................................................................. (3,762)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................................................................ 1,523
Principal payments of long-term debt................................................................ (206)
Investments by and Advances from Weberg Enterprises................................................. 6,251
Repayments of Investments by and Advances from Weberg Enterprises................................... (3,708)
--------
Net cash provided by financing activities...................................................... 3,860
--------
NET INCREASE IN CASH.................................................................................. 82
CASH, BEGINNING OF YEAR............................................................................... 94
--------
CASH, END OF YEAR..................................................................................... $ 176
--------
--------
</TABLE>
F-22
<PAGE>
WEBERG DIVISION
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Weberg Enterprises, Inc. (Company) operates 21 retail furniture stores and
2 distribution centers (collectively, the Division) in the states of Colorado,
Texas and Illinois. The accompanying financial statements of the Division
include the transactions and account balances related to the operations of the
Division including an allocation from the Company of certain operating expenses
and interest expense directly related to the operations of the Division.
Allocations of such operating expenses from the Company are generally based upon
the Division's sales and inventory levels relative to the Company's total sales
and inventory levels. Management believes that allocated expenses are
representative of actual expenses that would have been incurred by the Division.
However, the accompanying financial statements may not necessarily be indicative
of the conditions that would have existed or the results of operations if the
Division had been operated as a separate unaffiliated company. The Division's
financial statements do not include transactions and account balances related to
or resulting from other activities of the Company.
INVENTORIES
Inventories, consisting of finished goods, are stated at the lower of cost
or market value. Cost is determined principally by the last-in, first-out (LIFO)
method; however, cost for certain inventories is determined by the first-in,
first-out (FIFO) method (Note 4).
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided using the straight-line
and accelerated methods over the estimated useful lives ranging from three to
forty years. Amortization of leasehold improvements is provided on the
straight-line method over the lesser of the lease term or the estimated useful
lives of the assets.
STORE AND WAREHOUSE OPENING COSTS
The costs of opening new stores and warehouses are expenses as incurred.
The Division opened one distribution center in 1994.
2. CHANGE IN ACCOUNTING METHOD
Effective January 1, 1994, the Company changed its method of accounting for
inventory costs, including those of the Division, to include certain purchasing,
warehousing and transportation costs in inventory. Such costs had previously
been charged to expense in the period incurred. The Company believes this new
inventory valuation method is preferable because it provides a better matching
of costs with related revenues. The effect of this change was to increase the
Division's 1994 income before the cumulative effect of the accounting change by
approximately $57.
3. INVESTMENT BY AND ADVANCES FROM WEBERG ENTERPRISES
The Company has an investment in the Division in addition to having
advanced funds to the Division for purposes of its operations. Funding for the
operation of the Division is provided principally by the Company. As described
in Note 1, the Company has allocated interest expense to the Division and has
done so in an amount considered commensurate with the financing costs associated
with its advances to the Division.
There are no sales or purchases of product between the Division and the
Company and thus no related unrealized intercompany profit on any inventories or
property and equipment.
The Company has pledged all of the Division's inventories as collateral
under a bank line of credit, which has an outstanding balance at December 31,
1994 of $8,500.
F-23
<PAGE>
WEBERG DIVISION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. INVENTORIES
Inventories are comprised of the following as of December 31, 1994:
<TABLE>
<S> <C>
LIFO inventory at cost......................................................... $22,959
FIFO inventory at cost......................................................... 2,922
-------
Total inventory at cost........................................................ 25,881
LIFO reserve................................................................... (2,230)
-------
Total.......................................................................... $23,651
-------
-------
</TABLE>
If all of the Division's inventories had been valued at FIFO, 1994 net
income would have been $1,604.
5. LONG-TERM DEBT
Long-term debt at December 31, 1994 consists of the following:
<TABLE>
<S> <C>
Mortgage note payable in monthly installments of $11 including interest at 8%,
collateralized by building in El Paso, Texas, matures April 1995............... $ 29
Mortgage note payable in monthly installments of $9 including interest at 9.75%,
collateralized by building in Champaign, Illinois, matures April 2003.......... 602
Mortgage note payable in monthly installments of $24 including interest at prime
plus .5%, collateralized by inventory racks in the Denver Distribution Center,
matures November 2001.......................................................... 1,486
------
Total............................................................................ 2,117
Less current maturities.......................................................... 244
------
Long-term debt................................................................... $1,873
------
------
</TABLE>
Scheduled maturities of long-term debt for the years ending December 31 are
as follows:
<TABLE>
<S> <C>
1995 $ 244
1996............................................................................. 236
1997............................................................................. 258
1998............................................................................. 283
1999............................................................................. 310
Thereafter....................................................................... 786
------
Total............................................................................ $2,117
------
------
</TABLE>
6. LEASE OBLIGATIONS
In September 1992, the Company's stockholder purchased a building which had
been leased by the Division under a capital lease and, as a result, the
Division's obligations under the capital lease were terminated as of such date.
The Division, however, has continued to lease the building from the Company's
stockholder under a month-to-month lease. The Division deferred the $407 gain on
this transaction and is recognizing the gain ratably over the estimated
remaining useful life of the building.
The Division operates in certain facilities under operating leases with
various renewal options and escalation clauses. The leases require that
utilities, maintenance, taxes, insurance, and leasehold improvements be paid by
the tenant. The Division leases several facilities from the stockholder of the
Company under month-to-month leases.
F-24
<PAGE>
WEBERG DIVISION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. LEASE OBLIGATIONS -- Continued
Future minimum lease payments under operating leases are as follows for the
years ending December 31:
<TABLE>
<S> <C>
1995........................................................................... $ 1,840
1996........................................................................... 1,702
1997........................................................................... 1,572
1998........................................................................... 1,460
1999........................................................................... 1,035
Thereafter..................................................................... 3,211
-------
Total.......................................................................... $10,820
-------
-------
</TABLE>
Rent expense for facilities under operating leases in 1994 was $3,420.
Included in 1994 rent expense was $2,151 under operating leases with the
Company's stockholder.
7. INCOME TAXES
The taxable income of the Division is included in the income tax return of
the Company. The Company filed an election to revoke its S-Corporation status
effective December 17, 1993 and became a C-Corporation effective January 1,
1994. This election was deemed effective upon filing and, as a result, income
taxes are now provided for in the Company's financial statements in accordance
with Statement of Financial Accounting Standards No. 109 (SFAS No. 109). The
Company allocates current and deferred income taxes to the Division by applying
SFAS No. 109 as if the Division were a separate taxpayer. As of December 31,
1994, $799 of income taxes payable is included in the Investment By and Advances
From Weberg Enterprises account.
Deferred income tax assets and liabilities are allocated annually for
differences between the financial reporting basis and the income tax basis of
assets and liabilities that will result in taxable or deductible amounts in the
future. Such deferred tax assets and liability computations are based on enacted
tax laws and rates applicable to years in which the differences are expected to
affect taxable income.
Income tax expense for the year ended December 31, 1994 is comprised of the
following components:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ---- -----
<S> <C> <C> <C>
Current.......................................................... $(724) $(75) $(799)
Deferred......................................................... 24 2 26
------- ---- -----
$(700) (73) (773)
------- ---- -----
------- ---- -----
</TABLE>
As of December 31, 1994, the temporary differences which resulted in
deferred tax assets are as follows:
<TABLE>
<S> <C>
Current:
Accrual of expenses for financial reporting purposes but not for income tax
purposes.................................................................... $ 341
------
Noncurrent:
Difference between book and tax basis of property and equipment................ 554
Deferred gain.................................................................... 105
------
659
------
Total deferred tax asset......................................................... $1,000
------
------
</TABLE>
F-25
<PAGE>
WEBERG DIVISION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7. INCOME TAXES -- Continued
The following reconciles the 1994 income tax provision to the Federal
statutory rate:
<TABLE>
<S> <C>
Income tax expense, computed at Federal statutory rate........................... $ 650
Tax effect of:
State income taxes, net of Federal income tax benefit.......................... 45
Expenses not deductible for income tax purposes................................ 47
Other............................................................................ 31
------
Total provision.................................................................. $ 773
------
------
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Division's employees are eligible for participation in the Weberg
Enterprises, Inc. 401(k) Profit Sharing Plan and Trust (the 401(k) Plan). The
401(k) Plan is available for all employees age 21 and over who have been
employed by the Company for a period of one year. An employee may contribute up
to 15% of gross salary to the 401(k) Plan. The Company's Board of Directors
determines annually what contribution, if any, the Company shall make to the
401(k) Plan. Employee contributions vest immediately while Company contributions
vest over a seven-year period. The Company did not make any contributions to the
401(k) Plan on behalf of the Division's participants for the year ended December
31, 1994.
The Weberg Enterprises, Inc. Supplemental Retirement Plan (the Plan) was
created in December 1992 and is available to certain key employees of the
Division specified within the Plan. The Plan does not specify minimum or maximum
participant contributions. The Company's Board of Directors determines annually
what contribution, if any, the Company shall make to the Plan. Employee and
Company contributions vest immediately. The Company incurred $12 in expenses in
connection with the Plan on behalf of the Division's participants during the
year ended December 31, 1994. The Plan was terminated effective December 31,
1995.
9. SUBSEQUENT EVENT
On October 31, 1995, the Company sold certain of its assets related to the
Division, net of certain lease obligations and certain liabilities related to
employee benefits, (the Sale) to Rhodes, Inc. (Rhodes) for approximately $31
million. The assets, comprised principally of inventories, leasehold
improvements, office equipment and miscellaneous assets, were utilized by the
Company in the operation of 21 retail furniture stores and 2 distribution
centers in the states of Colorado, Texas and Illinois. In connection with the
Sale, Rhodes assumed the Division's obligations under 11 of the store locations
and entered into leases or subleases with affiliates of the Company for 10 store
and 2 distribution center locations.
F-26
<PAGE>
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HEILIG-MEYERS COMPANY,
HM MERGER SUBSIDIARY, INC.
AND
RHODES, INC.
DATED AS OF SEPTEMBER 17, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- -------------------- -----
<C> <S> <C>
ARTICLE I -- THE MERGER................................................................................................ A-1
Section 1.01. Effective Time of the Merger..................................................................... A-1
Section 1.02. Closing.......................................................................................... A-1
Section 1.03. Effects of the Merger............................................................................ A-1
Section 1.04. Directors and Officers of the Surviving Corporation.............................................. A-2
ARTICLE II -- CONVERSION AND EXCHANGE OF SECURITIES.................................................................... A-2
Section 2.01. Conversion of Shares in the Merger............................................................... A-2
Section 2.02. Exchange of Certificates......................................................................... A-2
(a) EXCHANGE AGENT................................................................................... A-2
(b) EXCHANGE PROCEDURES.............................................................................. A-2
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES; VOTING......................................... A-3
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK.............................................. A-3
(e) NO FRACTIONAL SHARES............................................................................. A-3
(f) TERMINATION OF EXCHANGE FUND..................................................................... A-4
(g) NO LIABILITY..................................................................................... A-4
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................................... A-4
Section 3.01. Organization..................................................................................... A-4
Section 3.02. Articles of Incorporation and By-laws............................................................ A-4
Section 3.03. Capitalization................................................................................... A-4
Section 3.04. Company Subsidiaries............................................................................. A-5
Section 3.05. Authority Relative to this Agreement............................................................. A-5
Section 3.06. Consents and Approvals........................................................................... A-5
Section 3.07. Non-Contravention................................................................................ A-5
Section 3.08. Compliance....................................................................................... A-6
Section 3.09. Company SEC Reports.............................................................................. A-6
Section 3.10. Absence of Certain Changes....................................................................... A-6
Section 3.11. Litigation....................................................................................... A-6
Section 3.12. Taxes............................................................................................ A-7
Section 3.13. Real Property and Leases......................................................................... A-7
Section 3.14. Information Supplied............................................................................. A-7
Section 3.15. Brokers.......................................................................................... A-8
Section 3.16. Employment and Severance Agreements.............................................................. A-8
Section 3.17. Employee Benefit Plans........................................................................... A-8
Section 3.18. Trademarks, Patents and Copyrights............................................................... A-9
Section 3.19. Environmental Matters............................................................................ A-9
Section 3.20. Undisclosed Liabilities.......................................................................... A-10
Section 3.21. Material Contracts............................................................................... A-10
Section 3.22. Full Disclosure.................................................................................. A-10
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF PURCHASER AND SUB...................................................... A-10
Section 4.01. Organization..................................................................................... A-10
Section 4.02. Capitalization of Purchaser...................................................................... A-11
Section 4.03. Capitalization of Sub; Ownership of Sub Common Stock............................................. A-11
Section 4.04. Authority Relative to this Agreement............................................................. A-11
Section 4.05. Consents and Approvals........................................................................... A-11
Section 4.06. Non-Contravention................................................................................ A-11
Section 4.07. Purchaser SEC Reports............................................................................ A-11
Section 4.08. Absence of Certain Changes....................................................................... A-12
Section 4.09. Litigation....................................................................................... A-12
Section 4.10. Information Supplied............................................................................. A-12
Section 4.11. Brokers.......................................................................................... A-12
Section 4.12. Employee Benefit Plans........................................................................... A-12
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
ARTICLE/SECTION PAGE
- -------------------- -----
<C> <S> <C>
Section 4.13. Full Disclosure.................................................................................. A-12
ARTICLE V -- CONDUCT OF BUSINESS PENDING THE MERGER.................................................................... A-12
Section 5.01. Conduct of Business by the Company Pending the Merger............................................ A-12
Section 5.02. Conduct of Business by Purchaser Pending the Merger.............................................. A-13
ARTICLE VI -- ADDITIONAL AGREEMENTS.................................................................................... A-14
Section 6.01. Preparation of Registration Statement and the Proxy Statement.................................... A-14
Section 6.02. Shareholder/Stockholder Meetings................................................................. A-14
Section 6.03. Legal Conditions to Merger....................................................................... A-14
Section 6.04. Transfer Restrictions; Affiliates................................................................ A-14
Section 6.05. Stock Exchange Listing........................................................................... A-14
Section 6.06. Access and Information........................................................................... A-14
Section 6.07. Other Offers..................................................................................... A-15
Section 6.08. Public Announcements............................................................................. A-15
Section 6.09. Employee Benefits................................................................................ A-15
Section 6.10. Stock Options.................................................................................... A-15
Section 6.11. Company Indemnification Provision................................................................ A-16
Section 6.12. Estoppel Certificates and Consents............................................................... A-16
ARTICLE VII -- CONDITIONS TO CONSUMMATION OF MERGER.................................................................... A-17
Section 7.01. Conditions to Each Party's Obligation to Effect the Merger....................................... A-17
Section 7.02. Conditions to Purchaser's and Sub's Obligation to Effect Merger.................................. A-17
Section 7.03. Conditions to the Company's Obligation to Effect Merger.......................................... A-18
ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER...................................................................... A-18
Section 8.01. Termination by Mutual Consent.................................................................... A-18
Section 8.02. Termination by Either Purchaser or the Company................................................... A-19
Section 8.03. Termination by the Company....................................................................... A-19
Section 8.04. Termination by Purchaser......................................................................... A-19
Section 8.05. Effect of Termination and Abandonment............................................................ A-19
ARTICLE IX -- GENERAL PROVISIONS....................................................................................... A-20
Section 9.01. Survival of Representations Warranties and Agreements............................................ A-20
Section 9.02. Notices.......................................................................................... A-20
Section 9.03. Descriptive Headings............................................................................. A-20
Section 9.04. Entire Agreement; Assignment..................................................................... A-20
Section 9.05. Governing Law.................................................................................... A-20
Section 9.06. Expenses......................................................................................... A-21
Section 9.07. Amendment........................................................................................ A-21
Section 9.08. Waiver........................................................................................... A-21
Section 9.09. Counterparts; Effectiveness...................................................................... A-21
Section 9.10. Severability; Validity; Parties in Interest...................................................... A-21
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 17, 1996, by and among
HEILIG-MEYERS COMPANY, a Virginia corporation ("PURCHASER"), HM MERGER
SUBSIDIARY, INC., a Georgia corporation and a wholly owned subsidiary of
Purchaser ("SUB"), and RHODES, INC., a Georgia corporation (the "COMPANY").
WHEREAS, the respective Boards of Directors of Purchaser, Sub and the
Company have each determined that it is in the best interests of their
respective stockholders for the merger of Sub with and into the Company upon the
terms and subject to the conditions set forth herein (the "MERGER");
WHEREAS, in furtherance of such Merger, the Boards of Directors of
Purchaser, Sub and the Company have each approved the Merger in accordance with
the Georgia Business Corporation Code (the "GEORGIA CODE") and the Virginia
Stock Corporation Act (the "VIRGINIA ACT") and upon the terms and subject to the
conditions of this Agreement, with the Company as the corporation surviving the
Merger;
WHEREAS, the Boards of Directors of Purchaser, Sub and the Company have
each determined that the Merger and the other transactions contemplated hereby
are consistent with, and in furtherance of, their respective business strategies
and goals;
WHEREAS, WPS Investors, L.P. ("WPS"), Green Capital Investors, L.P. ("GREEN
CAPITAL") and Purchaser (collectively, the "SHAREHOLDERS") desire to enter into
a Voting Agreement, dated as of the date hereof (the "VOTING AGREEMENT"),
pursuant to which the Shareholders have agreed to vote their respective shares
(each, a "SHARE") of common stock, no par value, of the Company ("COMPANY COMMON
STOCK") in favor of the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"); and
WHEREAS, Purchaser, Sub and the Company desire to make certain
representations, warranties and agreements in connection with the Merger and
also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, a certificate of merger (the "CERTIFICATE OF MERGER") shall be
duly prepared, executed and acknowledged by Purchaser, on behalf of the
Surviving Corporation (as defined in Section 1.03(b)), and thereafter delivered
to the Secretary of State of the State of Georgia for filing as provided in the
Georgia Code on the Closing Date (as defined in Section 1.02). The Merger shall
become effective upon the filing of the Certificate of Merger with the Secretary
of State of the State of Georgia or at such time thereafter as is provided in
the Certificate of Merger (the "EFFECTIVE TIME").
SECTION 1.02. CLOSING. The closing of the Merger (the "CLOSING") will take
place at 10:00 a.m. on the second business day after satisfaction or waiver
(subject to applicable law) of the conditions (excluding conditions that, by
their terms, cannot be satisfied until the Closing Date) set forth in Article
VII (the "CLOSING DATE"), unless another time or date is agreed to in writing by
the parties hereto. The Closing shall be held at such location as is agreed to
in writing by the parties hereto.
SECTION 1.03. EFFECTS OF THE MERGER. (a) At the Effective Time (i) the
separate existence of Sub shall cease and Sub shall be merged with and into the
Company (ii) the Articles of Incorporation of the Company as in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation, until thereafter amended as provided by law and
such Articles of Incorporation and (iii) the By-laws of the Company as in effect
immediately prior to the Effective Time shall be the By-laws of the Surviving
Corporation, until thereafter amended as provided by law, such By-laws and the
Articles of Incorporation of the Surviving Corporation.
(b) As used in this Agreement, "SURVIVING CORPORATION" shall mean the
Company at and after the Effective Time, as the surviving corporation in the
Merger.
(c) At and after the Effective Time, the Merger will have the effects set
forth in the Georgia Code.
A-1
<PAGE>
SECTION 1.04. DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The
directors of Sub immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, and the officers of Sub immediately
prior to the Effective Time shall be the initial officers of the Surviving
Corporation, in each case until their respective successors shall have been duly
elected or appointed and qualified.
ARTICLE II
CONVERSION AND EXCHANGE OF SECURITIES
SECTION 2.01. CONVERSION OF SHARES IN THE MERGER. At the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
share of Company Common Stock:
(a) Any Shares owned by Purchaser, Sub or any other direct or indirect
subsidiary of the Company or Purchaser shall be canceled and retired, without
any conversion thereof, and no payment shall be made with respect thereto.
(b) Each share of common stock of Sub, par value $.01 per share ("SUB
COMMON STOCK"), issued and outstanding immediately prior to the Effective Time,
shall continue to be an issued and outstanding share of common stock, par value
$.01 per share, of the Surviving Corporation.
(c) Subject to Section 2.02(e), each remaining Share of Company Common
Stock issued and outstanding immediately prior to the Effective Time shall be
converted into the right to receive 0.50 fully paid and nonassessable shares of
$2.00 par value common stock of Purchaser ("PURCHASER COMMON STOCK"). All such
shares of Company Common Stock shall no longer be outstanding and shall
automatically be cancelled and retired and shall cease to exist, and each
certificate previously representing any such shares shall thereafter represent
the right to receive the shares of Purchaser Common Stock into which such
Company Common Stock has been converted. Certificates previously representing
shares of Company Common Stock shall be exchanged for certificates representing
whole shares of Purchaser Common Stock issued in consideration therefor upon the
surrender of such certificates in accordance with Section 2.02, without
interest.
SECTION 2.02. EXCHANGE OF CERTIFICATES. (A) EXCHANGE AGENT. Prior to the
Effective Time, Purchaser shall designate a United States bank or trust company
to act as exchange agent (the "EXCHANGE AGENT") for the benefit of the holders
of certificates which immediately prior to the Effective Time evidenced shares
of Company Common Stock (the "COMPANY CERTIFICATES"), for exchange in accordance
with this Article II through the Exchange Agent, certificates representing the
shares of Purchaser Common Stock (such certificates for shares of Purchaser
Common Stock, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "EXCHANGE FUND") issuable pursuant to
Section 2.01 in exchange for such shares of Company Common Stock.
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of shares
of Company Common Stock immediately prior to the Effective Time whose shares
were converted into the right to receive shares of Purchaser Common Stock
pursuant to Section 2.01, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Company
Certificates shall pass, only upon delivery of the Company Certificates to the
Exchange Agent), and (ii) instructions for use in effecting the surrender of the
Company Certificates in exchange for certificates representing shares of
Purchaser Common Stock. Upon surrender of a Company Certificate for cancellation
to the Exchange Agent together with such letter of transmittal, duly executed,
the holder of such Company Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of Purchaser
Common Stock which such holder has the right to receive in respect of the
Company Certificate surrendered pursuant to the provisions of this Article II
(after taking into account all shares of Company Common Stock then held by such
holder), and the Company Certificate so surrendered shall forthwith be
cancelled. In the event of a transfer of ownership of Company Common Stock which
is not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Purchaser Common Stock may be issued
to a transferee if the Company Certificate representing such Company Common
Stock is presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.02, each Company Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive the Purchaser Common Stock into
which the shares of Company Common Stock represented by such Company Certificate
have been converted as provided in this Article II and the right to receive upon
such surrender cash in lieu of any fractional shares of Purchaser Common Stock
as contemplated by this Section 2.02.
A-2
<PAGE>
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES; VOTING.
(i) No dividends or other distributions declared or made after the
Effective Time with respect to Purchaser Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Company Certificate with respect to the right to receive the shares of
Purchaser Common Stock represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section
2.02(e), until the holder of such Company Certificate shall surrender such
Company Certificate. Subject to the effect of applicable laws, following
surrender of any such Company Certificate, there shall be paid to the
holder of the certificates representing whole shares of Purchaser Common
Stock issued in exchange therefor, without interest, (A) at the time of
such surrender or as promptly after the sale of the Excess Shares (as
defined in Section 2.02(e)) as practicable, the amount of any cash payable
with respect to a fractional share of Purchaser Common Stock to which such
holder is entitled pursuant to Section 2.02(e) and the amount of dividends
or other distributions with a record date after the Effective Time
theretofor paid (but withheld pursuant to the immediately preceding
sentence) with respect to such whole shares of Purchaser Common Stock, and
(B) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect
to such whole shares of Purchaser Common Stock.
(ii) Former holders of record as of the Effective Time of shares of
Company Common Stock shall not be entitled, at and after the Effective
Time, to vote the number of shares of Purchaser Common Stock which they
have the right to receive until the Company Certificates formerly
representing such shares shall have been surrendered in accordance with
this Section 2.02 and certificates evidencing such Purchaser Common Stock
shall have been issued in exchange therefor.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All shares of
Purchaser Common Stock issued upon conversion of shares of Company Common Stock
in accordance with the terms hereof (including any cash paid pursuant to Section
2.02(c) or 2.02(e)) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of Company Common Stock subject, however,
to the Surviving Corporation's obligation to pay any dividends or make any other
distributions with a record date prior to the Effective Time which may have been
declared or made by the Company on such shares of Company Common Stock in
accordance with the terms of this Agreement on or prior to the Effective Time
and which remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Company
Certificates are presented to the Surviving Corporation for any reason, they
shall be cancelled and exchanged as provided in this Article II.
(e) NO FRACTIONAL SHARES.
(i) No certificates or scrip representing fractional shares of
Purchaser Common Stock shall be issued upon the surrender for exchange of
Company Certificates evidencing Company Common Stock, and such fractional
share interests will not entitle the owner thereof to vote or to any rights
of a shareholder of the Surviving Corporation.
(ii) As promptly as practicable following the Effective Time, the
Exchange Agent shall determine the excess of (x) the number of full shares
of Purchaser Common Stock delivered to the Exchange Agent by Purchaser
pursuant to Section 2.02(a) over (y) the aggregate number of full shares of
Purchaser Common Stock to be distributed to holders of Company Common Stock
pursuant to Section 2.02(b) (such excess being herein called the "EXCESS
SHARES"). Following the Effective Time, the Exchange Agent, as agent for
the holders of Company Common Stock, shall sell the Excess Shares at then
prevailing prices on the New York Stock Exchange, Inc. (the "NYSE"), all in
the manner provided in paragraph (iii) of this Section.
(iii) The sale of the Excess Shares by the Exchange Agent shall be
executed on the NYSE through one or more member firms of the NYSE and shall
be executed in round lots to the extent practicable. The Exchange Agent
shall use all reasonable efforts to complete the sale of the Excess Shares
as promptly following the Effective Time as, in the Exchange Agent's
reasonable judgment, is practicable consistent with obtaining the best
execution of such sales in light of prevailing market conditions. Until the
net proceeds of such sale or sales have been distributed to the holders of
Company Common Stock, the Exchange Agent will hold such proceeds in trust
for the holders of Company Common Stock (the "COMMON SHARES TRUST").
Purchaser shall pay all commissions, transfer taxes and other out-of-pocket
transaction costs, including the expenses and compensation, of the Exchange
Agent incurred in connection with such sale of the Excess Shares. The
Exchange Agent shall determine the portion of the Common Shares Trust to
which each holder of Company Common Stock shall be entitled, if any, by
multiplying the amount of the aggregate net proceeds comprising
A-3
<PAGE>
the Common Shares Trust by a fraction the numerator of which is the amount
of the fractional share interest to which such holder of Company Common
Stock is entitled (after taking into account all shares of Company Common
Stock held at the Effective Time by such holder) and the denominator of
which is the aggregate amount of fractional share interests to which all
holders of Company Common Stock are entitled.
(iv) Notwithstanding the provisions of clauses (ii) and (iii), above,
Purchaser may elect at its option, exercised prior to the Effective Time,
in lieu of the issuance and sale of Excess Shares and the making of the
payments contemplated in said clauses, to pay each holder of Company Common
Stock an amount in cash equal to the product obtained by multiplying (x)
the fractional share interest to which such holder (after taking into
account all shares of Company Common Stock held at the Effective Time by
such holder) would otherwise be entitled by (y) the closing price for a
share of Purchaser Common Stock on the NYSE Composite Transaction Tape on
the first business day immediately preceding the Effective Time, and, in
such case, all references herein to the cash proceeds of the sale of the
Excess Shares and similar references shall be deemed to mean and refer to
the payments calculated as set forth in this clause (iv).
(v) As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Company Common Stock with respect to
any fractional share interests, the Exchange Agent shall make available
such amounts to such holders of Company Common Stock subject to and in
accordance with the terms of Section 2.02(c).
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund and
Common Shares Trust which remains undistributed to the shareholders of the
Company for six months after the Effective Time shall be delivered to Purchaser,
upon demand, and any shareholders of the Company who have not theretofor
complied with this Article II shall thereafter look only to Purchaser for
payment of their claim for Purchaser Common Stock, any cash in lieu of
fractional shares of Purchaser Common Stock and any dividends or distributions
with respect to Purchaser Common Stock.
(g) NO LIABILITY. Neither Purchaser nor the Company nor the Surviving
Corporation shall be liable to any holder of shares of Company Common Stock or
Purchaser Common Stock for such shares (or dividends or distributions with
respect thereto) or cash from the Common Shares Trust delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of Purchaser and Sub as
follows:
SECTION 3.01. ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Georgia and
has the corporate power and authority and all necessary governmental approvals
to own, lease and operate its properties and to carry on its business as it is
now being conducted or presently proposed to be conducted. The Company is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary, except
where the failure to be so qualified would not individually or in the aggregate
have a material adverse effect on the business, assets, liabilities, results of
operations or financial condition of the Company and the Company Subsidiaries
(as hereinafter defined), taken as a whole (a "COMPANY MATERIAL ADVERSE
EFFECT").
SECTION 3.02. ARTICLES OF INCORPORATION AND BY-LAWS. The Company has
heretofore furnished to Purchaser a complete and correct copy of the articles of
incorporation and the by-laws or equivalent organizational documents, each as
amended to date, of the Company and each Company Subsidiary. Such articles of
incorporation, by-laws and equivalent organizational documents are in full force
and effect. Neither the Company nor any Company Subsidiary is in violation of
any provision of its articles of incorporation, by-laws or equivalent
organizational documents.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock. As of September 13, 1996, (i)
there were 9,168,150 shares of Common Stock issued and outstanding and (ii)
679,000 shares of Common Stock were reserved for issuance upon the exercise of
outstanding Company Stock Options (as defined in Section 6.10). All of the
issued and outstanding shares of Common Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. Except as set forth above, as of
the date of this Agreement there are no shares of capital stock of the Company
issued or outstanding or any options, warrants, subscriptions, calls, rights,
convertible securities or other agreements or commitments obligating the Company
to issue, transfer, sell, redeem, repurchase or otherwise acquire any shares of
its capital stock.
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SECTION 3.04. COMPANY SUBSIDIARIES. (a) SCHEDULE 3.04(A) hereto sets forth
the name of each subsidiary of the Company (collectively, the "COMPANY
SUBSIDIARIES") and the state or jurisdiction of its incorporation. Each Company
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority and all necessary government approvals to own,
lease and operate its properties and to carry on its business as now being
conducted. Each Company Subsidiary is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed and in good standing would not
individually or in the aggregate have a Company Material Adverse Effect.
(b) The Company is, directly or indirectly, the record and beneficial owner
of all of the outstanding shares of capital stock of each of the Company
Subsidiaries, there are no proxies with respect to any such shares, and no
equity securities of any Company Subsidiary are or may become required to be
issued by reason of any options, warrants, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable or exercisable for, shares of any capital stock
of any Company Subsidiary, and there are no contracts, commitments,
understandings or arrangements by which the Company or any Company Subsidiary is
or may be bound to issue, redeem, purchase or sell additional shares of capital
stock of any Company Subsidiary or securities convertible into or exchangeable
or exercisable for any such shares. Except as set forth on SCHEDULE 3.04(B)
hereto, all of such shares so owned by the Company are validly issued, fully
paid and nonassessable and are owned by it free and clear of any encumbrances,
restraints on alienation, or any other restrictions with respect to the
transferability or assignability thereof (other than restrictions on transfer
imposed by federal or state securities laws).
(c) Except for the Company Subsidiaries and as set forth in the Company SEC
Reports (as hereinafter defined) or on SCHEDULE 3.04(C) hereto, the Company does
not directly or indirectly own any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for any equity or
similar interest in, any corporation, partnership, joint venture or other
business association or entity that directly or indirectly conducts any activity
which is material to the Company.
SECTION 3.05. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the
corporate power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby have been duly authorized by the Company's Board of
Directors, and no other corporate proceedings on the part of the Company, other
than the approval and adoption of this Agreement and the Merger by a majority of
the outstanding Shares and the filing of the Certificate of Merger, are
necessary to authorize this Agreement or the transactions contemplated hereby.
Subject to the foregoing, this Agreement has been duly and validly executed and
delivered by the Company and (assuming this Agreement constitutes a valid and
binding obligation of Purchaser and Sub) constitutes a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms.
SECTION 3.06. CONSENTS AND APPROVALS. Except (i) for applicable
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR ACT"), (ii) the filing with the SEC of (A) a proxy statement
in definitive form relating to a meeting of the Company's shareholders to be
held in connection with the Merger (the "PROXY STATEMENT"), and (B) such reports
under Sections 13(a), 13(d), 13(g) and 16(a) of the Securities and Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), as may be required in connection with
this Agreement and the transactions contemplated hereby and the obtaining from
the SEC of such orders as may be required in connection therewith, (iii) the
filing of the Certificate of Merger as required by the Georgia Code, (iv) if
necessary, such other applications, filings, authorizations, orders and
approvals as may be required pursuant to any applicable state takeover laws
("STATE TAKEOVER APPROVALS") (the requirements set forth in clauses (i) through
(iv) collectively, the "GOVERNMENTAL REQUIREMENTS"), or (v) where the failure to
make any filing with, or to obtain any permit, authorization, consent or
approval of, any court or tribunal or administrative, governmental or regulatory
body, agency, commission, division, department, public body or other authority
(a "GOVERNMENT ENTITY") would not prevent or materially delay the consummation
of the Merger, or otherwise prevent the Company from performing its obligations
under this Agreement, and would not individually or in the aggregate have a
Company Material Adverse Effect, no filing with, and no permit, authorization,
consent or approval of, any Governmental Entity is necessary for the execution,
delivery and performance of this Agreement by the Company and the consummation
of the transactions contemplated by this Agreement.
SECTION 3.07. NON-CONTRAVENTION. Neither the execution, delivery or
performance of this Agreement by the Company, nor the consummation by the
Company of the transactions contemplated hereby, will (i) conflict with or
result in any breach of any provisions of the articles of incorporation or
by-laws of the Company or the articles of incorporation or by-laws or equivalent
organizational documents of any of the Company Subsidiaries, (ii) except as set
forth on SCHEDULE 3.07 hereto,
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result in a violation or breach of, or constitute a default under, or give rise
to any right of termination, modification or acceleration under, any note, bond,
mortgage, deed of trust, security interest, indenture, license, lease, contract,
agreement, plan or other instrument or obligation to which the Company or any of
the Company Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound or affected, or (iii) violate or conflict with
any applicable law, except in the case of clauses (ii) and (iii) of this
sentence for violations, breaches, defaults or conflicts which would not
individually or in the aggregate have a Company Material Adverse Effect.
SECTION 3.08. COMPLIANCE. The Company and the Company Subsidiaries have
operated their respective businesses in compliance with all laws and regulations
applicable to them or their respective businesses including, without limitation,
those related to (i) antitrust and trade matters, (ii) civil rights, (iii)
zoning and building codes, (iv) public health and safety, (v) consumer credit,
including without limitation, the Federal Truth-in-Lending Act, (vi) worker
health and safety and (vii) labor, employment and discrimination in employment,
except for such violations which would not individually or in the aggregate have
a Company Material Adverse Effect. Neither the Company nor any Company
Subsidiary is in conflict with, or in default or violation of, (i) any law,
rule, regulation, order, judgment or decree applicable to the Company or any
Company Subsidiary or by which any property or asset of the Company or any
Company Subsidiary is bound or affected, or (ii) except as set forth on SCHEDULE
3.08 hereto, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which the
Company or any Company Subsidiary is a party or by which the Company or any
Company Subsidiary or any property or asset of the Company or any Company
Subsidiary is bound or affected, except for any such conflicts, defaults or
violations that would not, individually or in the aggregate, have a Company
Material Adverse Effect.
SECTION 3.09. COMPANY SEC REPORTS. The Company has made available to
Purchaser true and complete copies of each registration statement, report and
proxy or information statement (including exhibits and any amendments thereto)
filed by the Company with the SEC since March 1, 1994 (collectively, the
"COMPANY SEC REPORTS") all of which, as of their respective filing dates,
complied in all material respects with all applicable requirements of the
Securities Act of 1933, as amended (the "SECURITIES ACT") and the Exchange Act,
and the rules and regulations promulgated thereunder. None of such Company SEC
Reports, as of the respective dates they were filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Each of the
audited consolidated financial statements of the Company (including any related
notes and schedules) included (or incorporated by reference) in its Annual
Report on Form 10-K for the fiscal year ended February 29, 1996 (the "1996 FORM
10-K"), fairly present, in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis (except as may be indicated in
the notes thereto), the consolidated financial position of the Company and the
Company Subsidiaries as of the dates thereof and the consolidated results of
their operations and their cash flows for the periods then ended. Each of the
unaudited financial statements of the Company (including any related notes and
schedules) (the "INTERIM COMPANY FINANCIAL STATEMENTS") included in its
quarterly report on Form 10-Q for the quarter ended May 31, 1996 (the "MAY 1996
10-Q"), fairly present, in conformity with GAAP applied on a consistent basis
(except as may be indicated in the notes thereto), the consolidated financial
position of the Company and the Company Subsidiaries as of the dates thereof and
the consolidated results of their operations and their cash flows for the
periods then ended.
SECTION 3.10. ABSENCE OF CERTAIN CHANGES. Since February 29, 1996, there
has been no event or condition which has had (or is reasonably likely to result
in) a Company Material Adverse Effect, and, except as set forth on SCHEDULE 3.10
hereto, the Company and the Company Subsidiaries have in all material respects
conducted their businesses in the ordinary course consistent with past practices
and have not taken any action which, if taken after the date hereof, would
violate Section 5.01 hereof.
SECTION 3.11. LITIGATION. Except as disclosed in the notes to the financial
statements included in the Company SEC Reports or as set forth on SCHEDULE 3.11
hereto, there is no suit, action, proceeding or investigation pending or, to the
best knowledge of the Company, threatened against or affecting the Company or
any of the Company Subsidiaries, the outcome of which is likely individually or
in the aggregate (i) to have a Company Material Adverse Effect or (ii) to limit,
in any material manner, the right of Purchaser to control the Company and the
Company Subsidiaries after the Effective Time. Neither the Company nor any
Company Subsidiary is subject to any judgment, decree, injunction, rule or order
which, insofar as can reasonably be foreseen in the future, may (i) have a
Company Material Adverse Effect or (ii) limit, in any material manner, the right
of Purchaser to control the Company and the Company Subsidiaries after the
Effective Time.
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SECTION 3.12. TAXES. (a) Except as set forth on SCHEDULE 3.12(A) hereto,
the Company and the Company Subsidiaries have filed all tax returns required to
be filed by any of them, and none of the Company or the Company Subsidiaries
currently is the beneficiary of any extension of time within which to file any
tax return. All such tax returns that have been filed were correct and complete
in all material respects.
(b) Except as set forth on SCHEDULE 3.12(B) hereto, all taxes due and
payable by any of the Company and the Company Subsidiaries (whether or not shown
on any tax return) on or before the date hereof have been paid, and any taxes
accrued but not yet payable as of the date of the most recent balance sheet of
the Company do not exceed by any material amount the reserve for unpaid taxes
shown on the most recent balance sheet of the Company.
(c) Except as set forth on SCHEDULE 3.12(C) hereto, neither the Company nor
any of the Company Subsidiaries (i) has waived any statute of limitations in
respect of any tax or agreed to any extension of time with respect to any tax
assessment or deficiency or (ii) has executed any power of attorney authorizing
any other person to represent it before any tax authority.
(d) Neither the Company nor any Company Subsidiary (i) has filed a consent
under Section 341(f) of the Code concerning collapsible corporations, (ii) is a
party to any tax sharing or tax allocation agreement, (iii) since January 1,
1988, has been a member of an affiliated group filing a consolidated federal
income tax return (other than a group of which the Company was the common
parent) or (iv) has any liability for the taxes of any person (other than any of
the Company or the Company Subsidiaries) under Treasury Regulation Section
1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor or otherwise.
For the purpose of this Agreement, the term "TAX" (including, with
correlative meaning, the terms "TAXES" and "TAXABLE") shall include, except
where the context otherwise requires, (i) all Federal, state, local and foreign
income, profits, environmental, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy and other taxes,
duties or assessments of any nature whatsoever, together with all interest,
penalties and additions imposed with respect to such amounts and (ii) any
liability of the Company or any Company Subsidiary for the payment of any
amounts of the type described in clause (i) above as a result of being a member
of an affiliated, consolidated, combined or unitary group for any period.
SECTION 3.13. REAL PROPERTY AND LEASES. (a) Except for Permitted Liens (as
defined below), the Company and the Company Subsidiaries have good and
marketable title to all of the real property owned by the Company and the
Company Subsidiaries and good title to all of the personal property, tangible
and intangible, owned by the Company and the Company Subsidiaries. Such title is
sufficient for the Company and the Company Subsidiaries to conduct their
respective businesses as currently conducted.
(b) Except as set forth on SCHEDULE 3.13(B) hereto, each parcel of real
property owned or leased by the Company or any Company Subsidiary (i) is owned
or leased free and clear of all mortgages, pledges, liens, security interests,
conditional and installment sale agreements, encumbrances, charges or other
claims of third parties of any kind (collectively, "LIENS"), other than (A)
Liens for current taxes and assessments not yet past due, (B) inchoate
mechanics' and materialmen's Liens for construction in progress and inchoate
workmen's, repairmen's, warehousemen's and carriers' Liens arising in the
ordinary course of business of the Company or such Company Subsidiary consistent
with past practice, and (C) all matters of record, Liens and other imperfections
of title and encumbrances which, individually or in the aggregate, would not
materially interfere with the use of such real property by the Company or any
Company Subsidiary (collectively, "PERMITTED LIENS"), and (ii) is neither
subject to any governmental decree or order to be sold nor is being condemned,
expropriated or otherwise taken by any public authority with or without payment
of compensation therefor, nor, to the best knowledge of the Company, has any
such condemnation, expropriation or taking been proposed.
(c) All leases of real property leased for the use or benefit of the
Company or any Company Subsidiary to which the Company or any Company Subsidiary
is a party, and all amendments and modifications thereto, are in full force and
effect and have not been modified or amended, and, except as set forth on
SCHEDULE 3.13(C) hereto, there exists no default under any such lease by the
Company or any Company Subsidiary and the Company and the Company Subsidiaries
have complied in all material respects with their respective obligations under
such leases.
SECTION 3.14. INFORMATION SUPPLIED. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in (i)
the registration statement on Form S-4 to be filed with the SEC by the Purchaser
in connection with the issuance of shares of the Purchaser Common Stock in the
Merger (the "REGISTRATION STATEMENT") will, at the time the Registration
Statement is filed with the SEC and at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Proxy Statement will, at the
date of mailing to shareholders and at the
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times of the meeting of shareholders to be held in connection with the Merger,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Proxy Statement (except for such portions thereof that relate
only to the Purchaser) will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder.
SECTION 3.15. BROKERS. Except for Salomon Brothers Inc, no person is
entitled to any brokerage, financial advisory, finder's or similar fee or
commission payable by the Company in connection with the transactions
contemplated by this Agreement based upon arrangements made by and on behalf of
the Company. The Company has provided Purchaser with a true and complete copy of
the engagement letter between Salomon Brothers Inc and the Company.
SECTION 3.16. EMPLOYMENT AND SEVERANCE AGREEMENTS. Except as set forth on
SCHEDULE 3.16 hereto, there are no employment, severance or termination
agreements to which the Company or any Company Subsidiary is a party. Except for
this Agreement and those agreements described in the Company SEC Reports or on
SCHEDULE 3.16 hereto, neither the Company nor any Company Subsidiaries is a
party to, or bound by, any employment agreement or any other arrangement or
understanding with any person that provides for the payment of any consideration
by the Company or any Company Subsidiary (or Purchaser or Sub) to such person as
a result of the consummation of any of the transactions contemplated by this
Agreement. Except as set forth on SCHEDULE 3.16 hereto, neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby or thereby has resulted in or will result in payments to
"disqualified individuals" (as defined in Section 280G(c) of the Code) of the
Company or the Company Subsidiaries which, individually or in the aggregate,
will constitute "excess parachute payments" (as defined in Section 280G(b) of
the Code) resulting in the imposition of the excise tax under Section 4999 of
the Code or the disallowance of deductions under Section 280G of the Code.
SECTION 3.17. EMPLOYEE BENEFIT PLANS. (a) SCHEDULE 3.17(A) hereto contains
a written list of all employee benefit plans, programs, policies, practices and
other arrangements providing benefits to any employee or former employee of the
Company or the Company Subsidiaries that are maintained by the Company or the
Company Subsidiaries or to which the Company or the Company Subsidiaries
contribute on behalf of such employees or former employees whether or not
subject to the Employee Retirement Income Security Act of 1974 ("ERISA"),
including, without limitation, all plans, agreements or arrangements relating to
deferred compensation, stock option, bonus, profit sharing or other incentive
plan, pensions, retirement income or other benefits, severance arrangements,
health benefits and insurance benefits (collectively the "COMPANY PLANS"). The
Company has made available to Purchaser complete and correct copies of (i) all
Company Plans and (ii) the most recent actuarial report for each Company Plan
that is a defined benefit plan (within the meaning of Section 3(35) of ERISA).
None of the Company Plans is a "multiemployer plan" within the meaning of
Section 3(37) or Section 4001(a)(3) of ERISA. Since January 1, 1988, neither the
Company nor any of the Company Subsidiaries has at any time contributed to or
had any obligation to contribute to a "multiemployer plan."
(b) Each Company Plan has been administered and operated in compliance with
its terms and applicable law in all material respects, including, without
limitation, in accordance with the Code and ERISA, except where the failure to
be so administered or operated would not have a Company Material Adverse Effect.
Except as set forth on SCHEDULE 3.17(B) hereto, the Company has received a
favorable determination letter from the IRS with respect to each Company Plan
which is intended to be a "qualified" plan under Section 401(a) of the Code, any
amendment made or event related to such Company Plan subsequent to the date of
such favorable determination letter has not adversely affected the qualified
status of such Company Plan, and, to the best knowledge of the Company, the IRS
has taken no action to revoke any such letter. No material liability under
ERISA, the Code, or other applicable law has been incurred or, to the knowledge
of the Company, is reasonably likely to be incurred by the Company, with respect
to any Company Plan.
(c) Neither the Company nor, to the best of the Company's knowledge, any of
the Company Subsidiaries or, to the best of the Company's knowledge, any other
"disqualified person" (as defined in Section 4975 of the Code) or
"party-in-interest" (as defined in Section 3(14) of ERISA), has engaged in any
transaction in connection with which the Company or any Company Subsidiary,
directly or indirectly, would be subject to either a civil penalty assessed
pursuant to Section 502 (i) of ERISA or a tax imposed by Section 4975 of the
Code.
(d) Except as set forth on SCHEDULE 3.17(D) hereto, there are no actions,
suits, claims or proceedings, pending or, to the best of the Company's
knowledge, threatened (other than routine claims for benefits), which would be
reasonably likely to result in any liability to the Company or to any of the
Company Subsidiaries with respect to any Company Plan or any trust related
thereto which would have or would be reasonably likely to have a Company
Material Adverse Effect.
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(e) No liability (other than liability for premium payments required by
Section 4007 of ERISA, which premiums have been paid when due) to the Pension
Benefit Guaranty Corporation ("PBGC") exists or has been incurred with respect
to any Company Plan subject to Title IV of ERISA which would or would be
reasonably likely to have a Company Material Adverse Effect.
(f) Except as set forth on SCHEDULE 3.17(F) hereto, the actuarial present
value of all accrued benefits under each Company Plan which is a "defined
benefit plan"(within the meaning of Section 3(35) of ERISA) and which is subject
to Subtitles C and D of Title IV of ERISA (each such plan being hereinafter
referred to as a "TITLE IV PLAN") and maintained or contributed to by the
Company and the Company Subsidiaries, as from time to time in effect, did not,
as of January 1, 1996, exceed the value of the assets of each such Company Plan
as of such date determined on the basis of the actuarial assumptions required by
the PBGC for plans terminating under Section 4041 of ERISA.
(g) Except as set forth on SCHEDULE 3.17(G) hereto, there have not been any
"reportable events," as that term is defined in Section 4043 of ERISA, with
respect to any Title IV Plan required to be reported to the PBGC since January
1, 1992.
(h) None of the Company Plans subject to Part 3 of Subtitle B of Title I or
Title II of ERISA nor any trusts have incurred any "accumulated funding
deficiency," as such term is defined in Section 302 of ERISA or Section 412 of
the Code (whether or not waived), since January 1, 1992, and full payment has
been made of all contributions required to be made under the terms of each
Company Plan.
(i) Neither the Company nor the Company Subsidiaries have any collective
bargaining or similar agreements with any employees. There are no controversies
pending, or to the best knowledge of the Company, threatened between the Company
or any of the Company Subsidiaries and any of their employees which would
reasonably be expected to have a Company Material Adverse Effect.
(j) Except as set forth in on SCHEDULE 3.17(J) hereto, the Company and the
Company Subsidiaries have no liability for life, health, medical or other
welfare benefits to former employees or beneficiaries or dependents thereof,
except for health continuation coverage as required by Section 4980B of the Code
or Part 6 of Title I of ERISA.
SECTION 3.18. TRADEMARKS, PATENTS AND COPYRIGHTS. The Company and the
Company Subsidiaries own or have valid rights in all patents, patent rights,
trademarks, trademark rights, trade names, trade name rights, copyrights,
service marks, trade dress, trade secrets, applications for trademarks and for
service marks, and other proprietary rights and information used or held for use
in connection with the business of the Company and the Company Subsidiaries as
currently conducted or as contemplated to be conducted, and the Company is
unaware of any assertion or claim challenging the validity of any of the
foregoing which, individually or in the aggregate, would have a Company Material
Adverse Effect. The conduct of the business of the Company and the Company
Subsidiaries as currently conducted and as contemplated to be conducted does not
and will not conflict in any way with any copyright, patent, patent right,
license, trade dress, trademark, trademark right, trade name, trade name right,
or service mark of any third party that, individually or in the aggregate, would
have a Company Material Adverse Effect. To the best knowledge of the Company,
there are no infringements of any proprietary rights owned by or licensed by or
to the Company or any Company Subsidiary which, individually or in the
aggregate, would have a Company Material Adverse Effect. Neither the Company nor
any Company Subsidiary has licensed or otherwise permitted the use by any third
party of any proprietary information on terms or in a manner which, individually
or in the aggregate, would have a Company Material Adverse Effect.
SECTION 3.19. ENVIRONMENTAL MATTERS. (a) For purposes of this Agreement,
the following terms shall have the following meanings: (i) "HAZARDOUS
SUBSTANCES" means (A) those substances defined in or regulated under the
following federal statutes and their state counterparts, as each may be amended
from time to time, and all regulations thereunder: the Hazardous Materials
Transportation Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the Clean
Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal
Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act; (B) petroleum
and petroleum products including crude oil and any fractions thereof; (C)
natural gas, synthetic gas, and any mixtures thereof; (D) radon; (E) any other
contaminant; and (F) any substance with respect to which a federal, state or
local agency requires environmental investigation, monitoring, reporting or
remediation; (ii) "ENVIRONMENTAL LAWS" means any federal, state or local law
relating to (A) releases or threatened releases of Hazardous Substances or
materials containing Hazardous Substances; (B) the manufacture, handling,
transport, use, treatment, storage or disposal of Hazardous Substances or
materials containing Hazardous Substances; or (C) otherwise relating to
pollution or protection of the environment or the protection of human health.
(b) Except as set forth on SCHEDULE 3.19(B) hereto, or as would not,
individually or in the aggregate, have a Company Material Adverse Effect: (i)
the Company has not violated and is not in violation of any Environmental Law;
(ii) none of the
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properties currently or, to the best knowledge of the Company, formerly, owned
or leased by the Company (including, without limitation, soils and surface and
ground waters) are contaminated with any Hazardous Substance, and no release or
threat of release of Hazardous Substances except in the routine operation of the
Company consistent with past practices and in compliance with applicable law in
all material respects has occurred in, on, under, from or at any such
properties; (iii) to the best knowledge of the Company, the Company is not
actually, nor to the best knowledge of the Company, potentially or allegedly
liable for any off-site contamination; (iv) to the best knowledge of the
Company, none of the properties adjacent to properties owned or leased by the
Company (including, without limitation, soil and surface and groundwaters) are
contaminated with any Hazardous Substances and no release or threat of release
of Hazardous Substances has occurred in, on, under, from or at any such adjacent
property; (v) the Company is not actually or potentially nor, to the best
knowledge of the Company, allegedly liable under any Environmental Law
(including, without limitation, pending or threatened liens); (vi) the Company
has all permits, licenses and other authorizations required under any
Environmental Law ("ENVIRONMENTAL PERMITS"); (vii) the Company has always been
and is in compliance with its Environmental Permits; and (viii) no above ground
or underground storage tanks are located in, on or under any properties owned or
leased by the Company. For purposes of this Section 3.19(b), all references to
the Company shall include all current and former subsidiaries and any entities
acquired by the Company or any current or former subsidiaries, and all
representations relating to current and former subsidiaries, and properties
formerly owned by the Company, shall be limited in scope to the time periods
before or during the Company's ownership or operation of any such subsidiaries
or properties or before or during the term of the lease.
SECTION 3.20. UNDISCLOSED LIABILITIES. Since February 29, 1996 neither the
Company nor the Company Subsidiaries have incurred any liabilities or
obligations which are not reflected in the Interim Company Financial Statements
other than those which were incurred in the ordinary course of business and
consistent with past practices and which do not and cannot reasonably be
expected to have a Company Material Adverse Effect.
SECTION 3.21. MATERIAL CONTRACTS. The Company has filed as an exhibit
(either by inclusion or by incorporation by reference therein) to its 1996 Form
10-K and its May 1996 Form 10-Q all contracts, agreements or commitments of the
Company or the Company Subsidiaries that are required to be filed with such
Company SEC Reports in accordance with the Exchange Act and the rules and
regulations promulgated thereunder. SCHEDULE 3.21 hereto sets forth a complete
list of each contract, agreement or commitment of the Company or the Company
Subsidiaries:
(i) which provides for the sale, lease or transfer, after the date
hereof and other than in the ordinary course of business, of any of their
respective assets; and
(ii) which contains covenants pursuant to which any person has agreed
not to compete with any business conducted by the Company or the Company
Subsidiaries or not to disclose to others information concerning the
Company or the Company Subsidiaries.
Each of the foregoing is referred to in this Agreement as a "MATERIAL CONTRACT".
Except as set forth on SCHEDULE 3.21 hereto, the Company and the Company
Subsidiaries have complied in all material respects with their respective
obligations under all of the Material Contracts and, to the best knowledge of
the Company, no event has occurred or condition exists which constitutes or can
reasonably be expected to constitute a breach of any such contract by any party
thereto.
SECTION 3.22. FULL DISCLOSURE. None of the representations and warranties
in this Article III contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND SUB
Purchaser and Sub hereby represent and warrant to the Company as follows:
SECTION 4.01. ORGANIZATION. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of Virginia
and Sub is a corporation duly organized, validly existing and in good standing
under the laws of the State of Georgia, and each has the corporate power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted or
presently proposed to be conducted. Each of Purchaser and Sub is duly qualified
as a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities make such qualification necessary, except where the
failure to be so qualified would not individually or in the aggregate have a
material adverse
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effect on the business, assets, liabilities, results of operations or financial
condition of the Purchaser and its subsidiaries, taken as a whole (a "PURCHASER
MATERIAL ADVERSE EFFECT").
SECTION 4.02. CAPITALIZATION OF PURCHASER. The authorized capital stock of
the Purchaser consists of 250,000,000 shares of Purchaser Common Stock and
3,000,000 shares of $10.00 par value preferred stock ("PURCHASER PREFERRED
STOCK"). As of September 13, 1996 (i) there were 48,622,771 shares of Purchaser
Common Stock issued and outstanding and no shares of Purchaser Preferred Stock
outstanding and (ii) 5,495,974 shares of Purchaser Common Stock were reserved
for issuance under the Purchaser's stock option plans. All of the issued and
outstanding shares of Purchaser Common Stock are validly issued, fully paid and
nonassessable and free of preemptive rights. Except as set forth above, as of
the date of this Agreement there are no shares of capital stock of the Purchaser
issued or outstanding or any options, warrants, subscriptions, calls, rights,
convertible securities or other agreements or commitments obligating the
Purchaser to issue, transfer, sell, redeem, repurchase or otherwise acquire any
shares of its capital stock.
SECTION 4.03. CAPITALIZATION OF SUB; OWNERSHIP OF SUB COMMON STOCK. The
authorized capital stock of Sub consists of 1,000 shares of Sub Common Stock. As
of the date hereof, Purchaser owns all of the issued and outstanding shares of
Sub Common Stock.
SECTION 4.04. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Purchaser and
Sub has the corporate power and authority to enter into this Agreement and, in
the case of Purchaser, the Voting Agreement, and to carry out its obligations
hereunder and, in the case of the Purchaser, the Voting Agreement. The
execution, delivery and performance of this Agreement and, in the case of the
Purchaser, the Voting Agreement, and the consummation by Purchaser and Sub of
the transactions contemplated hereby and, in the case of the Purchaser, the
Voting Agreement, have been duly authorized by all necessary corporate action on
the part of Purchaser and Sub, as applicable. This Agreement has been duly and
validly executed and delivered by each of Purchaser and Sub, and the Voting
Agreement has been duly and validly executed and delivered by the Purchaser and
(assuming this Agreement constitutes a valid and binding obligation of the
Company and the Voting Agreement constitutes a valid and binding obligation of
the other Shareholders party thereto) each constitutes a valid and binding
agreement of each of Purchaser and Sub, enforceable against Purchaser and Sub in
accordance with their terms.
SECTION 4.05. CONSENTS AND APPROVALS. Except (i) for the Governmental
Requirements, or (ii) where the failure to make any filing with, or to obtain
any permit, authorization, consent or approval of, any Governmental Entity would
not prevent or materially delay the consummation of the Merger, or otherwise
prevent Purchaser or Sub from performing their respective obligations under this
Agreement, no filing with, and no permit, authorization, consent or approval of,
any Governmental Entity is necessary for the execution, delivery and performance
of this Agreement by Purchaser and Sub and, in the case of the Purchaser, the
Voting Agreement, and the consummation of the transactions contemplated by this
Agreement and, in the case of the Purchaser, the Voting Agreement.
SECTION 4.06. NON-CONTRAVENTION. Neither the execution, delivery or
performance of this Agreement and the Voting Agreement by Purchaser or Sub, as
the case may be, nor the consummation by Purchaser or Sub, as the case may be,
of the transactions contemplated hereby or by the Voting Agreement, will (i)
conflict with or result in any breach of any provisions of the certificate of
incorporation or by-laws or equivalent organizational documents of Purchaser and
Sub, (ii) result in a violation or breach of, or constitute a default under, or
give rise to any right of termination, modification or acceleration under, any
note, bond, mortgage, deed of trust, security interest, indenture, license,
lease, contract, agreement, plan or other instrument or obligation to which
Purchaser or Sub is a party or by which any of them or any of their properties
or assets may be bound or affected, (iii) violate or conflict with any
applicable law, except in the case of clauses (ii) and (iii) for violations,
breaches, defaults or conflicts which would not individually or in the aggregate
have a Purchaser Material Adverse Effect.
SECTION 4.07. PURCHASER SEC REPORTS. Purchaser has made available to the
Company true and complete copies of each registration statement, report and
proxy or information statement (including exhibits and any amendments thereto)
filed by Purchaser with the SEC since March 1, 1994 (collectively, the
"PURCHASER SEC REPORTS") all of which, as of their respective filing dates,
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act, and the rules and regulations promulgated
thereunder. None of such Purchaser SEC Reports, as of the respective dates they
were filed, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the audited consolidated financial statements of
Purchaser (including any related notes and schedules) included (or incorporated
by reference) in its Annual Report on Form 10-K for the fiscal year ended
February 29, 1996, fairly present, in conformity with GAAP applied on a
consistent basis (except as may be indicated in the notes thereto), the
consolidated financial position of Purchaser and the Purchaser Subsidiaries as
of the dates thereof and the consolidated results of their operations and their
cash flows for the periods then ended. Each of the unaudited financial
statements of Purchaser (including
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any related notes and schedules) included in its quarterly report on Form 10-Q
for the quarter ended May 31, 1996, fairly present, in conformity with GAAP
applied on a consistent basis (except as may be indicated in the notes thereto),
the consolidated financial position of the Purchaser and its subsidiaries as of
the dates thereof and the consolidated results of their operations and their
cash flows for the periods then ended.
SECTION 4.08. ABSENCE OF CERTAIN CHANGES. Since February 29, 1996, there
has been no event or condition which has had (or is reasonably likely to result
in) a Purchaser Material Adverse Effect, and, except as set forth on SCHEDULE
4.08 hereto, Purchaser and its subsidiaries have in all material respects
conducted their businesses in the ordinary course consistent with past
practices.
SECTION 4.09. LITIGATION. Except as disclosed in the notes to the financial
statements included in the Purchaser SEC Reports or as set forth on SCHEDULE
4.09 hereto, there is no suit, action, proceeding or investigation pending or,
to the best knowledge of Purchaser, threatened against or affecting Purchaser or
any of the Purchaser Subsidiaries, the outcome of which is likely individually
or in the aggregate to have a Purchaser Material Adverse Effect. Neither
Purchaser nor any Purchaser Subsidiary is subject to any judgment, decree,
injunction, rule or order which, insofar as can reasonably be foreseen in the
future, may have a Purchaser Material Adverse Effect.
SECTION 4.10. INFORMATION SUPPLIED. None of the information supplied or to
be supplied by Purchaser or Sub for inclusion or incorporation by reference in
(i) the Registration Statement will, at the time the Registration Statement is
filed with the SEC and at the time it becomes effective under the Securities
Act, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Proxy Statement will, at the date of
mailing to shareholders and at the times of the meetings of shareholders to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
SECTION 4.11. BROKERS. Except for Goldman, Sachs & Co., no person is
entitled to any brokerage, financial advisory, finder's or similar fee or
commission payable by Purchaser in connection with the transactions contemplated
by this Agreement based upon arrangements made by and on behalf of Purchaser.
SECTION 4.12. EMPLOYEE BENEFIT PLANS. SCHEDULE 4.12 hereto contains a
written list of all employee benefit plans, programs, policies, practices and
other arrangements providing benefits to any employee or former employee of
Purchaser or its subsidiaries that are maintained by the Company or the Company
Subsidiaries contribute on behalf of such employees or former employees whether
or not subject to the Employee Retirement Income Security Act of 1974 ("ERISA"),
including, without limitation, all plans, agreements or arrangements relating to
deferred compensation, stock option, bonus, profit sharing or other incentive
plan, pensions, retirement income or other benefits, severance arrangements,
health benefits and insurance benefits (collectively the "PURCHASER PLANS").
Purchaser has made available to the Company complete and correct copies of (i)
all Purchaser Plans and (ii) the most recent actuarial report for each Purchaser
Plan that is a defined benefit plan (within the meaning of Section 3(35) of
ERISA). None of the Purchaser Plans is a "multiemployer plan" within the meaning
of Section 3(37) or Section 4001(a)(3) of ERISA.
SECTION 4.13. FULL DISCLOSURE. None of the representations and warranties
in this Article IV contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.01. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. From
the date hereof until the Effective Time, unless Purchaser shall otherwise agree
in writing or as otherwise contemplated by this Agreement, the Company and the
Company Subsidiaries shall conduct their respective businesses in the ordinary
course consistent with past practice and shall use its reasonable best efforts
to preserve intact their business organizations and relationships with third
parties and to keep available the services of their present officers and key
employees, subject to the terms of this Agreement. Except as set forth in this
Agreement, from the date hereof until the Effective Time, without the prior
written consent of Purchaser:
(a) the Company shall not adopt or propose any change in its
articles of incorporation or by-laws;
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(b) the Company shall not declare, set aside or pay any dividend or
other distribution with respect to any shares of capital stock of the
Company, or split, combine or reclassify any of the Company's capital
stock, and the Company and the Company Subsidiaries shall not
repurchase, redeem or otherwise acquire any shares of capital stock or
other securities of, or other ownership interests in, the Company;
(c) the Company shall not, and shall not permit any Company
Subsidiary to, merge or consolidate with any other person or acquire a
material amount of assets of any other person;
(d) except as set forth on SCHEDULE 5.01(D) HERETO, the Company
shall not, and shall not permit any Company Subsidiary to, sell, lease,
license or otherwise surrender, relinquish or dispose of (i) any
facility owned or leased by the Company or any Company Subsidiary or
(ii) any assets or property which are material to the Company and the
Company Subsidiaries, taken as a whole, except pursuant to existing
contracts or commitments (the terms of which have been disclosed to
Purchaser prior to the date hereof);
(e) except as set forth on SCHEDULE 5.01(D) HERETO, mortgage,
pledge or otherwise encumber any of its assets other than the pledge of
inventory in the ordinary course of business consistent with past
practice;
(f) except pursuant to the Company's employee stock purchase plan,
the Company and the Company Subsidiaries shall not issue any capital
stock or other securities or enter into any amendment of any material
term of any outstanding security of the Company, and the Company and the
Company Subsidiaries shall not incur any indebtedness except in the
ordinary course of business, amend or otherwise increase, accelerate the
payment or vesting of the amounts payable or to become payable under or
fail to make any required contribution to, any Company Plan, except in
the ordinary course of business consistent with past practice or as
otherwise permitted by this Agreement;
(g) except as set forth on SCHEDULE 3.16 hereto, the Company shall
not, and shall not permit any Company Subsidiary to, grant any increase
in the compensation or benefits of directors, officers, employees,
consultants or agents other than increases in compensation of employees
who are not executive officers or directors to the extent that such
increases are in the ordinary course of business consistent with past
practice;
(h) the Company shall not, and shall not permit any Company
Subsidiary to, enter into or amend any employment agreement or other
employment arrangement with any employee of the Company or any Company
Subsidiary, except in the ordinary course of business consistent with
past practice;
(i) the Company shall not, and shall not permit any Company
Subsidiary to, take any action that could, directly or indirectly, cause
the Merger to fail to qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code; and
(j) the Company shall not, and shall not permit any Company
Subsidiary to, agree or commit to do any of the foregoing.
SECTION 5.02. CONDUCT OF BUSINESS BY PURCHASER PENDING THE MERGER. From the
date hereof until the Effective Time, unless the Company shall otherwise agree
in writing or as otherwise contemplated by this Agreement, Purchaser, Sub and
the other subsidiaries of Purchaser shall conduct their respective businesses in
the ordinary course consistent with past practice and shall use all reasonable
efforts to preserve intact their business organizations and relationships with
third parties and to keep available the services of their present officers and
key employees, subject to the terms of this Agreement. Except as otherwise
provided in this Agreement, from the date hereof until the Effective Time,
without the prior written consent of the Company:
(a) Purchaser shall not adopt or propose any change in its
Certificate of Incorporation or By-laws;
(b) Purchaser shall not declare, set aside or pay any dividend or
other distribution with respect to any shares of capital stock of
Purchaser (except for regular quarterly dividends in an amount no
greater than $.07 per share), or split, combine or reclassify any of the
Purchaser's capital stock, and Purchaser and its subsidiaries shall not
repurchase, redeem, or otherwise acquire any shares of capital stock or
other securities of, or other ownership interests in, Purchaser;
(c) Purchaser and its subsidiaries shall not issue any capital
stock or other securities or enter into any amendment of any material
term of any outstanding security of Purchaser, except that Purchaser
shall be permitted to issue additional shares of Purchaser Common Stock
in an aggregate amount not to exceed 20% of the total number of shares
outstanding at the date of this Agreement;
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(d) Purchaser shall not, and shall not permit any subsidiary to,
take any action that could, directly or indirectly, cause the Merger to
fail to qualify as a tax-free reorganization within the meaning of
Section 368(a) of the Code;
(e) Purchaser shall not, and shall not permit any subsidiary to,
purchase or otherwise acquire any shares of Company Common Stock; and
(f) Purchaser shall not, and shall not permit Sub or any subsidiary
to, agree or commit to do any of the foregoing.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. PREPARATION OF REGISTRATION STATEMENT AND THE PROXY
STATEMENT. Purchaser and the Company shall cooperate with each other in the
preparation of, and the Company shall promptly prepare and file with the SEC,
the preliminary Proxy Statement. Purchaser and the Company shall cooperate with
each other in the preparation of, and the Purchaser shall prepare and file with
the SEC, the Registration Statement. Each of Purchaser and the Company shall use
all reasonable efforts to have the Registration Statement declared effective
under the Securities Act as promptly as practicable after the filing of the
preliminary Proxy Statement. Purchaser shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of Purchaser Common Stock in the Merger.
SECTION 6.02. SHAREHOLDER/STOCKHOLDER MEETINGS. The Company shall call a
meeting of its shareholders to be held as promptly as practicable for the
purpose of voting upon the approval of this Agreement and the transactions
contemplated by this Agreement. Subject to the second succeeding sentence or as
contemplated by the provisions of Section 8.03 hereof, the Company will, through
its Board of Directors, recommend to its shareholders approval of such matters.
The Company shall use its best efforts to hold such meeting as soon as
practicable after the date on which the Registration Statement becomes
effective. This Section 6.02 shall not prohibit accurate disclosure by a party
that is required in any Purchaser SEC Document or Company SEC Document
(including the Proxy Statement and the Registration Statement) or otherwise
under applicable law of the opinion of the Board of Directors of such party as
of the date of such SEC Document or such other required disclosure as to the
transactions contemplated hereby or as to any Acquisition Proposal (as defined
in Section 6.07).
SECTION 6.03. LEGAL CONDITIONS TO MERGER. Each of Purchaser and the Company
shall use all reasonable efforts (i) to take, or cause to be taken, all actions
necessary to comply promptly with all legal requirements which may be imposed on
such party or its subsidiaries with respect to the Merger and to consummate the
transactions contemplated by this Agreement as promptly as practicable, subject
to the appropriate vote of the shareholders of the Company described in Section
6.02, and (ii) to obtain (and to cooperate with the other party to obtain) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other public or private third party which is
required to be obtained or made by such party or any of its subsidiaries in
connection with the Merger and the transactions contemplated by this Agreement.
In connection with the foregoing, the Company will provide Purchaser, and
Purchaser will provide the Company, with copies of correspondence, filings or
communications (or memoranda setting forth the substance thereof) between such
party or any of its representatives, on the one hand, and any governmental
agency or authority or members of their respective staffs, on the other hand,
with respect to this Agreement and the transactions contemplated hereby.
SECTION 6.04. TRANSFER RESTRICTIONS; AFFILIATES. The Company shall cause
the persons listed on Schedule 6.04(a) hereto to deliver to Purchaser on the
date of this Agreement a written agreement, substantially in the form attached
as Exhibit 6.04(a). At least thirty days prior to the Closing Date, the Company
shall deliver to Purchaser a letter identifying all persons who are, at the time
this Agreement is submitted for approval to the shareholders of the Company,
"affiliates" of the Company for purposes of Rule 145 under the Securities Act.
The Company shall use all reasonable efforts to cause each person named on the
letter delivered by it to deliver to Purchaser on or prior to the Effective Time
a written agreement, substantially in the form attached as Exhibit 6.04(b).
SECTION 6.05. STOCK EXCHANGE LISTING. Purchaser shall use all reasonable
efforts to cause the shares of Purchaser Common Stock to be issued in the Merger
to be approved for listing on the NYSE, subject to official notice of issuance,
prior to the Closing Date.
SECTION 6.06. ACCESS AND INFORMATION. The Company shall afford to Purchaser
and to Purchaser's financial advisors, legal counsel, accountants, consultants,
financing sources, and other authorized representatives reasonable access during
normal business hours throughout the period prior to the Effective Time to all
of its books, records, properties, plants and
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personnel and, during such period, the Company shall furnish as promptly as
practicable to Purchaser (i) a copy of each report, schedule and other document
filed or received by it pursuant to the requirements of federal or state
securities laws, and (ii) all other information as Purchaser reasonably may
request, provided that no investigation pursuant to this Section 6.06 shall
affect any representations or warranties made herein or the conditions to the
obligations of the respective parties to consummate the Merger. Each party shall
continue to abide by the terms of the confidentiality agreements between
Purchaser and the Company, dated May 13, 1996 and September 16, 1996 (the
"CONFIDENTIALITY AGREEMENTS").
SECTION 6.07. OTHER OFFERS. (a) From the date hereof until the termination
hereof, the Company and the Company Subsidiaries will not, and will use their
best efforts to cause their respective officers, directors, employees or other
agents not to, directly or indirectly, (i) take any action to solicit, initiate
or encourage any Acquisition Proposal (as defined below), (ii) subject to the
fiduciary duties of the Board of Directors under applicable law as advised by
counsel, waive any provision of any standstill or similar agreements entered
into by the Company or (iii) subject to the fiduciary duties of the Board of
Directors under applicable law as advised by counsel to the Company, engage in
negotiations with, or disclose any nonpublic information relating to the Company
or any Company Subsidiary or afford access to the properties, books or records
of the Company or any Company Subsidiary to, any person that may be considering
making, or has made, an Acquisition Proposal.
(b) The Company will (i) promptly notify Purchaser after receipt of any
Acquisition Proposal or any inquiries indicating that any Person is considering
making or wishes to make an Acquisition Proposal, (ii) promptly notify Purchaser
after receipt of any request for nonpublic information relating to the Company
or any Company Subsidiary or for access to the properties, books or records of
the Company or any Company Subsidiary or any person that may be considering
making, or has made an Acquisition Proposal and (iii) subject to the fiduciary
duties of the Board of Directors under applicable law as advised by counsel to
the Company, keep Purchaser advised of the status and principal financial terms
of any such Acquisition Proposal. The term "ACQUISITION PROPOSAL" as used herein
means any offer or proposal for, or any indication of interest in, a merger or
other business combination involving the Company or any Company Subsidiary or
the acquisition of any equity interest in, or a substantial portion of the
assets of, the Company or any Company Subsidiary, other than the transactions
contemplated by this Agreement.
SECTION 6.08. PUBLIC ANNOUNCEMENTS. The Purchaser and the Company will
consult with each other before issuing any press release or making any public
statement or any filing with any governmental body, agency, official or
authority with respect to this Agreement and the transactions contemplated
hereby and, except as may be required by applicable law or any listing agreement
with any national securities exchange, will use reasonable best efforts not to
issue any such press release or make any such public statement or such filing
prior to such consultation.
SECTION 6.09. EMPLOYEE BENEFITS. From and after the Effective Time, subject
to applicable law and except as contemplated hereby, Purchaser and the Purchaser
Subsidiaries will honor, in accordance with their terms, all Company Plans of
the Company and the Company Subsidiaries in effect as of the date hereof (or as
modified in accordance with Section 6.10 hereof); provided, however, that
nothing herein shall preclude any change effected on a prospective basis in, or
termination of, any Company Plan from and after the Effective Time. Purchaser
and the Purchaser Subsidiaries will provide benefits to employees of the Company
and the Company Subsidiaries who become employees of Purchaser and the Purchaser
Subsidiaries or continue after the Effective Time as employees of the Company or
the Company Subsidiaries which will, in the aggregate, be no less favorable than
those provided to other similarly situated employees of Purchaser and the
Purchaser Subsidiaries from time to time. With respect to the Purchaser Plans in
effect as of the date hereof, Purchaser and the Surviving Corporation shall
grant all employees of the Company and the Company Subsidiaries from and after
the Effective Time credit for all service with the Company and the Company
Subsidiaries, their affiliates and predecessors prior to the Effective Time for
purposes of eligibility to participate, eligibility for benefits, form of
benefit, and vesting under Purchaser's and its subsidiaries' employee benefit
plans. To the extent the Purchaser Plans provide medical or dental welfare
benefits after the Effective Time, such plans shall waive any pre-existing
conditions and actively-at-work exclusions and shall provide that any expenses
incurred on or before the Effective Time shall be taken into account under
deductible, coinsurance and maximum out-of-pocket provisions.
SECTION 6.10. STOCK OPTIONS. (a) At the Effective Time, each outstanding
option to purchase shares of Company Common Stock (a "COMPANY STOCK OPTION")
issued pursuant to any incentive or stock option program of the Company (the
"COMPANY STOCK PLAN"), whether vested or unvested, shall be assumed by
Purchaser. Each Company Stock Option shall be deemed to constitute an option to
acquire, on the same terms and conditions as were applicable under such Company
Stock Option, the same number of shares of Purchaser Common Stock as the holder
of such Company Stock Option would have been entitled to receive pursuant to the
Merger had such holder exercised such option in full immediately prior to the
Effective Time, rounded, if necessary, up or down, to the nearest whole share,
at a price per share equal to (y) the aggregate
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exercise price for the shares of Company Common Stock otherwise purchasable
pursuant to such Company Stock Option divided by (z) the number of full shares
of Purchaser Common Stock deemed purchasable pursuant to such Company Stock
Option; PROVIDED, HOWEVER, that in the case of any option to which Section 421
of the Code applies by reason of its qualification under Section 422 of the Code
("INCENTIVE STOCK OPTIONS"), the option price, the number of shares purchasable
pursuant to such option and the terms and conditions of exercise of such option
shall be determined in order to comply with Section 424(a) of the Code.
(b) As soon as practicable after the Effective Time, Purchaser shall
deliver to the holders of Company Stock Options appropriate notices setting
forth such holders' rights pursuant to the Company Stock Plan and the agreements
evidencing the grants of such Company Stock Options shall continue in effect on
the same terms and conditions (subject to the adjustments required by this
Section 6.10 after giving effect to the Merger and the assumption by Purchaser
as set forth above). If necessary, Purchaser shall comply with the terms of the
Company Stock Plan and ensure, to the extent required by, and subject to the
provisions of, such Plan, that Company Stock Options which qualified as
incentive stock options prior to the Effective Time continue to qualify as
incentive stock options of Purchaser after the Effective Time.
(c) To the extent necessary, Purchaser shall take all corporate action
necessary to reserve for issuance a sufficient number of shares of Purchaser
Common Stock for delivery upon exercise of Company Stock Options assumed by it
in accordance with this Section 6.10. With respect to the shares of Purchaser
Common Stock subject to such options, the Purchaser shall, as soon as
practicable after the Effective Time, cause such shares to be covered by a
registration statement on Form S-3 or Form S-8, as the case may be (or any
successor or other appropriate forms), or another appropriate form and shall use
its best efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain outstanding.
With respect to those individuals who subsequent to the Merger will be subject
to the reporting requirements under Section 16(a) of the Exchange Act, where
applicable, Purchaser shall administer the Company Stock Plan assumed pursuant
to this Section 6.10 in a manner that complies with Rule 16b-3 promulgated under
the Exchange Act to the extent the Company Stock Plan complied with such rule
prior to the Merger.
SECTION 6.11. COMPANY INDEMNIFICATION PROVISION. The articles of
incorporation and by-laws of the Surviving Corporation shall contain provisions
no less favorable with respect to indemnification than are set forth in the
Company's articles of incorporation or by-laws or the articles of incorporation,
by-laws or similar organizational documents of any of the Company Subsidiaries
as in effect as of the date hereof, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would affect adversely the rights thereunder of individuals
who at the Effective Time were Indemnified Parties (as hereinafter defined) of
the Company or the Company Subsidiaries, unless such modification shall be
required by law. Purchaser shall cause the Surviving Corporation to indemnify
and hold harmless the present and former directors, officers, employees,
fiduciaries and agents of the Company and the Company Subsidiaries
(collectively, the "INDEMNIFIED PARTIES") against all costs and expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and settlement amounts paid in connection with any claim, action,
suit, proceeding or investigation (whether arising before or after the Effective
Time), whether civil, criminal, administrative or investigative, arising out of
or pertaining to any action or omission in their capacity as an officer,
director, employee, fiduciary or agent, whether occurring before or after the
Effective Time, for a period of six years after the date hereof. Purchaser shall
cause the Surviving Corporation to maintain in effect for not less than six
years from the Effective Time the current policies of the directors' and
officers' liability insurance maintained by the Company (provided that Purchaser
may substitute therefor policies of at least equivalent coverage containing
terms and conditions which are no less advantageous) with respect to matters
occurring prior to the Effective Time, provided that in no event shall Purchaser
or the Surviving Corporation be required to expend to maintain or procure
insurance coverage pursuant to this Section 6.11 any amount per annum in excess
of 250% of the aggregate premiums paid in fiscal year 1996 on an annualized
basis for such purpose. In the event the payment of such amount for any year is
insufficient to maintain such insurance or equivalent coverage cannot otherwise
be obtained, the Surviving Corporation shall purchase as much insurance as may
be purchased for the amount indicated. The provisions of this Section 6.11 shall
survive the consummation of the Merger and expressly are intended to benefit
each of the Indemnified Parties.
SECTION 6.12. ESTOPPEL CERTIFICATES AND CONSENTS. The Company shall use
commercially reasonable efforts to obtain and deliver to Purchaser executed
estoppel certificates and consents, satisfactory in form and substance to
Purchaser, for the leased properties set forth on Schedule 6.12 hereto.
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ARTICLE VII
CONDITIONS TO CONSUMMATION OF MERGER
SECTION 7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger shall be subject
to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) any waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated, and no action shall have been
instituted by the Department of Justice or Federal Trade Commission challenging
or seeking to enjoin the consummation of this transaction, which action shall
have not been withdrawn or terminated;
(b) no statute, rule, regulation, executive order, decree, ruling or
preliminary or permanent injunction shall have been enacted, entered,
promulgated or enforced by any federal or state court or governmental authority
which prohibits, restrains, enjoins or restricts the consummation of the Merger,
and there shall not have been threatened in writing, nor shall there be pending,
any action or proceeding in any court or before any governmental agency seeking
to prohibit or delay, or challenging the validity of, the Merger;
(c) the Registration Statement shall have become effective and no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for the purpose shall have been initiated by the SEC;
and
(d) the Purchaser Common Stock issuable in the Merger shall have been
authorized for listing on the NYSE, subject to official notice of issuance.
SECTION 7.02. CONDITIONS TO PURCHASER'S AND SUB'S OBLIGATION TO EFFECT
MERGER. The obligation of Purchaser and Sub to consummate the Merger is further
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Each of the acts and undertakings of the Company to be performed or
complied with by it on or before the Effective Time pursuant to the terms hereof
shall have been duly performed and complied with in all material respects.
(b) The representations and warranties of the Company contained in this
Agreement shall be true and correct on and as of the Effective Time in all
material respects with the same effect as though made on and as of such date,
except to the extent that any such representation or warranty is made as of a
specified date, in which cases such representation or warranty shall have been
true and correct in all material respects as of such date, and Purchaser shall
have received at the Effective Time a certificate to that effect, dated the
Effective Time, and executed on behalf of the Company by an executive officer of
the Company.
(c) This Agreement and the issuance of Purchaser Common Stock in
conjunction with the Merger shall have been approved by the Board of Directors
of the Purchaser.
(d) Purchaser shall have received an opinion of King & Spalding, dated the
date of the Effective Time, reasonably satisfactory in form and substance to
Purchaser, substantially to the effect that, on the basis of certain facts,
representations and assumptions set forth in such opinion, which are consistent
with the state of facts existing at the Effective Time, (i) the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and (ii) the holders of Company Common Stock will
recognize no gain or loss upon receipt of Purchaser Common Stock in the Merger.
In rendering such opinion, such counsel may require and rely upon
representations contained in certificates of officers of the Company, Purchaser
and their respective subsidiaries.
(e) All corporate action required to be taken by the Company (including
receiving the requisite approval of its shareholders) in connection with the
Merger shall have been taken, all documents incident thereto shall be reasonably
satisfactory in substance and form to Purchaser and Purchaser shall have
received such originals or copies of such documents as it may reasonably
request.
(f) The Company shall have obtained and delivered to Purchaser the estoppel
certificates and consents required by Section 6.12 hereof, except for estoppel
certificates and consents relating to stores which represent in the aggregate
less than $35 million of the Company's gross sales for the fiscal year ended
February 29, 1996.
(g) The Company shall have obtained and delivered to Purchaser a waiver of
Beneficial National Bank USA ("BNB"), satisfactory in form and substance to
Purchaser, pursuant to which BNB will agree to waive certain rights under
Section 23 and 25 of the Merchant Agreement, dated as of May 15, 1993, between
the Company and BNB.
(h) Purchaser shall have received the written resignation, effective as of
the Effective Time, of each officer and director of the Company and the Company
Subsidiaries whom it shall have specified in writing prior to the Closing.
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(i) If, as a result of the consummation of the Merger, a consent would be
required under Section 8.19(b) of that certain Note Purchase Agreement, dated
June 17, 1993 (the "NOTE AGREEMENT"), among the Company and the note purchasers
(or their successors) party thereto (the "NOTE PURCHASERS"), the Company shall
have obtained and delivered to Purchaser a consent, satisfactory in form and
substance to Purchaser, pursuant to which the Note Purchasers waive any such
non-compliance with Section 8.19(b) of the Note Agreement in connection with the
Merger; PROVIDED, that notwithstanding any other provision of this Agreement, no
provision contained herein shall prevent the Company from paying a reasonable
fee in connection with obtaining such consent.
(j) There shall not have occurred an acceleration of the Notes (as such
term is defined in the Note Agreement) pursuant to Section 11.1 of the Note
Agreement on or prior to the Effective Time.
(k) Purchaser shall have received letters from the Company's independent
certified public accountants dated (i) the mailing date of the Proxy Statement
and (ii) the Closing Date, with respect to such matters as the Purchaser may
reasonably request relating to the financial information regarding the Company
and the Company Subsidiaries contained in the Registration Statement.
(l) Purchaser shall have received an opinion from King & Spalding, counsel
for the Company, in substantially the form attached hereto as Exhibit 7.02(l).
SECTION 7.03. CONDITIONS TO THE COMPANY'S OBLIGATION TO EFFECT MERGER. The
obligation of the Company to consummate the Merger is further subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Each of the acts or undertakings of Purchaser and Sub to be performed
or complied with by them on or before the Effective Time pursuant to the terms
hereof shall have been duly performed and complied with in all material
respects.
(b) The representations and warranties of Purchaser and Sub contained in
this Agreement shall be true and correct on and as of the Effective Time in all
material respects with the same effect as though made on and as of such date,
except to the extent that any such representation or warranty is made as of a
specified date, in which cases such representation or warranty shall have been
true and correct in all material respects as of such date, and the Company shall
have received at the Effective Time a certificate to that effect, dated the
Effective Time, and executed on behalf of Purchaser and Sub by an executive
officer of Purchaser.
(c) This Agreement shall have been duly adopted and approved by the
shareholders of the Company by the requisite vote in accordance with applicable
law.
(d) The Company shall have received an opinion of King & Spalding, dated
the date of the Effective Time, reasonably satisfactory in form and substance to
the Company, substantially to the effect that, on the basis of certain facts,
representations and assumptions set forth in such opinion, which are consistent
with the state of facts existing at the Effective Time, (i) the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and (ii) the holders of Company Common Stock will
recognize no gain or loss upon receipt of Purchaser Common Stock in the Merger.
In rendering such opinion, such counsel may require and rely upon
representations contained in certificates of officers of the Company, Purchaser
and their respective subsidiaries.
(e) All corporate action required to be taken by the Purchaser in
connection with the Merger shall have been taken, all documents incident thereto
shall be reasonably satisfactory in substance and form to the Company and the
Company shall have received such originals or copies of such documents as it may
reasonably request.
(f) The Company shall have received letters from the Purchaser's
independent certified public accountants dated (i) the mailing date of the Proxy
Statement and (ii) the Closing Date, with respect to such matters as the Company
may reasonably request relating to the financial information regarding the
Purchaser and its subsidiaries contained in the Registration Statement.
(g) The Company shall have received an opinion from McGuire, Woods, Battle
& Boothe, L.L.P., counsel for the Purchaser, in substantially the form attached
hereto as Exhibit 7.03(g).
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Effective Time by mutual written agreement
of Purchaser and the Company.
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SECTION 8.02. TERMINATION BY EITHER PURCHASER OR THE COMPANY. This
Agreement may be terminated and the Merger may be abandoned by action of the
Board of Directors of either Purchaser or the Company if (a) the Merger shall
not have been consummated on or before February 28, 1997, (b) any United States
federal or state court of competent jurisdiction or United States federal or
state governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and nonappealable or (c) the Closing Date has not occurred and the closing
sales price of the Purchaser Common Stock is less than $13.50 per share for at
least ten (10) consecutive trading days in the twenty (20) consecutive trading
day period immediately preceding the date of such termination.
SECTION 8.03. TERMINATION BY THE COMPANY. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval of the Merger and the adoption of this Agreement by the
shareholders of the Company referred to in Section 6.02 by action of the Board
of Directors of the Company, if (a) there has been a breach by Purchaser or Sub
of any representation or warranty contained in this Agreement which would have
or would be reasonably likely to affect adversely Purchaser's or Sub's ability
to complete the Merger; (b) there has been a material breach of any of the
covenants or agreements set forth in this Agreement on the part of Purchaser,
which breach is not curable or, if curable, is not cured within thirty (30) days
after written notice of such breach is given by the Company to Purchaser; or (c)
the Board of Directors of the Company has (i) withdrawn, or modified or changed
in a manner adverse to Purchaser or Sub its approval or recommendation of this
Agreement or the Merger in order to approve and permit the Company to execute a
definitive agreement relating to an Acquisition Proposal, and (ii) determined,
based on an opinion of outside legal counsel to the Company, that the failure to
take such action as set forth in the preceding clause (i) would result in a
breach of the Board of Directors' fiduciary duties under applicable law;
PROVIDED, HOWEVER, that (A) the Board of Directors shall have been advised in
such opinion of outside counsel that notwithstanding a binding commitment to
consummate an agreement of the nature of this Agreement entered into in the
proper exercise of their applicable fiduciary duties, and notwithstanding all
concessions which may be offered by Purchaser in negotiations entered into
pursuant to clause (B) below, such fiduciary duties would also require the
directors to terminate this Agreement as a result of such Acquisition Proposal,
and (B) prior to any such termination, the Company shall, and shall cause its
respective financial and legal advisors to, negotiate with Purchaser to make
such adjustments in the terms and conditions of this Agreement as would enable
the Company to proceed with the transactions contemplated herein on such
adjusted terms.
SECTION 8.04. TERMINATION BY PURCHASER. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time by
action of the Board of Directors of Purchaser, if (a) there has been a breach by
the Company of any representation or warranty contained in this Agreement which
would have or would be reasonably likely to have a Company Material Adverse
Effect; (b) there has been a material breach of any of the covenants or
agreements set forth in this Agreement on the part of the Company or set forth
in the Voting Agreement on the part of the Shareholders (other than Purchaser),
which breach is not curable or, if curable, is not cured within thirty (30) days
after written notice of such breach is given by Purchaser to the Company; or (c)
the Board of Directors of the Company shall have withdrawn, or modified or
changed in a manner adverse to Purchaser or Sub its approval or recommendation
of this Agreement or the Merger or shall have recommended an Acquisition
Proposal, or shall have executed an agreement in principle (or similar
agreement) or definitive agreement providing for an Acquisition Proposal or
other business combination with a person or entity other than Purchaser or its
affiliates (or the Board of Directors of the Company resolves to do any of the
foregoing).
SECTION 8.05. EFFECT OF TERMINATION AND ABANDONMENT. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VIII, written notice thereof shall as promptly as practicable be given
to the other parties to this Agreement and this Agreement shall terminate and
the transactions contemplated hereby shall be abandoned, without further action
by any of the parties hereto. If this Agreement is terminated as provided
herein: (a) there shall be no liability or obligation on the part of Sub,
Purchaser, the Company or the Company Subsidiaries or their respective officers
and directors, and all obligations of the parties shall terminate, except for
the obligations of the parties pursuant to this Section 8.05, except for the
provisions of Sections 9.04, 9.05, 9.06 and 9.10, except for the obligations of
the parties set forth in the Confidentiality Agreements referred to in Section
6.06 hereof and except that a party who is in material breach of its
representations, warranties, covenants or agreements set forth in this Agreement
shall be liable for damages occasioned by such breach, including without
limitation any expenses incurred by the other party in connection with this
Agreement and the transactions contemplated hereby; PROVIDED, HOWEVER, in the
event that Company terminates this Agreement pursuant to clause (c) of Section
8.03, then the Company shall promptly after such termination pay Purchaser in
cash the sum of $3,000,000 plus an amount equal to reasonable legal fees and
expenses of counsel to the Purchaser and other reasonable out-of-pocket costs
incurred by Purchaser's employees in connection with the transactions
contemplated by this Agreement (such
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<PAGE>
amount representing reasonable compensation to Purchaser and not constituting a
penalty), and (b) all filings, applications and other submissions made pursuant
to the transactions contemplated by this Agreement shall, to the extent
practicable, be withdrawn from the agency or person to which made.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. SURVIVAL OF REPRESENTATIONS WARRANTIES AND AGREEMENTS. No
representations or warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive beyond the Effective Time. This Section
9.01 shall not limit any covenant or agreement which by its terms contemplates
performance after the Effective Time.
SECTION 9.02. NOTICES. All notices, claims, demands and other
communications hereunder shall be in writing and shall be deemed given upon (a)
confirmation of receipt of a facsimile transmission, (b) confirmed delivery by a
standard overnight courier or when delivered by hand or (c) the expiration of
five business days after the day when mailed by registered or certified mail
(postage prepaid, return receipt requested), addressed to the respective parties
at the following addresses (or such other address for a party as shall be
specified by like notice):
(d) If to Purchaser or Sub, to:
Heilig-Meyers Company
2235 Staples Mill Road
Richmond, Virginia 23230
Telecopy: (804) 254-1493
Attention: Joseph R. Jenkins
with a copy to:
McGuire Woods Battle & Boothe LLP
One James Center
Richmond, Virginia 23219-4030
Telecopy: (804) 775-1061
Attention: David W. Robertson
(e) If to the Company to:
Rhodes, Inc.
4730 Peachtree Road
Atlanta, Georgia 30319
Telecopy: (404) 364-3970
Attention: Joel H. Dugan
with a copy to:
King & Spalding
120 West 45th Street
New York, New York 10036
Telecopy: (212) 556-2222
Attention: E. William Bates II, Esq.
SECTION 9.03. DESCRIPTIVE HEADINGS. The headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
SECTION 9.04. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the
exhibits, schedules and other documents and instruments referred to herein) (a)
constitutes the entire agreement and supersedes all other prior agreements and
understandings (other than those contained in the Confidentiality Agreements,
which are hereby incorporated by reference herein), both written and oral, among
the parties or any of them, with respect to the subject matter hereof,
including, without limitation, any transaction between or among the parties
hereto and (b) shall not be assigned by operation of law or otherwise.
SECTION 9.05. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Virginia without giving
effect to the provisions thereof relating to conflicts of law.
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<PAGE>
SECTION 9.06. EXPENSES. Except as provided in Section 8.05 hereof, whether
or not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby and thereby shall
be paid by the party incurring such expenses, except that those expenses
incurred in connection with the preparation, clearance and distribution of the
Registration Statement and the Proxy Statement and other documents relating
thereto, will be shared equally by Purchaser and the Company.
SECTION 9.07. AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
SECTION 9.08. WAIVER. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
SECTION 9.09. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed
in two or more counterparts, each of which shall be deemed to be an original but
all of which shall constitute one and the same agreement. This Agreement shall
become effective when each party hereto shall have received counterparts thereof
signed by all of the other parties hereto.
SECTION 9.10. SEVERABILITY; VALIDITY; PARTIES IN INTEREST. If any provision
of this Agreement, or the application thereof to any person or circumstance is
held invalid or unenforceable, the remainder of this Agreement, and the
application of such provision to other persons or circumstances, shall not be
affected thereby, and to such end, the provisions of this Agreement are agreed
to be severable. Nothing in this Agreement, express or implied, is intended to
confer upon any person not a party to this Agreement any rights or remedies of
any nature whatsoever under or by reason of this Agreement, except as
contemplated by Section 6.11.
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<PAGE>
IN WITNESS WHEREFORE, each of Purchaser, Sub and the Company has caused
this Agreement to be executed on its behalf by its duly authorized officers
thereunder, all as of the date first above written.
HEILIG-MEYERS COMPANY
By: /s/ TROY A. PEERY, JR._____________
Name: Troy A. Peery, Jr.
Title: President and Chief Operating
Officer
HM MERGER SUBSIDIARY, INC.
By: /s/ TROY A. PEERY, JR._____________
Name: Troy A. Peery, Jr.
Title: President and Chief Operating
Officer
RHODES, INC.
By: /s/ JOEL H. DUGAN__________________
Name: Joel H. Dugan
Title: Senior Vice President
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<PAGE>
[Salomon Brothers Inc Letterhead]
ANNEX B
November 22, 1996
Board of Directors
Rhodes, Inc.
4370 Peachtree Road
Atlanta, GA 30319
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of common stock, no par value ("Company Common Stock"),
of Rhodes, Inc. (the "Company"), of the consideration to be received by such
holders in connection with the proposed merger (the "Merger") of a wholly owned
subsidiary ("Sub") of the Heilig-Meyers Company ("Parent"), with and into the
Company as set forth in a draft dated August 27, 1996, of the Agreement and Plan
of Merger to be entered into among Parent, Sub and the Company ("Merger
Agreement"). We understand that, pursuant to the Merger Agreement, each issued
and outstanding share of Company Common Stock (other than shares owned by
Parent, Sub or any other subsidiary of Parent and shares owned by the Company or
any subsidiary of the Company) will be converted into and represent the right to
receive 0.50 (the "Exchange Ratio") shares of the common stock, par value $2.00
per share ("Parent Common Stock"), of Parent.
In arriving at our opinion, we have reviewed certain publicly available
information concerning the Company and Parent. In the case of the Company, we
have also reviewed certain other financial information concerning the Company,
including financial forecasts, that were provided to us by the Company. We have
discussed the past and current business operations, financial condition and
prospects of the Company and Parent with certain officers and employees of the
Company and Parent, respectively. We have also considered such other
information, financial studies, analyses, investigations and financial, economic
and market criteria which we deemed relevant to our inquiry.
We have assumed and relied upon the accuracy and completeness of the
information reviewed by us, and we have not assumed any responsibility for
independent verification of such information. With respect to the Company's
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of the Company, and we express no opinion as to such projections or
the assumptions upon which they are based. We have not made or obtained or
assumed any responsibility for making or obtaining any independent evaluations
or appraisals of any of the assets (including properties and facilities) or
liabilities of the Company or Parent nor have we been furnished with any such
evaluations or appraisals.
Our opinion is necessarily based upon conditions as they exist and can be
evaluated on the date hereof. Our opinion as expressed below does not imply any
conclusion as to the likely trading range for Parent Common Stock following the
consummation of the Merger, which may vary depending upon, among other factors,
changes in interest rates, dividend rates, market conditions, general economic
conditions and other factors that generally influence the price of securities.
Our opinion does not address the Company's underlying business decision to
effect the Merger. Our opinion is directed only to the fairness, from a
financial point of view, of the Exchange Ratio to the holders of Company Common
Stock and does not constitute a recommendation concerning how holders of Company
Common Stock should vote with respect to the Merger Agreement or the Merger.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Merger and will receive a fee from the Company for our
services, payment of which is contingent upon consummation of the Merger. Also,
we have previously rendered certain investment banking and financial advisory
services to the Company, for which we have received customary compensation. In
the ordinary course of business, we may actively trade the securities of the
Company and Parent for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Exchange Ratio is fair, from a financial point of view, to the
holders of Company Common Stock.
Very truly yours,
/s/ Salomon Brothers Inc
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