RHODES INC, S-3/A, 1994-03-07

RHODES INC
S-3/A, 1994-03-07
FURNITURE STORES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1994.

REGISTRATION NO. 33-52423

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- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RHODES, INC.
(Exact name of registrant as specified in its charter)
---------------------

<TABLE>
<S> <C>
GEORGIA 58-0536190
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>

4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
(404) 264-4600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JOEL H. DUGAN
SENIOR VICE PRESIDENT, FINANCE & ADMINISTRATION
4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
(404) 264-4600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH COPIES TO:

<TABLE>
<S> <C>
E. WILLIAM BATES, II MARC S. ROSENBERG
KING & SPALDING CRAVATH, SWAINE & MOORE
191 PEACHTREE STREET WORLDWIDE PLAZA
ATLANTA, GEORGIA 30303 825 EIGHTH AVENUE
(404) 572-4600 NEW YORK, NEW YORK 10019
(212) 474-1000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /

---------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2

***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************

SUBJECT TO COMPLETION

MARCH 7, 1994

PROSPECTUS [LOGO]

2,489,374 SHARES

RHODES, INC.

COMMON STOCK
(WITHOUT PAR VALUE)

All of the shares of Common Stock, without par value (the "Common Stock"), of
Rhodes, Inc. (the "Company") offered hereby are being sold by certain
shareholders of the Company (the "Selling Shareholders"). The Company will not
receive any of the proceeds from the sale of the shares of Common Stock being
sold by the Selling Shareholders. See "Selling Shareholders."

The Company has applied for listing of the Common Stock on the New York Stock
Exchange ("NYSE") under the symbol "RHD." The Common Stock is currently quoted
on The Nasdaq Stock Market under the symbol "RHDS." The last reported sale price
of the Common Stock on March 4, 1994 was $20.25 per share. See "Price Range of
Common Stock."

SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED
HEREBY.

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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
PROCEEDS
PRICE TO UNDERWRITING TO SELLING
PUBLIC DISCOUNT SHAREHOLDERS(1)(2)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(2)........................................ $ $ $
- -----------------------------------------------------------------------------------------------
</TABLE>

(1) Prior to deducting estimated expenses of $ , payable by the Selling
Shareholders. The balance of the expenses, estimated to be $ , will be
payable by the Company.
(2) One of the Selling Shareholders has granted the Underwriters a 30-day option
to purchase up to 225,000 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise this option in full, the total Price to
Public, Underwriting Discount and Proceeds to Selling Shareholders will be
$ , $ and $ , respectively. See "Underwriting."

The Common Stock is offered subject to receipt and acceptance by the
Underwriters, to prior sale, and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the Common Stock will be made at the office of
Salomon Brothers Inc, Seven World Trade Center, New York, New York on or about
March , 1994.

SALOMON BROTHERS INC KIDDER, PEABODY & CO.
INCORPORATED

The date of this Prospectus is March , 1994.
<PAGE> 3

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ STOCK MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK IN THE NASDAQ STOCK
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise noted, the information in this
Prospectus does not give effect to the exercise of the Underwriters'
over-allotment option and all share and per share information has been adjusted
for a 1.8-for-1 stock split effective May 17, 1993. Fiscal years end on the last
day of February and are designated by the calendar year in which the fiscal year
ends.

THE COMPANY

Rhodes, Inc. ("Rhodes" or the "Company") is one of the largest specialty
furniture retailers in the United States. Founded in 1875, the Company operates
78 stores in metropolitan areas of 11 contiguous Southeastern and Midwestern
states and for many years has focused on selling brand name residential
furniture to middle-income customers. Based on Company internal market analyses,
the Company believes that it has the number one or two share of furniture sales
among specialty furniture retailers in most of the markets in which it operates.

The Rhodes retailing philosophy is to provide value to its customers
through a combination of quality, price and service. Each of the Company's
stores offers a broad line of brand name merchandise, emphasizing good quality
and an extensive selection. The Company 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. The Company believes that its consistent execution of this "customer
value" philosophy differentiates it from other furniture retailers and has
enabled it to better serve its target market of middle-income customers and
develop a loyal customer base.

The Company believes the retail furniture industry is currently recovering
from recent recessionary conditions, during which period many consumers delayed
purchases of consumer durables, and that the industry has begun to benefit from
an improving economy and lower interest rates. While there can be no assurances
that such trends will continue, retail furniture sales have improved
significantly since August 1992, as evidenced by Rhodes' comparable store sales
growth of 7.4% in the nine months ended November 30, 1993 as compared to the
nine months ended November 30, 1992. Comparable store sales growth, excluding
the three Florida stores that were favorably impacted in the nine months ended
November 30, 1992 by increased sales following Hurricane Andrew, was 9.0% for
the nine months ended November 30, 1993 as compared to the nine months ended
November 30, 1992.

The key elements of the Company's growth strategy include:

- Expansion of the store base by adding new locations in existing markets
and acquiring or opening stores in new markets, with a goal of reaching
100 stores by the end of fiscal 1997. The Company plans to add new stores
in existing markets to increase penetration and take advantage of
operating leverage in advertising, distribution and administrative
expenses; and to expand into new metropolitan markets.

- A comprehensive store remodeling and refurbishing program for its
existing store base which is designed to significantly upgrade its
existing stores and increase sales per store. Through fiscal 1994, the
Company has remodeled or refurbished 20 of its stores, and over the next
three fiscal years the Company plans to remodel or refurbish 37
additional stores.

- Strict, centralized financial and operating controls in all of its
markets utilizing its information system, which the Company believes is
one of the most advanced in the furniture retailing industry.

- Merchandising mix, store formats and advertising tailored to the
characteristics and opportunities of local markets.

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<PAGE> 5

In September 1988, Rhodes was acquired (the "Acquisition") by a group of
investors led by Holcombe T. Green, Jr., who is currently Chairman of the Board
of Directors of the Company. Two of the Selling Shareholders in this offering
(this "Offering"), selling an aggregate of 2,240,494 shares of Common Stock, are
controlled by Mr. Green. As of the date of this Prospectus, Mr. Green
beneficially owned approximately 52.8% of the outstanding shares of Common
Stock. After giving effect to this Offering, Mr. Green will beneficially own
2,918,379 shares of Common Stock, which represent approximately 29.8% of the
outstanding shares of Common Stock.

During the period from September 1988 through June 1993, the Company
focused on improving its furniture retailing performance. The Company disposed
of 26 stores which were located in small, rural markets and opened 12 new stores
in larger, metropolitan markets. In addition, the Company developed and
installed an advanced, real-time inventory control and point-of-sale system.
From fiscal 1988 to fiscal 1993, Rhodes increased sales per store from
$2,750,000 to $3,795,000, sales per employee from $90,000 to $131,000, gross
profit margin from 43.0% to 47.5% and inventory turnover from 3.1x to 4.0x.

In June 1993, the Company completed a recapitalization plan (the
"Recapitalization"), whereby $120.2 million of indebtedness and $14.7 million of
preferred stock was retired through the issuance of 8.2 million shares of Common
Stock and $40.0 million of senior secured notes (the "Senior Notes"). The
Recapitalization significantly reduced the Company's indebtedness and interest
expense and provided additional resources and financial flexibility for the
Company's store remodeling and refurbishing program and its expansion program.

The Company is a Georgia corporation. Its principal executive offices are
located at 4370 Peachtree Road, N.E., Atlanta, Georgia 30319, and its telephone
number is (404) 264-4600.

RECENT RESULTS

Net sales, on a preliminary basis, for the three months and fiscal year
ended February 28, 1994 were $86,064,000 and $325,251,000, respectively,
comprising increases of 25.8% and 13.5%, respectively, over the prior comparable
periods. Comparable store sales growth, on a preliminary basis, for the three
months and fiscal year ended February 28, 1994 were 18.4% and 10.0%,
respectively, over the prior comparable periods.

RESULTS OF OPERATIONS

The following table sets forth certain financial data expressed as a
percentage of net sales for the fiscal years ended February 28, 1991, February
29, 1992 and February 28, 1993 and nine months ended November 30, 1992 and 1993.

<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
FISCAL YEAR ENDED FEBRUARY 28 NINE MONTHS ENDED NINE MONTHS ENDED
OR 29, NOVEMBER 30, NOVEMBER 30,
------------------------------ ----------------- -----------------
1991 1992 1993 1992 1993 1992 1993
------ ------ ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net Sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold..... 52.8 52.6 52.5 52.3 51.7 52.3 51.7
------ ------ ------ ----- ----- ----- -----
Gross Profit......... 47.2 47.4 47.5 47.7 48.3 47.7 48.3
Finance Charges and
Insurance
Commissions.......... 14.7 14.2 4.8 5.8 1.5 1.8 1.5
Operating Expenses:
Selling.............. 14.9 15.3 16.7 17.2 15.9 17.2 15.9
General and
administrative.... 31.4 32.6 28.4 28.2 25.9 26.3 25.9
Provision for credit
losses............ 5.1 2.8 1.7 2.2 -- 0.1 --
Amortization of
intangibles....... 1.1 1.3 1.1 1.1 1.0 1.0 1.0
Non-recurring
items............. 1.9 -- -- -- -- -- --
Other (income)
expense, net...... 0.1 0.3 (0.2) (0.2) -- -- --
------ ------ ------ ----- ----- ----- -----
54.5 52.3 47.7 48.5 42.8 44.6 42.8
------ ------ ------ ----- ----- ----- -----
Operating Income..... 7.4 9.3 4.7 5.0 7.0 4.9 7.0
Interest expense,
net.................. 14.4 12.8 8.5 8.7 4.2 2.8 2.3
Income (loss) before
income taxes,
change in
accounting for
taxes and
extraordinary item... (6.9) (3.9) (3.8) (3.7) 2.8 2.1 4.8
Net income (loss)...... (5.3) (3.7) (3.4) (3.2) 0.4 -- --
</TABLE>

Nine Months Ended November 30, 1993 and 1992 Compared -- Pro Forma Basis

Net sales increased 9.7% to $239,187,000 from $218,093,000 for the nine
months ended November 30, 1993 compared with the comparable period of the prior
year. Comparable store sales growth was 7.4% for the nine months ended November
30, 1993. Comparable store sales growth, excluding the three stores that were
favorably impacted in the nine months ended November 30, 1992 by Hurricane
Andrew, was 9.0% for the nine months ended November 30, 1993. Operating income
for the nine months ended

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November 30, 1993 of $16,825,000 (7.0% of net sales) increased 58.8% compared
with $10,594,000 (4.9% of net sales) for the same period last year on a net
sales increase of $21,094,000. Pro forma net income before extraordinary item
for the nine months ended November 30, 1993 increased 158% to $6,831,000, or
$.70 per share, compared with $2,648,000 or $.27 per share for the prior period.

During the nine months ended November 30, 1993, Rhodes opened one new store
in Chattanooga, Tennessee and acquired one new store in Knoxville, Tennessee to
bring the total stores in operation to 78 compared with 75 stores in operation
at November 30, 1992. The Company also opened a new store in Clarksville,
Indiana (a suburb of Louisville, Kentucky) in January 1994. Rhodes has also
leased four future store locations and is in active negotiations to lease
additional store locations. The Company closed one store in Sarasota, Florida in
January 1994, which had no adverse impact on the Company.

Gross profit as a percentage of net sales for the nine months ended
November 30, 1993 increased to 48.3% from 47.7%, compared with the same period
last year. Gross margin improvement is partially attributable to improved sales
penetration of extended warranties which have a higher gross profit. Also, the
credit promotions discussed below permitted less discounting of selling prices,
contributing to the higher gross profit percentage. Inventory turnover on a FIFO
basis was 4.0x for each of the nine months ended November 30, 1992 and 1993.
Inventories were approximately $5.2 million higher at November 30, 1993 than
November 30, 1992 due to three more stores and management's anticipation of an
improved economic climate.

Finance charge and insurance commission income derives from commissions
earned from BNB under the Merchant Agreement and from commissions on credit
insurance on credit customer balances. The amounts earned were down due to lower
net yields on insurance commissions.

Selling expense for the nine months ended November 30, 1993 declined
substantially as a percentage of net sales to 15.9%, compared with 17.3% for the
same period in fiscal 1993. The expense of interest free and deferred payment
credit promotions was more than off-set by reduced net advertising expenditures
and reduced sales commissions compared with the prior period. Sales commissions
have decreased as a percentage of net sales as a result of revisions made to the
commission structure at the beginning of fiscal 1994.

General and administrative expenses for the nine months ended November 30,
1993 increased to $61,758,000 (25.8% of net sales) from $57,326,000 (26.3% of
net sales) for the same period in fiscal 1993. The increased expense is due to
adding three new stores plus increases in employee expenses. The improvement in
the percentage of net sales is due to the increased sales volume.

Interest expense on the Company's indebtedness is generally fixed and is
expected to decline slightly in future periods as such debt is reduced from
internal cash flow.

Nine Months Ended November 30, 1993 and 1992 Compared -- Historical Basis

On a historical basis, the nine months ended November 30, 1993 are not
comparable with the prior year due to the Receivables Sale, which took place on
June 18, 1992 and the completion of the Recapitalization, which took place on
June 24, 1993. As a result of the Receivables Sale, the Company no longer earns
finance charge income, and general and administrative expenses, credit losses
and interest expense related to the credit operation have been eliminated. Also,
as a result of the Recapitalization, interest expense has been substantially
reduced. The following information describes results of operations on a
historical basis to the extent that the historical information differs from the
pro forma information set forth under "-- Nine Months Ended November 30, 1993
and 1992 Compared -- Pro Forma Basis."

Finance charges and insurance commissions income was $3,658,000 for the
nine months ended November 30, 1993, compared with $12,161,000 for the same
period in fiscal 1993. As a result of the Receivables Sale, the related finance
charge income is no longer earned by the Company.

General and administrative expenses for the nine months ended November 30,
1993 increased to $61,877,000 (25.9% of net sales) from $61,440,000 (28.2% of
net sales) for the same period in fiscal

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<PAGE> 15

1993 due to the cost of adding three new stores plus increases in employee
expenses, partially offset by the elimination of the Company's credit operations
following the Receivables Sale. The improvement in general and administrative
expenses as a percentage of net sales is due principally to the increased sales
volume.

The provision for credit losses of $4,696,000 reported for the nine months
ended November 30, 1992 decreased to $116,000 for the nine months ended November
30, 1993 due to the Receivables Sale which eliminated the Company's risk of
credit losses on the customer credit accounts sold to BNB under the Merchant
Agreement. As a result, the only credit loss expenses to the Company are
write-offs associated with bankcard and check transactions.

Interest expense for the nine months ended November 30, 1993 decreased to
$9,947,000, compared with $18,875,000 for the nine month period last year as a
result of the Recapitalization and Receivables Sale and related reduction in the
Company's indebtedness.

In the nine months ended November 30, 1993 the Company expensed certain
charges incurred principally in connection with the Recapitalization. These
extraordinary items represent non-recurring prepayment penalties of $2,624,000
for early retirement of debt and the write-off of $903,000 in related deferred
loan costs, less income tax benefit of $800,000.

Fiscal Years 1993 and 1992 Compared -- Historical Basis

Operating income for fiscal 1993 is not comparable with the prior year due
to the Receivables Sale. Although operating income attributable to the Company's
credit operations (which was $877,000 in fiscal 1993) has been reduced as a
result of the elimination of finance charge revenue, partially offset by
reductions in general and administrative expense and in provision for credit
losses, management believes that the Receivables Sale positively impacted net
income by eliminating credit-related interest expense.

Net furniture sales increased 7.7% for fiscal 1993 over fiscal 1992, and
comparable store sales were up 7.0% for the same period. Comparable store sales
growth, 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. Net warranty sales of $1.3 million, less direct
expenses of $280,000, were deferred to future periods in fiscal 1993. The
Company markets extended warranty contracts to its customers on certain
merchandise at the time of the initial sale. The Company had 76 stores in
operation at February 29, 1992 and February 28, 1993, due to the loss of one
store to Hurricane Andrew and the opening of one new store in February 1993.

Gross profit was 47.5% of net sales in fiscal 1993, compared with 47.4% for
the prior year, due to the recognition of more extended warranty income.

Finance charges and insurance commissions income was $13.9 million for
fiscal 1993 compared with $37.7 million for fiscal 1992. As a result of the
Receivables Sale, the related finance charge income, which totalled $33.3
million for fiscal 1992 and $9.0 million for fiscal 1993, is no longer earned by
the Company. Insurance commission income earned for fiscal 1993 was $4.0 million
compared with $4.5 million in fiscal 1992 as a result of lower average accounts
receivable balances and lower credit insurance sales penetration in fiscal 1993.

Selling expense was 16.7% of net sales in fiscal 1993, compared with 15.3%
for the prior year, due to the increase in expenses associated with the
transition to operating under the Merchant Agreement, as discussed previously.
Management expects selling expense as a percentage of net sales for fiscal 1994
to be lower as a percentage of net sales than fiscal 1993 levels.

General and administrative expense for fiscal 1993 was down to $81.4
million (28.4% of net sales) compared with $86.8 million (32.6% of net sales)
for fiscal 1992. The decrease is largely attributable to the elimination of (i)
105 employee positions through the closing of the Company's credit center in
Greenwood, South Carolina, (ii) fees paid to the outside credit processor and
(iii) other related costs following the Receivables Sale on June 18, 1992. In
addition, the sale of previously written-off accounts to

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<PAGE> 16

Green Financial Services Corp., an affiliated company ("GFSC") set up for that
purpose, increased general and administrative expenses by $494,000 in fiscal
1992.

The provision for credit losses decreased to $4.8 million for fiscal 1993
compared with $7.4 million for fiscal 1992 as a result of the Receivables Sale.
The provision for credit losses in fiscal 1992 was reduced $1.0 million by the
sale of previously written-off accounts to GFSC, and by charging write-offs on
accounts existing at the time of the 1988 Merger to the allowance for credit
losses in the amount of $4.6 million for fiscal 1992. The remaining balance of
$8.4 million in the allowance for credit losses at the time of the Receivables
Sale was reversed and is included in the gain on this transaction.

Interest expense in fiscal 1993 was substantially less than in fiscal 1992
due to the reduction of short-term debt following the Receivables Sale and the
termination of the related commercial paper facility.

Fiscal Years 1992 and 1991 Compared -- Historical Basis

The Company's operating income increased 29.1% to $24.6 million for fiscal
1992 compared with $19.1 million for fiscal 1991. Although the Company continued
to experience net losses, the net loss before change in accounting for income
taxes declined to $9.2 million for fiscal 1992 compared to a net loss before
change in accounting for income taxes of $13.5 million for fiscal 1991.

Net sales increased 3.6% for fiscal 1992 over the prior year. Comparable
store sales were down 0.6% for fiscal 1992 compared to fiscal 1991. Fiscal 1991
furniture sales had been hurt by the recession and the transfer of personnel
from military bases in the Southeast to the Persian Gulf. Effective March 1,
1991, the Company adopted the technical bulletin of the Financial Accounting
Standards Board regarding the sale of extended warranty contracts and has
deferred a portion of extended warranty income, based on historical data on
service and repair claims, to be recognized in subsequent periods. As a result,
net warranty sales of $2.3 million, less direct expenses of $498,000, were
deferred to future periods in fiscal 1992. The Company had 76 and 75 stores in
operation at February 29, 1992 and February 28, 1991, respectively.

Gross profit was 47.4% of net sales for the year ended February 29, 1992,
an improvement compared with 47.2% for the prior year. The improvement was due
to a more profitable mix of furniture and the expansion of certain customer
service items with higher gross margins, including fabric protection, extended
warranties and cleaning and care kits.

Finance charges and insurance commissions income decreased to $37.7 million
for fiscal 1992, compared with $37.8 million for the prior year. The decrease
was due to the lower average accounts receivable portfolio balance in fiscal
1992 compared to fiscal 1991. Approximately 61% of net sales were on
Company-extended credit in fiscal 1992 compared with 65% in fiscal 1991. The
yield was 20.2% for fiscal 1992, compared with 20.1% for the prior year. The
yield increase was due to the addition of late charges in certain states and
additional credit insurance products.

Selling expense for the year increased as a percentage of net sales,
principally reflecting continuance of an increased level of advertising
expenditures to maintain market share during the recession.

General and administrative expense for the year increased to $86.8 million
reflecting the expense of operating six new stores, increased medical and
workmen's compensation insurance expense and the collection expense on
receivables sold to GFSC (as explained below), offset in part by personnel
reductions in stores and the Company's central credit operation and the sale of
three stores in smaller rural markets.

The provision for credit losses (net of the sale of previously written-off
accounts described below) was $7.4 million for fiscal 1992, compared with $13.0
million for fiscal 1991. Credit losses (write-offs) in fiscal 1992 in the amount
of $4.6 million on accounts existing at the time of the Acquisition were charged
to the allowance for credit losses. At the end of fiscal 1991, management
believed the Company had absorbed substantially all credit losses associated
with the accounts receivable of credit customers

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<PAGE> 17

existing at the time of the Acquisition. At the time of the Acquisition, the
total balance of receivables was $145.1 million and at April 30, 1992, the
remaining balance of those accounts, including add-on sales subsequent to the
Acquisition, was less than $22.4 million. Significant reserves had been
established in fiscal 1989 and 1990 relating to these receivables, and
management established an additional provision of $5.0 million during fiscal
1991. Due to its "out of period" nature, this additional provision is reflected
as a non-recurring item. The losses on receivables associated with credit
customers existing at the time of the Acquisition represented approximately 40%
of total credit losses in fiscal 1991. The receivables attributable to accounts
existing at the time of the Acquisition decreased as a percentage of the
Company's total receivables portfolio to 14% at February 29, 1992, as compared
to 22% at February 28, 1991.

In July and August 1991, Rhodes Financial Services Corp. ("Rhodes
Financial") sold, without recourse, a portion of its previously written-off
accounts to GFSC and agreed to monitor future collections of these accounts on
behalf of GFSC. The effect of these transactions was to record net cash proceeds
of $742,000, to reduce the provision for credit losses by $1.2 million and
increase administrative expenses by $494,000. In connection with the Receivables
Sale, Rhodes Financial repurchased the remaining written-off accounts previously
sold to GFSC because it could no longer meet its obligation to service any
accounts. The repurchase price was the remaining recoverable balance of such
receivables of approximately $235,000. Accordingly, as of February 29, 1992, the
Company increased the provision for credit losses by $235,000 and recorded the
related payables to GFSC. The net effect of the above transactions reduced the
Company's provision for credit losses by $1.0 million. Upon the consummation of
the Receivables Sale, such receivables were transferred to BNB.

During the second quarter of fiscal 1992, accounts of lower income
customers were starting to deteriorate because of the recession, causing higher
credit losses than management's goal. Consequently, in September 1991 the
Company began to restrict approval of credit customers in those groups causing
the highest credit losses.

Although total debt increased during fiscal 1992, interest expense for the
year was less than the prior year's due to lower short-term interest rates. The
Company purchased two-year interest rate caps that expired in August 1993 on
commercial paper of $100.0 million at 8.0%, at a cost of $260,000, and $50.0
million at 8.5%, at a cost of $77,500. The Company was obligated under its
previous commercial paper facility to maintain similar interest rate caps during
the term of the facility. The commercial paper facility was terminated upon
consummation of the Receivables Sale and the unamortized portion of the interest
rate caps of approximately $197,000 was written-off.

During fiscal 1992, the Company elected to adopt Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes" and
recorded the effect of the adoption retroactive to March 1, 1991 in a manner
similar to the cumulative effect of a change in accounting principle. See Note 2
to Consolidated Financial Statements.

Seasonality

The Company typically experiences its strongest sales in its third quarter.
Gross profit margin is generally lower in the Company's second and fourth
quarters, during which the Company conducts its clearance sales.

Effects of Inflation on Operations

Although the rate of inflation has remained low and has had little impact
on the Company during the last three fiscal years or the nine months ended
November 30, 1993, the Company's operating results could be adversely affected
by high rates of inflation. The area which could be most affected is the
Company's cost to replenish inventory. An increase in the cost of inventory
would be mitigated, however, to the extent the Company was able to pass along
such costs to its customers through price increases. The Company's interest rate
risk is limited to the variable rate of interest paid under the Revolving Credit
Agreement.

16
<PAGE> 18

INCOME TAXES

At February 28, 1993, the Company had approximately $17.0 million of net
operating loss carryforwards ("NOLs") for federal income tax purposes. Either
the transfer of Common Stock from an affiliate of Green Capital Investors, L.P.
("Green Capital") to WPS Investors on February 25, 1994, or the sale of Common
Stock offered pursuant to this Prospectus will cause an "ownership change" as
defined in Section 382 of the Internal Revenue Code of 1986, as amended, which
will give rise to an annual limitation on the amount of taxable income that such
NOLs can offset in a particular year. The Company believes that such limitation
will not significantly affect net income or cash flow.

LIQUIDITY AND CAPITAL RESOURCES

Currently, the Company's principal sources of liquidity are cash flow from
operations and additional borrowing capacity under its Revolving Credit
Agreement. The Company had net cash provided (used) by operating activities of
approximately ($1.4 million), $11.6 million, $6.2 million (adjusted for the
short-term debt paydown related to the Receivables Sale), and $15.5 million in
fiscal years 1991, 1992, 1993 and the nine months ended November 30, 1993,
respectively. The Company's principal uses of cash are debt service obligations,
capital expenditures and working capital needs.

On June 24, 1993, the Company completed the Recapitalization to enhance the
Company's strategic, financial and operating flexibility by increasing
shareholders' equity and reducing indebtedness and interest expense. Management
believes that the new capital structure provides sufficient cash flow to fund
its planned expansion, remodeling, and refurbishing programs and debt service
requirements. On June 18, 1992, the Company completed the Receivables Sale. The
Company also contracted to sell all future receivables until June 1995, unless
extended, under the Merchant Agreement (the term of which is extended
automatically unless terminated by one of the parties), whereby BNB provides
credit to customers under the Rhodes credit card name for future credit sales.
This arrangement removed the need for Rhodes to fund that portion of the
accounts receivable not financed by the commercial paper facility. The net
proceeds of the Receivables Sale were used principally to reduce short-term
debt, including terminating the related commercial paper program.

At the end of fiscal years 1991, 1992 and 1993, LIFO inventories were $39.2
million, $38.5 million and $37.3 million, respectively. FIFO inventory turns in
these years have increased to 4.0x for fiscal 1993 from 3.4x in fiscal year
1991. The Company has, and has historically had, 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.

The Company made additions to property and equipment of approximately $2.6
million, $2.8 million, $3.4 million and $7.2 million for fiscal years 1991,
1992, 1993 and 1994, respectively. These expenditures have been both for the
opening of new stores and capital replacements in existing stores, including the
remodeling completed for four stores in fiscal 1993 and 16 stores in fiscal
1994. Prior to the Recapitalization, the Company's capital expenditures were
restricted by covenants contained in the various loan agreements and by the
significant financial constraints imposed by its high debt and interest expense
levels. Upon completion of the Recapitalization, the Company substantially
increased its capital expenditures in fiscal 1994 (although capital expenditure
funding continues to be subject to restrictions in the Senior Notes and
Revolving Credit Agreement), and plans to spend $12.0 million and $9.1 million
in fiscal 1995 and 1996, respectively. These increases reflect the cost of
remodeling and refurbishing the existing store base and the addition of 18 net
new stores, as described under "Business -- Store Base." The Company does not
plan to purchase any real estate in acquiring and opening new stores. The
Company anticipates that these increased capital expenditures will be funded
primarily from cash flow from operations. If the Company's cash flow from
operations were insufficient to fund such capital expenditures, the Company
would consider additional means to finance its remodeling and refurbishing and
expansion programs or delaying or limiting such programs.

The Company's consolidated funded indebtedness at November 30, 1993,
including obligations under capital leases, was $61.9 million, down from $145.7
million at February 28, 1993 and $307.8 mil-

17
<PAGE> 19

lion at February 29, 1992 due to the Recapitalization and the Receivables Sale
and the payments previously described. Set forth below are the scheduled
principal payments required under the Company's existing debt agreements.

<TABLE>
<S> <C>
Fiscal 1995............................................................. $ 582,000
Fiscal 1996............................................................. 584,000
Fiscal 1997............................................................. 8,087,000
</TABLE>

The maximum availability of funds under the Revolving Credit Agreement is
the lesser of $30.0 million or 50% of eligible inventory. The Revolving Credit
Agreement is secured by substantially all of the inventory of the Company. As of
the date of this Prospectus, borrowings under the Revolving Credit Agreement
were approximately $1.0 million and approximately $20.0 million is estimated to
be available for borrowing. Loans outstanding under the Revolving Credit
Agreement generally will bear interest at one of two interest rate options
selected by the Company: (i) Prime Rate + .5% per annum or (ii) a quoted LIBOR +
2.375% per annum for specified interest periods. The "Prime Rate" is the rate of
interest announced publicly by the lender, from time to time, as its prime rate.
The Company is required to pay a commitment fee of 0.375% per annum of the
average daily unused portion of the lender's commitment under the Revolving
Credit Agreement. The Revolving Credit Agreement is scheduled to terminate in
February 1996.

The Senior Notes consist of two tranches: (i) Tranche A Notes in the
aggregate principal amount of $30 million which mature in June 1999 (subject to
mandatory annual redemption payments of $7.5 million per year commencing 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 Notes are secured by all real property owned by the
Company.

The terms of the Revolving Credit Agreement and the Senior Notes impose
restrictions that affect, among other things, the Company's 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 Credit Agreement and the Senior Notes
also require the Company to comply with certain specified financial ratios and
tests.

The Company 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 Company's existing credit facility will be
sufficient to fund the Company's present and proposed operations and capital
expenditure program.

18
<PAGE> 20

BUSINESS

Rhodes is one of the largest specialty furniture retailers in the United
States. Founded in 1875, the Company operates 78 stores in metropolitan areas of
11 contiguous Southeastern and Midwestern states and for many years has focused
on selling brand name residential furniture to middle-income customers. Based on
Company internal market analyses, the Company believes that it has the number
one or two share of furniture sales among specialty furniture retailers in most
of the markets in which it operates.

INDUSTRY OVERVIEW

Furniture purchases are generally discretionary, and, because they
represent a significant expenditure to the average consumer, are often deferred
during times of economic uncertainty. Therefore, the retail furniture industry
has historically been cyclical and significantly affected by general economic
conditions, including, among other things, interest rates, consumer confidence,
housing starts and existing home sales. The Company believes the retail
furniture industry is currently recovering from recent recessionary conditions,
during which period many consumers delayed purchases of consumer durables, and
that the industry has begun to benefit from an improving economy and lower
interest rates.

Historically, specialty furniture retailers have experienced significant
increases in sales during periods of economic recovery and rising consumer
confidence. For example, following the 1981-1982 recession, retail sales from
furniture stores increased by 12.1% and 12.9% in 1983 and 1984, respectively,
and Rhodes' comparable store sales growth of 22.9% and 8.3% in fiscal years 1984
and 1985, respectively. While there can be no assurances that such trends will
be repeated, retail furniture sales have improved significantly since August
1992, as evidenced by Rhodes' comparable store sales growth of 7.4% in the nine
months ended November 30, 1993 as compared to the nine months ended November 30,
1992. Comparable store sales growth, excluding the three Florida stores that
were favorably impacted in the nine months ended November 30, 1992 by increased
sales following Hurricane Andrew, was 9.0% during the nine months ended November
30, 1993 compared with the prior comparable period.

In addition, the retail furniture industry is highly fragmented, with a
large number of retailers operating in several channels of distribution -- for
example, single-market furniture stores, regional and national furniture chains,
traditional department stores and mass merchandisers. While it remains highly
fragmented, the industry continues to consolidate. Rhodes believes that its
capital structure following the Recapitalization provides it sufficient
financial flexibility to acquire additional stores, as the Company seeks to take
advantage of opportunities resulting from industry consolidation.

BUSINESS STRATEGY

The key elements of the Company's growth strategy include:

19
<PAGE> 21

- Merchandising mix, store formats and advertising tailored to the
characteristics and opportunities of local markets.

STORE BASE

Background

Since the Acquisition, the Company has divested 26 stores, primarily in
smaller, rural markets, and added 15 new stores in metropolitan markets. New
store additions consisted of the opening of new stores in each of Venice,
Florida and Raleigh, North Carolina and the acquisition of two stores in
Nashville, Tennessee in fiscal 1990 and the subsequent opening of two new stores
in that market; the opening of a new store in Atlanta, Georgia and acquisition
of four stores in Birmingham, Alabama in fiscal 1991; the opening of a new store
in Orlando, Florida in fiscal 1993; the acquisition of one new store in each of
Chattanooga and Knoxville, Tennessee and Clarksville, Indiana in fiscal 1994.
See "-- Properties." These store additions were selected to further the
Company's strategy of developing clusters of stores that may be served from
existing regional distribution centers ("RDCs").

The table below summarizes openings, closings and remodelings or
refurbishings of stores during the fiscal years indicated and the Company's
current plans for fiscal years 1995 through 1997.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------------------------------
1990 1991 1992 1993 1994 1995* 1996* 1997*
---- ---- ---- ---- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number of stores at beginning of year....... 69 72 75 76 76 78 88 96
Opened or acquired........................ 4 6 1 1 3 10 8 6
Closed or sold............................ (1) (3) -- (1)+ (1) -- -- (1)
Number of stores at end of year............. 72 75 76 76 78 88 96 101
Stores remodeled or refurbished............. 0 1++ 2++ 4 16 18 16 3
</TABLE>

- ---------------

* Proposed
+ On August 24, 1992, Hurricane Andrew destroyed one of the Company's four Miami
stores.
++ Remodelings and refurbishings prior to fiscal 1993 were not part of the
Company's current remodeling and refurbishing program and therefore are not
comparable.

Remodeling and Refurbishing Program

In fiscal 1993, the Company initiated a store remodeling and refurbishing
program designed to significantly upgrade its existing stores and increase sales
per store. This program provides a more attractive in-store atmosphere by
professionally redesigning and redecorating existing display space in order to
improve the consumer's shopping experience and enhance the appearance of
displayed merchandise.

Remodeling a store typically involves redesigning the store's display space
and reconfiguring its model room settings, replacing its carpet and wallpaper,
repainting its interior walls, and replacing or updating its lighting.
Remodeling a store may include work on its exterior (such as paint, lighting and
signage) but does not typically increase the store's existing display space. The
cost for the complete remodeling of a store in fiscal 1995 is anticipated to be
approximately $300,000. Refurbishing a store typically involves replacing carpet
and wallpaper, repainting and making minor improvements to the store's lighting.
The cost to refurbish a store in fiscal 1995 is anticipated to be approximately
$125,000.

20
<PAGE> 22

Stores generally remain open during a remodeling or refurbishing and the event
is advertised as an opportunity for customers to enjoy increased savings.

Twenty stores have been remodeled or refurbished in fiscal 1993 and 1994.
The Company believes that its customers have responded favorably to these
stores. During the 12 months ended February 28, 1994 (or the shorter period
during which a store had been open subsequent to its remodeling or refurbishing)
for stores remodeled or refurbished during the period, the 20 remodeled and
eight refurbished stores achieved average sales growth of 16.1% over the same
period ended February 28, 1993. During this period, Company stores which had not
been remodeled or refurbished experienced an 8.6% average sales growth as
compared to the prior period. Although the Company is generally satisfied with
the sales growth from its refurbished and remodeled stores, the Company
continues to monitor the results of its remodeling and refurbishing program to
attempt to maximize its return on investment therein and may adjust such program
(e.g., increasing the number of remodeled stores compared to refurbished stores)
as dictated by conditions affecting such stores existing at the time. There can
be no assurance as to the duration of the period over which these remodeled and
refurbished stores will achieve increased sales growth or that the remodeling or
refurbishing of additional stores will result in comparable levels of sales
growth.

The Company plans to remodel or refurbish 18 stores during fiscal 1995,
with an additional 19 stores being scheduled to be remodeled or refurbished by
the end of fiscal 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." In
total, Rhodes plans to have remodeled or refurbished 57 of its 78 existing
stores by the end of fiscal 1997. The Company has targeted stores primarily in
North Carolina, Alabama and Georgia for remodeling or refurbishing in fiscal
1995. Each of the remaining targeted stores has been scheduled for remodeling or
refurbishing in either fiscal 1996 or 1997.

Expanding Store Base

In each existing market and, when possible, in new markets, the Company
seeks to add new cluster stores that may be served from existing RDCs. The
opening of new cluster stores in an existing market allows the Company to
benefit from its name recognition and reputation in the market, spread
advertising and other operating expenses over a greater number of stores and
benefit from distribution and administrative efficiencies. Since 1988, a total
of five new stores have been added in the existing markets of Atlanta, Georgia;
Louisville, Kentucky; Orlando, Florida; Raleigh, North Carolina; and the west
coast of Florida. The Company has currently identified the seven existing
markets of Atlanta, Georgia; Birmingham, Alabama; Jacksonville, Miami and
Orlando, Florida; Charlotte, North Carolina; and St. Louis, Missouri in which to
open a total of nine new stores. The Company has entered into leases on four
sites -- three in Atlanta and one in Birmingham -- and is in the process of
negotiating leases for several additional sites. The Company anticipates that
stores will be opened at six sites in fiscal 1995, with the remaining three
stores anticipated to be opened by fiscal 1997. All of those stores would be
served from existing RDCs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

In evaluating the feasibility of entering a new market, the Company would
typically consider (a) the size of the market, focusing on locations that have a
local population base of more than 100,000 people, (b) existing competitive
conditions and (c) the feasibility of serving the new stores from an existing
RDC. The Company would generally seek to enter a new market by acquiring or
opening two or more stores that may operate as a cluster, although the Company
believes that single stores may be operated profitably in certain markets. New
markets were opened in the metropolitan areas of Nashville, Tennessee in fiscal
1990 and Birmingham, Alabama in fiscal 1991, with the Company currently
operating four stores in each of these markets. Single stores were opened in
Chattanooga and Knoxville, Tennessee in fiscal 1994.

The Company believes that there are attractive acquisition opportunities in
new metropolitan markets due to consolidation in the retail furniture industry
and the current availability of favorable sites and lease

21
<PAGE> 23

terms for retail space. In fiscal 1995, the Company has targeted for future
expansion certain additional markets in Tennessee, Florida and states in the
Midwest contiguous to states in which the Company presently operates. The
Company is engaged in discussions with landlords in certain of these areas with
respect to potential store sites. The Company plans to add approximately 14
stores in new markets by the end of fiscal 1997 and believes that it will be
able to serve each of these new markets from its existing RDCs, with certain RDC
capacity expanded as appropriate. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

STORE OPERATIONS

Target Market

For many years, the Company has focused its retailing strategy on selling
good quality furniture to a broad base of middle-income customers. The Company
intends to maintain this focus both in its existing markets and as it enters new
markets. The Company 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 the 11 months ended January 31, 1994, approximately
67% of customers using the Rhodes credit card were in the 25 to 49 year-old age
group, and approximately 57% had annual income in the $20,000 to $50,000 range.

Store Format and Site Selection

The Company's stores average 30,000 square feet of display space. 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. Stores are open 362 days each year and at least five evenings per week.

The Company continuously assesses retail trade areas and specific sites in
its existing markets and targeted metropolitan areas to evaluate the feasibility
of opening a new store. Within a trade area, the Company carefully analyzes
prospective sites for new stores 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.

Merchandising and Purchasing

The Company's merchandising strategy is to offer a broad selection of
affordably priced home furnishings. Each of the Company's stores offers a full
line of residential furniture, including upholstered furniture, recliners and
occasional tables for dens and living rooms; bedroom suits and bedding; dinettes
and more formal dining room suits; and desks, lamps and other accessories. The
table below sets 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,
-------------------------------
1991 1992 1993
----- ----- -----
<S> <C> <C> <C>
Living Room Furniture........................................ 48.1% 48.8% 50.9%
Bedroom Furniture............................................ 23.8 22.3 23.0
Dining Room Furniture........................................ 12.7 13.6 12.2
Bedding...................................................... 11.2 10.9 10.7
All Other Merchandise and Accessories........................ 4.2 4.4 3.2
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>

The Company's centralized merchandising and buying group selects all lines
of merchandise, negotiates purchase prices and terms with suppliers and places
orders for each of the Company's stores and RDCs. The Company purchases
merchandise from a large number of manufacturers, including well-

22
<PAGE> 24

known brands such as Armstrong, Bassett, Berkline, Broyhill, Dunmore, Kincaid,
Klaussner, La-Z-Boy, Peoplelounger, River Oaks, Sealy, Simmons and Universal.
One manufacturer, making products under the brand names La-Z-Boy and Kincaid,
currently accounts for 10.6% of the Company's total purchases. The Company
believes its buying power results in advantageous pricing and delivery and
favorable freight costs from vendors, thereby enhancing competitiveness and
profitability. The Company's 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.

Promotions and Advertising

The Company relies to a considerable extent upon promotions and advertising
to produce sales, with much of the Company's marketing featuring the
availability of in-store credit and special credit plans. The Company conducts
over 40 Company-wide promotional events each year. Sales are generally related
to holidays and other promotional events. The Company's headquarters staff
develops a monthly calendar of Company-wide promotional events.

The Company advertises extensively throughout the year in newspapers and by
use of radio and television in each of its markets. Color circulars also are
issued several times a year in special mailings or newspaper inserts. In the 11
months ended January 31, 1994, newspaper and print media advertising accounted
for approximately 58.7% of the Company's total advertising expense. Regional
managers along with the Company's headquarters staff 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 Company's
headquarters staff in conjunction with an outside advertising agency.

Management Information System

The Company has developed and installed an advanced inventory control and
point-of-sale information system which enables senior management to improve
individual store performance and access customer demographics, credit, sales and
inventory information on a real-time basis. This system expedites the processing
of customer transactions and credit approval, controls inventory levels and is
designed to support future growth. Specifically, the Company accounts for
merchandise in each store and RDC, and the movement of items, by inventory stock
identification numbers known as SKU numbers. Management and each store manager
are furnished with daily sales and gross margins by SKU category and for each
salesperson. The Company believes its management information system is one of
the most advanced in the furniture retailing industry and has allowed the
Company to achieve one of the highest inventory turnover rates in the industry.

The Company believes that the centralization and standardization of its
operating systems, and the successful implementation of these systems in its
existing stores, will allow the Company 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
systems, the Company 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 the Company is the experience of its
senior management team, with the seven executive officers of the Company having
an aggregate of approximately 100 years of experience with Rhodes. In order to
utilize the knowledge and experience of its senior management team, the Company
has centralized its merchandise and promotion controls.

Senior management is supported through the Company's seven operating
regions, each of which has a regional manager and multiple area managers. The
seven regional managers and one division manager have a combined 91 years of
experience with Rhodes. The Company believes that its regional, area and store
managers are attractively compensated with substantial incentive compensation
based on

23
<PAGE> 25

operating results. In addition, all store sales personnel are compensated
through sales commissions. 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 the Company's stores and at the
Company's 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 all stores expected to be opened in the current
fiscal year.

Each month, the Company's headquarters staff produces a planning calendar
which is distributed to each store. This calendar provides a day-by-day schedule
of sales, promotional and training events for the month, and is supplemented by
video and other aids to assist local store managers in training and motivating
their employees. The Company believes that this planning calendar serves as an
example of the Company's standardized operating system that will effectively
support the operations of additional new stores.

In addition to its formal operating policies and training program,
management has instituted additional policies designed to enhance store
management. For instance, each store maintains, and the Company distributes
throughout its system, daily closing rates, which indicate the percentage of
customers who entered the store on a given day purchasing merchandise. In
addition, all store managers are required to regularly shop the stores of
competitors in their area in order to keep abreast of current pricing,
merchandising and promotional efforts.

Distribution and Delivery

Inventories are maintained in RDCs, from which merchandise is shipped to
the appropriate store for delivery to the customer's home. Since fiscal 1988,
the Company has closed four older, less efficient RDCs and consolidated its
warehouse operations into the seven RDCs. This consolidation has resulted in
lower operating and freight costs and reduced inventory requirements. The seven
RDCs, which collectively have more than 600,000 square feet, have cantilever
racking and computer-controlled inventory storage. The Company anticipates
expanding the capacity of certain RDCs to support new store growth. The Company
believes its RDCs and inventory control and point-of-sale information system
will provide it the aggregate capacity to support planned store growth.

Typically, each store is within 200 miles of one of the RDCs. Substantially
all of the Company's merchandise is distributed to its stores through its RDCs.
The Company operates a fleet of trucks which delivers merchandise from an RDC to
each store several times each week. The Company believes the use of the RDCs and
its inventory control system enable it 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 the Company's stores by
Company-operated trucks or, in certain markets, by independent contractors. In
certain of its major metropolitan markets, the Company guarantees next-day
delivery for all in-stock purchases and the Company believes that this program,
and its prompt delivery for all stores, provides it with a competitive
advantage.

Credit Operations

The Company offers its customers the option to purchase furniture using
cash, the Rhodes credit card or other major nationally recognized credit cards.
Approximately 66% of the Company's sales in the 11 months ended January 31, 1994
were made through the Rhodes credit card, which operates as a revolving charge
account. The Company believes that it derives a competitive advantage from the
convenience of its in-store credit application and approval procedures, under
which applications are

24
<PAGE> 26

typically processed within minutes. All credit applications, sales and many
payments on account are processed electronically through the Company's
point-of-sale system. The terms for the Rhodes credit card purchases are
flexible and on most purchases allow up to 44 months to pay. The Company 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.

On June 18, 1992, the Company completed the Receivables Sale. In the
Receivables Sale, the Company sold to BNB all of its outstanding customer
installment receivables (in the amount of approximately $174.0 million) and
received approximately $170.0 million in cash. Under the related Merchant
Agreement, the Company also contracted to sell to BNB all future receivables for
three years following the Receivables Sale, and received approximately $4.3
million, net of a $0.5 million contingency deposit, in advances against future
revenue to be earned by the Company under this arrangement. The Company derives
income under the Merchant Agreement from commissions earned from BNB on certain
credit transactions. The Merchant Agreement 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 material change in any law or regulation or in the
operation, assets, condition (financial or otherwise), business or ownership of
Rhodes. After the initial three-year term, the Merchant Agreement remains in
effect unless terminated by either party on 180 days notice. Upon termination of
the Merchant Agreement, 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 Company believes that
reduced administrative, bad debt and interest expenses have more than offset the
finance charges that it would have earned on these receivables, and that it has
benefited from the elimination of the interest rate and credit risks inherent in
owning a large portfolio of consumer receivables. Management believes the
transition to BNB was achieved with no disruption of service or credit
availability to Rhodes' credit customers.

COMPETITION

The retail home furnishings business is highly competitive and fragmented.
The Company 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 in calendar 1992, the Company was the seventh
largest specialty furniture retailer in North America; however, the 10 largest
specialty furniture retailers accounted for less than 15% of industry sales in
1992. Some of the furniture store chains, department stores and mass
merchandisers with which the Company competes have greater financial and other
resources than the Company.

The retail furniture industry competes primarily on the basis of quality,
price and service. Each of the Company's stores offers a broad line of brand
name merchandise, emphasizing good quality and an extensive selection. The
Company 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

The Company conducts its business under the names "Rhodes," "Crossroads"
(in Kentucky and Missouri), "Marks-Fitzgerald" (in Birmingham, Alabama) and
"Fowler's Furniture Center" (in Knoxville, Tennessee). The Company holds service
marks for each of these names and believes that the names are well-recognized in
their markets and of great value to the Company.

EMPLOYEES

As of February 1, 1994, the Company employed 2,458 persons, including 2,191
in sales and store operations, 162 in its RDCs and 105 in its corporate office.
The Company has never experienced a work stoppage due to labor difficulties. The
Company is not a party to any collective bargaining agreements and considers its
relations with employees to be good.

25
<PAGE> 27

PROPERTIES

The Company's stores are free-standing units or are located in shopping
centers, and have display space ranging from approximately 15,000 square feet to
approximately 78,000 square feet (with an average of approximately 30,000 square
feet). As of February 1, 1994, the Company owned 14 of its stores and leased the
remaining 64, of which nine were leased pursuant to sale/leaseback arrangements.
See Notes 1 and 6 to Consolidated Financial Statements.

Store leases have initial terms which will expire at various dates through
2008, with an average lease term, including renewal options, of approximately 12
years. The Company's leases generally provide for fixed monthly rentals,
although some provide for fixed minimum rentals with a percentage rental based
on sales.

The following sets forth information, as of February 1, 1994, regarding the
Company's 78 stores.

<TABLE>
<CAPTION>
DISPLAY AREA
LOCATION (SQUARE FEET) YEAR OPENED OWNED/LEASED
------------------------------------------------ ------------- ----------- -------------
<S> <C> <C> <C>
ALABAMA:
Birmingham
Hoover...................................... 30,856 1990 Leased
5 Points.................................... 17,044 1990 Leased
Center Point................................ 17,500 1990 Leased
Eastwood.................................... 23,322 1990 Leased
Dothan........................................ 24,447 1984 Leased
Huntsville.................................... 26,187 1986 Leased
Mobile........................................ 34,100 1970 Leased
Montgomery.................................... 32,652 1976 Leased
FLORIDA:
Bradenton..................................... 26,025 1987 Leased
Charlotte Harbor.............................. 29,504 1973 Leased
Ft. Myers..................................... 33,144 1979 Leased
Ft. Walton.................................... 17,715 1981 Owned
Gainesville................................... 26,668 1969 Leased
Jacksonville
Beach Blvd.................................. 22,468 1974 Leased
Normandy.................................... 22,313 1974 Owned
Orange Park................................. 29,800 1987 Leased
Walgreen.................................... 35,227 1972 Owned
Miami
163rd....................................... 21,251 1990 Leased
Pembroke.................................... 15,116 1983 Leased
Red Road.................................... 24,934 1986 Leased
Naples........................................ 17,635 1973 Leased
Orlando
Altamonte Springs........................... 34,790 1987 Leased
E. Colonial................................. 25,385 1987 Leased
W. Colonial................................. 34,790 1987 Leased
Orange Blossom Trail........................ 33,000 1986 Leased
Ormand Beach................................ 26,638 1993 Leased
Panama City................................... 28,400 1965 Owned
Pensacola..................................... 30,900 1974 Owned
Tallahassee................................... 19,160 1966 Owned
Venice........................................ 28,963 1989 Leased
GEORGIA:
Albany........................................ 23,496 1978 Leased
Athens........................................ 18,784 1983 Leased
Atlanta
Conyers..................................... 23,860 1986 Leased
Doraville................................... 54,690 1984 Leased
Marietta.................................... 33,024 1984 Leased
Hapeville................................... 30,477 1984 Leased
Decatur..................................... 32,648 1985 Leased
Union City.................................. 22,601 1985 Leased
Snellville.................................. 30,463 1985 Leased
Roswell..................................... 26,404 1987 Leased
Douglasville................................ 29,670 1990 Leased
</TABLE>

26
<PAGE> 28

<TABLE>
<CAPTION>
DISPLAY AREA
LOCATION (SQUARE FEET) YEAR OPENED OWNED/LEASED
------------------------------------------------ ------------- ----------- -------------
<S> <C> <C> <C>
Augusta....................................... 31,066 1979 Leased
Columbus...................................... 24,072 1986 Leased
Macon......................................... 28,304 1978 Leased
Savannah...................................... 31,544 1983 Leased
ILLINOIS:
Fairview Heights.............................. 31,090 1987 Leased
INDIANA:
Clarksville................................... 29,819 1994 Leased
KENTUCKY:
Lexington..................................... 25,079 1986 Leased
Louisville
Durrett Lane................................ 44,200 1972 Owned
Shelbyville................................. 22,928 1980 Leased
MISSISSIPPI:
Gulfport...................................... 31,460 1967 Owned
Jackson
Northview................................... 20,016 1966 Owned
Lakeland.................................... 20,100 1986 Leased
MISSOURI:
St. Louis
Campus Parkway.............................. 54,144 1971 Owned
Union Road.................................. 33,811 1979 Leased
St. Peters.................................. 37,500 1988 Leased
NORTH CAROLINA:
Asheville..................................... 21,073 1986 Leased
Charlotte
Independence................................ 45,808 1978 Owned
West Park................................... 32,000 1988 Leased
Durham........................................ 28,936 1970 Leased
Fayetteville.................................. 31,490 1984 Leased
Greensboro.................................... 29,220 1972 Leased
Raleigh
Glenwood.................................... 38,258 1970 Leased
Spring Forest............................... 28,302 1989 Leased
Wilmington.................................... 19,814 1977 Leased
Winston Salem................................. 30,860 1984 Leased
SOUTH CAROLINA:
Charleston
Highway 7................................... 45,086 1970 Owned
N. Charleston............................... 31,824 1983 Leased
Columbia
Two Notch................................... 30,357 1977 Leased
Rivermont................................... 28,086 1969 Leased
Greenville.................................... 37,742 1974 Leased
Spartanburg................................... 27,200 1984 Leased
TENNESSEE:
Chattanooga................................... 57,991 1993 Leased
Knoxville..................................... 78,210 1993 Leased
Nashville
Brentwood................................... 33,408 1989 Owned
Madison..................................... 29,107 1989 Owned
Rivergate................................... 27,510 1991 Leased
White Bridge................................ 20,870 1992 Leased
</TABLE>

27
<PAGE> 29

The following sets forth information, as of February 1, 1994, regarding the
Company's seven RDCs:

<TABLE>
<CAPTION>
WAREHOUSE SPACE
LOCATION (SQUARE FEET) YEAR OPENED OWNED/LEASED
-------------------------------------------- --------------- ------------ -------------
<S> <C> <C> <C>
FLORIDA:
Jacksonville.............................. 75,218 1984 Owned
Orlando................................... 102,960 1987 Leased
Pensacola................................. 64,211 1974/1984 Owned/Leased(1)
GEORGIA:
Powder Springs............................ 209,740 1985 Owned
KENTUCKY:
Louisville................................ 53,995 1972 Owned
MISSOURI:
St. Louis................................. 87,984 1971 Owned
NORTH CAROLINA:
Greensboro................................ 52,428 1981 Leased
</TABLE>

- ---------------

(1) Consists of two connected buildings. The first building was opened in
1974 and is leased by the Company. The second building was opened in
1984 and is owned by the Company.

The Company's principal executive offices are located in a 29,505 square
foot leased facility located in Atlanta, Georgia. The facility is leased by the
Company pursuant to two leases, one of which extends to July 2005 and the other
of which extends to May 2002 and which the Company has an option to extend for
an additional 10 year term. Management believes that the Company has adequate
expansion opportunities to accommodate its needs for the foreseeable future.

LITIGATION

The Company is not a party to any litigation which, in the judgment of
management, would have a material adverse effect on its operations or financial
condition if adversely determined. However, due to the nature of the Company's
business, it is from time to time a party to certain legal proceedings arising
in the ordinary course of its business.

28
<PAGE> 30

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to each
person who is an executive officer or director of the Company, as indicated
below.

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Holcombe T. Green, Jr..................... 54 Director, Chairman of the Board
Irwin L. Lowenstein....................... 58 Director, President and Chief Executive
Officer
Don L. Chapman............................ 54 Director
James R. Kuse............................. 63 Director
James V. Napier........................... 57 Director
Joel T. Lanham............................ 38 Executive Vice President, Operations
Joel H. Dugan............................. 55 Senior Vice President, Finance and
Administration
Jack A. Hurst............................. 61 Senior Vice President, Training & Human
Resources
Don M. Parker............................. 50 Senior Vice President, Merchandising and
Advertising
Michael Beindorff......................... 42 Senior Vice President, Marketing
Barbara W. Snow........................... 36 Corporate Controller
</TABLE>

Holcombe T. Green, Jr. has been Chairman of the Board of the Company since
1988. Mr. Green has been the principal of Green Capital, a holding company,
since its organization in January 1988 and prior to that time was a senior
partner at Hansell & Post. Mr. Green currently is Chairman of the Board of HBO &
Company, a provider of hospital information systems, and Chairman of the Board
and Chief Executive Officer of WestPoint Stevens Inc., a textile manufacturer,
and a director of Georgia Gulf Corporation, a chemical manufacturer.

Irwin L. Lowenstein joined the Company in 1972 and has served as President,
Chief Operating Officer and Director of the Company since 1977. Effective in
1989, Mr. Lowenstein was elected Chief Executive Officer of the Company.

Don L. Chapman has been a Director of the Company since December 1992. Mr.
Chapman has been Chief Executive Officer of Opti-World Inc., an optical products
retailer, since 1983. Mr. Chapman is Principal and Chief Executive Officer of
Tug Manufacturing Corp., an airline ground support equipment manufacturer, a
position he has held since 1977. Mr. Chapman is a director of Superior Teletec
Inc., a wire and cable manufacturer, Sheffield Funds, Inc., a bond and stock
fund, and Longhorn Steaks, Inc., a restaurant chain.

James R. Kuse has been a Director of the Company since 1988. Mr. Kuse has
been Chairman of Georgia Gulf Corporation since January 1985. Georgia Gulf
Corporation was formed to acquire the chemicals division of Georgia-Pacific
Corporation in 1984. Mr. Kuse owns limited partnership interests of 13.33% and
20% in Green Capital and RHD Investors, respectively.

James V. Napier has been a Director of the Company since 1992. Mr. Napier
has been Chairman of the Board of Directors of Scientific-Atlanta, Inc., an
electronic products company, since December 1992. Mr. Napier served as Chairman
and President of Commercial Telephone Group, Inc., a designer of telephone
products, from July 1988 to December 1992 and was a private investor and
consultant from April 1986 to July 1988. Mr. Napier is a director of Centex
Telecommunications, Inc., a telecommunications management service company,
Engelhard Corporation, a manufacturer of specialty chemical and metallurgical
products, HBO & Company, Intelligent Systems Company, a manufacturer of computer
accessories, and Vulcan Materials Company, a producer of chemicals and
construction materials from scrap metal.

29
<PAGE> 31

Joel T. Lanham joined the Company in 1976. For the past five years he has
served as Regional Vice President and Senior Vice President before being
promoted to his current position as Executive Vice President, Operations in
1991. He is a director of the National Home Furnishings Association.

Joel H. Dugan joined the Company in 1985. Mr. Dugan, a certified public
accountant formerly with Price Waterhouse, was elected Vice President,
Accounting and Information Services in 1985 and Senior Vice President, Finance
and Administration in 1988.

Jack A. Hurst joined the Company in 1957 and has served as Senior Vice
President, Training & Human Resources since 1986.

Don M. Parker joined the Company in 1987 as the Regional Manager for the
Atlanta area stores, and served in that capacity until being named Senior Vice
President of Merchandising and Advertising in May 1993. Prior to joining the
Company, Mr. Parker served as General Manager for Maxwell Furniture, a furniture
retailer.

Michael A. Beindorff joined the Company as Senior Vice President, Marketing
in 1993. Prior to joining Rhodes, Mr. Beindorff spent fourteen years with The
Coca-Cola Company in various marketing roles, serving most recently as Vice
President of Marketing for Coca-Cola USA and Director of Global Advertising.

Barbara W. Snow joined the Company in 1981 and has served as Corporate
Controller since 1988. Ms. Snow, a certified public accountant, served in the
capacity of Accounting Manager prior to being promoted to Corporate Controller.

All executive officers of the Company are elected by the Board of Directors
and serve for a one-year term and until their successors have been elected and
qualified.

The Board of Directors has established an Audit Committee, which is
currently composed of Messrs. Kuse and Napier. The Audit Committee is
responsible for recommending independent auditors, reviewing with the
independent auditors the scope and results of the audit engagement, monitoring
the Company's financial policies, activities of the Company's internal audit
department and control procedures and reviewing and monitoring the provision of
non-audit services by the Company's auditors.

The Board of Directors has also established a committee to establish
compensation for Company executives and administer the Company's 1991 Stock
Option Plan, which committee is currently composed of Messrs. Green, Chapman and
Kuse. See "Stock Option Plans -- 1991 Stock Option Plan."

CERTAIN RELATIONSHIPS AND TRANSACTIONS

In June 1993, the Company consummated the Recapitalization, pursuant to
which the Company issued 2,859,115 shares of Common Stock to Green Capital, an
affiliate of Holcombe T. Green, Jr., in exchange for outstanding indebtedness of
the Company to Green Capital having an accreted value of $34.3 million. The
Company also issued 1,221,666 shares of Common Stock to Green Capital in
exchange for preferred stock of the Company 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 has maintained an unsecured line of credit for the Company of
up to $10.0 million for working capital purposes, and has advanced funds to the
Company 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 maximum
amount outstanding in the period beginning March 1, 1990 and ending November 30,
1993 was $9.9 million and total interest paid to Green Capital during such
period was $750,000. The line of credit was terminated upon execution by the
Company of the Revolving Credit Agreement on February 24, 1994.

In December 1993 and January and February 1994, the Company had outstanding
advances to Green Capital in varying amounts, with the largest principal amount
outstanding at any time being

30
<PAGE> 32

$3.0 million. Interest accrued on outstanding principal at a rate of 8% per
annum, and total interest paid by Green Capital to the Company for these
advances was approximately $22,000. No advances were outstanding as of the date
of this Prospectus.

On June 28, 1990, the Company 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 the Company, 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 RHD Holdings Corp., the parent of the Company, and $35.0 million
of the $40.0 million outstanding 15% Senior Subordinated Notes due September 20,
1998 of the Company (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. Jackson National will be a Selling Shareholder in this
Offering. See "Selling Shareholders."

On May 15, 1990, Green Capital purchased from the Company $6.0 million in
Class A Preferred Stock. Green Capital purchased another $4.0 million in Class A
Preferred Stock on June 28, 1990. The Class A Preferred Stock was entitled to
cumulative dividends of 15% per annum payable semiannually and all such
preferred stock was repurchased by the Company in the Recapitalization.

Pursuant to an agreement dated November 15, 1991 between the Company and
Bankers Fidelity, an affiliate of Atlantic American Corporation, Bankers
Fidelity exchanged 17% Junior Discount Subordinated Debentures due 2000 (the
"17% Debentures") owned by it having an aggregate stated face amount of $10.2
million for an aggregate of 485,398 newly issued shares of Common Stock (an
exchange rate of 47.7613 shares of Common Stock for each $1,000 stated face
amount of 17% Debentures). On November 18, 1991, Green Capital acquired all such
shares of Common Stock from Bankers Fidelity for a purchase price of $3.0
million, thereby increasing the beneficial ownership by Holcombe T. Green, Jr.
and Green Capital of the outstanding Common Stock of the Company at that time to
80.2% and 56.6%, respectively. During June and July 1992, Green Capital
purchased from Atlantic American Corporation and affiliates 17% Debentures
having an aggregate face value of $20.1 million for an aggregate purchase price
of $6.0 million. Immediately following this transaction, Green Capital held
78.1% of the outstanding 17% Debentures having an accreted value of $34.3
million at June 17, 1993 all of which were exchanged in the Recapitalization.

Rhodes Financial and GFSC, which is a wholly owned subsidiary of Green
Capital, entered into a Continuing Accounts Purchase and Collection Services
Agreement effective as of January 15, 1990 pursuant to which GFSC agreed to
purchase, without recourse, certain accounts receivable of Rhodes Financial that
had been written off. The purchase price for such receivables was an amount
determined by the parties to be estimated realizable value of the purchased
accounts. Rhodes Financial performed billing and collection services with
respect to the purchased accounts. In connection with the Receivables Sale, the
remaining uncollected receivables were repurchased by the Company for $235,000
and the Agreement was terminated effective June 10, 1992. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."

On June 26, 1992, Rhodes redeemed an industrial revenue bond with an
interest rate of 9% (the "Bond"), which had an outstanding principal amount of
$2.1 million. Green Capital owned a participation in the Bond and received the
aggregate amount of $987,905 ($945,637 of which represented principal and
$42,268 of which represented accrued and unpaid interest) in connection with the
redemption of the Bond. Green Capital had acquired its participation in the Bond
in September 1991 in satisfaction of an obligation of Rhodes to effect a partial
redemption of the Bond from the original holder thereof.

Effective July 31, 1992, William C. Morris, Senior Vice President,
Marketing and Merchandising for the Company, voluntarily resigned as an officer
of the Company. The Company and Mr. Morris entered into a Separation Agreement,
dated September 21, 1992. Pursuant to the terms of the Separation Agreement, the
Company paid Mr. Morris a severance bonus of approximately $94,000, Mr. Morris

31
<PAGE> 33

allowed options he owned to purchase approximately 6,070 shares of Common Stock
to lapse, and the Company and Mr. Morris entered into mutual releases.

For the period from July 1990 through the date of the Recapitalization, the
Company 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 fee was $20,833. Although Holcombe T. Green, Jr., who through
affiliates controls RHD Investors, personally devotes substantial efforts on the
Company's behalf in his capacity as Chairman of the Board of the Company, Mr.
Green receives no directors' fees or other compensation from the Company.
Payment of the monthly management fee terminated effective upon consummation of
the Recapitalization.

On March 28, 1990, East Tower Fund, Inc. ("East Tower Fund"), a subsidiary
of Green Capital, offered to buy up to $20.0 million stated face amount of the
17% Debentures at a price of $250 per $1,000 of stated face amount. Holders of
the 17% Debentures tendered $12.0 million in stated face amount under the offer,
which was completed on April 24, 1990. On September 17, 1990, East Tower Fund
offered to buy up to $10.0 million stated face amount of the 17% Debentures on
the same terms as the March 1990 offer. Holders of the 17% Debentures tendered
$11.0 million in stated face amount under this offer, which was completed on
October 16, 1990. On August 29, 1990, East Tower Fund completed the acquisition
from Goldman, Sachs & Co. and affiliated entities of a total of 1.5 million
shares of common stock of RHD Holdings for an aggregate purchase price of $3.8
million. East Tower Fund was liquidated on February 28, 1991, and all 17%
Debentures and the shares of common stock of RHD Holdings (which were converted
into shares of Common Stock in the 1991 Merger) formerly held by East Tower Fund
were transferred directly to Green Capital. The 17% Debentures have since been
exchanged.

SELLING SHAREHOLDERS

The following table sets forth, as of the date of this Prospectus, the
number and percentage of shares of Common Stock beneficially owned by each
Selling Shareholder, on an actual basis and an as-adjusted basis after giving
effect to the Offering, and the number of shares of Common Stock being sold by
each such Selling Shareholder in the Offering. Unless otherwise indicated in a
footnote, each person possesses sole voting and investment power with respect to
the shares indicated as beneficially owned.

<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO THE NUMBER OF OWNED AFTER THE
OFFERING SHARES OFFERING
-------------------- BEING --------------------
SELLING SHAREHOLDERS(1) NUMBER PERCENT SOLD NUMBER PERCENT
- ------------------------------------- --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
RHD Capital Investors, L.P........... 240,494 2.5% 240,494 0 0%
2,91
WPS Investors, L.P................... 4,912,679(2) 50.2% 2,000,000(3) 2,679 29.8%
Jackson National Life Insurance
Co................................. 248,880 2.5% 248,880 0 0%
</TABLE>

- ---------------

(1) Holcombe T. Green, Jr., Chairman of the Board of Directors of the Company,
controls RHD Investors and WPS Investors.
(2) These shares were transferred to WPS Investors by Green Capital in a series
of transactions in February 1994.
(3) WPS Investors has granted to the Underwriters an over-allotment option to
purchase up to an additional 225,000 shares of Common Stock. If such
over-allotment option is exercised in full, after the offering WPS
Investors will own approximately 27.5% of the outstanding shares of Common
Stock. See "Underwriting."

32
<PAGE> 34

SHARES ELIGIBLE FOR FUTURE SALE

Of the 9,778,933 outstanding shares of Common Stock, 6,656,374 shares (or
6,881,374 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act by persons other than "affiliates" of the Company after the
Offering. The remaining shares of Common Stock are deemed "restricted
securities" as defined in Rule 144 under the Securities Act and may not be
resold in the absence of registration under the Securities Act or pursuant to an
exemption from such registration, including exemptions provided by Rule 144
under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including affiliates of the Company, who has
beneficially owned "restricted securities" for at least two years may sell,
within any three-month period, a number of such shares that does not exceed the
greater of 1% of the outstanding shares of Common Stock or the reported average
weekly trading volume of the Common Stock on all national securities exchanges
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain manner-of-sale provisions, notice requirements and the
availability of current public information about the Company. A person who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned "restricted securities"
for at least three years, may sell such shares under Rule 144 without regard to
the volume limitations, manner of sale provisions or notice requirements. Sales
of "restricted securities" by affiliates, even after a three-year holding
period, must continue to be made in broker's transactions subject to the volume
limitations described above. The foregoing summary of Rule 144 is not intended
to be a complete description of that rule.

The Company has reserved 700,000 shares of Common Stock for issuance
pursuant to its 1991 Stock Option Plan, of which options to acquire 637,500
shares of Common Stock are outstanding. Options to purchase an additional 15,000
shares of Common Stock have been granted to certain directors of the Company.
The Company intends to file a registration statement under the Securities Act to
register the Common Stock that may be issued upon exercise of options, including
options previously outstanding. Shares issued upon exercise of stock options
after the effective date of any registration statement covering such shares
generally may be sold immediately in the public market.

No prediction can be made as to the effect, if any, that future sales, or
the availability of shares of Common Stock for future sales, will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices.

The Company and the holders of 30.7% of the outstanding shares of Common
Stock, including WPS Investors, have agreed that, without the prior written
consent of Salomon Brothers Inc and Kidder, Peabody & Co. Incorporated, they
will not offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock for a period of 180 days after the date of this Prospectus,
other than the shares of Common Stock offered hereby and the issuance by the
Company of shares of Common Stock pursuant to employee stock options and the
grant of options under the 1991 Stock Option Plan (which will not become
exercisable within such 180-day period). See "Underwriting."

33
<PAGE> 35

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the entities named below
(the "Underwriters"), and each of the Underwriters, for whom Salomon Brothers
Inc and Kidder, Peabody & Co. Incorporated are acting as representatives (the
"Representatives"), has severally agreed to purchase from the Selling
Shareholders the respective number of shares of Common Stock set forth opposite
its name below:

<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------------------------------------------------------------------ ------------
<S> <C>
Salomon Brothers Inc....................................................
Kidder, Peabody & Co. Incorporated......................................
------------
Total......................................................... 2,489,374
------------
------------
</TABLE>

In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all 2,489,374
shares of Common Stock offered hereby (other than the shares of Common Stock
covered by the over-allotment option described below) if any such shares are
purchased. In the event of a default by any Underwriter, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitments of
the non-defaulting Underwriters may be increased or the Underwriting Agreement
may be terminated. The Selling Shareholders have been advised by the
Representatives that the several Underwriters propose initially to offer such
shares of Common Stock to the public at the Price to Public set forth on the
cover of this Prospectus, and to certain dealers at such price less a concession
not in excess of $ per share. The Underwriters may allow and such dealers
may reallow a concession not in excess of $ per share to other dealers.
After the initial public offering, the public offering price and such
concessions may be changed.

One of the Selling Shareholders, WPS Investors, has granted to the
Underwriters an option to purchase up to an additional 225,000 shares of Common
Stock at the Price to Public set forth on the cover of this Prospectus, less
underwriting discount. The Underwriters may exercise such option solely to cover
over-allotments, if any, made in connection with the Offering. The option may be
exercised at any time up to 30 days after the date of this Prospectus. To the
extent that the Underwriters exercise such

34
<PAGE> 36

option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.

The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, or contribute to
payments the Underwriters may be required to make in respect thereof.

An affiliate of Kidder, Peabody & Co. Incorporated owns a 15% limited
partnership interest in RHD Investors and, indirectly, an approximate 8.9%
limited partnership interest in WPS Investors. Salomon Brothers Inc has from
time to time provided margin loans on customary terms and financial consulting
and advisory services to Holcombe T. Green, Jr., RHD Investors and WPS
Investors.

In connection with this Offering, certain Underwriters and selling group
members who are qualifying registered market makers on The Nasdaq Stock Market
may engage in passive market making transactions in the common stock on The
Nasdaq Stock Market in accordance with Rule 10b-6A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the two business day period
before commencement of offers or sales of the Common Stock in this offering.
Passive market making transactions must comply with certain volume and price
limitations and be identified as such. In general, a passive market maker may
display its bid at a price not in excess of the highest independent bid for the
security, and if all independent bids are lowered below the passive market
maker's bid, then such bid must be lowered when certain purchase limits are
exceeded.

The Company and the holders of 30.7% of the outstanding shares of Common
Stock, including WPS Investors, have agreed that, without the prior written
consent of the Representatives, they will not offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock for a period of 180 days
after the date of this Prospectus, other than the shares of Common Stock offered
hereby and the issuance by the Company of shares of Common Stock pursuant to
employee stock options and the grant of options under the 1991 Stock Option Plan
(which will not become exercisable within such 180-day period). See "Shares
Eligible for Future Sale."

LEGAL MATTERS

The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by King & Spalding, Atlanta, Georgia.
Certain legal matters will be passed upon for the Underwriters by Cravath,
Swaine & Moore, New York, New York.

EXPERTS

The historical financial statements and schedules as of February 29, 1992
and February 28, 1993 and for the three years ended February 28, 1993 included
or incorporated by reference in this Prospectus and the historical statement of
operations data for the periods ended September 20, 1988, February 28, 1989,
1990 and 1991, February, 29, 1992 and February 28, 1993 and the historical
balance sheet data as of September 20, 1988, February 28, 1989, 1990 and 1991,
February 29, 1992 and February 28, 1993 contained in the selected consolidated
financial data have been audited and the pro forma statement of operations for
the year ended February 28, 1993 has been reviewed by Arthur Andersen & Co.,
independent public accountants, as indicated in their reports with respect
thereto, and are included or incorporated by reference herein in reliance upon
the authority of said firm as experts in giving said reports.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the

35
<PAGE> 37

"Commission"). Such reports and other information filed with the Commission, as
well as the Registration Statement relating to the Common Stock offered hereby,
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located in Chicago (Suite 1400, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661) and in New York (13th Floor,
Seven World Trade Center, New York, New York 10048). Copies of such material can
also be obtained by mail from the Public Reference Section of the Commission, at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.

This Prospectus does not contain all the information set forth in the
Registration Statement (the "Registration Statement") filed with the Commission.
For further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto, copies of which are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission or may be examined
without charge at the offices of the Commission.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents have been previously filed by the Company with the
Commission and are hereby incorporated by reference in this Prospectus as of
their respective dates: (a) Annual Report on Form 10-K for the year ended
February 29, 1993; (b) Quarterly Reports on Form 10-Q for the quarters ended May
31, 1993, August 31, 1993 and November 30, 1993; and (c) the description of the
Company's Common Stock contained in the Form 8-A Registration Statement filed
under the Exchange Act (File No. 0-8966).

Additionally, all documents filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the Offering shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statements contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein 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 this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written requests for
such copies should be directed to the Secretary, Rhodes, Inc., 4370 Peachtree
Road, Atlanta, Georgia 30319. Telephone requests may be directed to (404)
264-4600.

36
<PAGE> 38

RHODES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rhodes, Inc. and Subsidiaries --
Consolidated Financial Statements:
Report of independent public accountants...................................... F-2
Consolidated balance sheets as of February 29, 1992 and February 28, 1993..... F-3
Consolidated statements of operations for the years ended February 28, 1991,
February 29, 1992 and February 28, 1993...................................... F-4
Consolidated statements of shareholders' equity for the years ended February
28, 1991, February 29, 1992 and February 28, 1993............................ F-5
Consolidated statements of cash flows for the years ended February 28, 1991,
February 29, 1992 and February 28, 1993...................................... F-6
Notes to consolidated financial statements for the years ended February 28,
1991, February 29, 1992 and February 28, 1993................................ F-7
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets -- February 28, 1993 and November 30,
1993 (unaudited)............................................................. F-24
Condensed Consolidated Statements of Operations and Accumulated Deficit -- For
the Nine Months Ended November 30, 1992 and 1993 (unaudited)................. F-25
Condensed Consolidated Statements of Cash Flows -- For the Nine Months Ended
November 30, 1992 and 1993 (unaudited)....................................... F-26
Notes to Condensed Consolidated Financial Statements (unaudited).............. F-27
</TABLE>

F-1
<PAGE> 39

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, 1992 and
February 28, 1993 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended February 28, 1993. 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 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, 1992 and February 28, 1993, the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1993 in conformity with generally accepted accounting principles.

As more fully discussed in Note 2 to the financial statements, effective
March 1, 1991 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes".

We have also audited, in accordance with generally accepted auditing
standards, the balance sheets as of February 28, 1989, 1990 and 1991, and the
related statements of operations, shareholders' equity and cash flows for each
of the two years in the period ended February 28, 1990 (none of which are
presented herein), and have expressed an unqualified opinion on those financial
statements. In our opinion, the statement of operations data and the balance
data set forth in the selected financial data for each of the five years in the
period ending February 28, 1993, appearing on page 10, is fairly stated in all
material respects in relation to the financial statements from which they have
been derived.

ARTHUR ANDERSEN & CO.

Atlanta, Georgia
April 14, 1993 (except with respect to
the matter discussed in the first
paragraph of Note 11 as to which the
date is May 17, 1993).

F-2
<PAGE> 40

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FEBRUARY
FEBRUARY 29, 28,
1992 1993
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash........................................................................................ $ 137 $ 158
Accounts receivable and installment receivables, including amounts due after one year, less
allowance for credit losses of $8,400 at February 29, 1992 (see Note 1)................... 172,218 2,222
Inventories at LIFO cost.................................................................... 38,485 37,326
Prepaid expenses and other.................................................................. 3,322 4,843
------------ -----------
Total Current Assets.................................................................. 214,162 44,549
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $20,063 at
February 29, 1992 and $25,210 at February 28, 1993.......................................... 49,409 46,845
------------ -----------
CAPITALIZED REAL ESTATE LEASES, at cost, less accumulated amortization of $2,609 at February
29, 1992 and $3,367 at February 28, 1993.................................................... 9,335 8,577
------------ -----------
INTANGIBLE ASSETS, net
Goodwill.................................................................................... 65,712 63,914
Favorable leases............................................................................ 7,039 5,888
Other intangibles........................................................................... 2,932 2,331
------------ -----------
Total Intangible Assets............................................................... 75,683 72,133
------------ -----------
OTHER ASSETS.................................................................................. 563 992
------------ -----------
TOTAL ASSETS.......................................................................... $349,152 $ 173,096
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Commercial paper............................................................................ $146,750 $ --
Notes and loans payable..................................................................... 24,203 7,447
Current maturities of long-term debt and capital lease obligations.......................... 5,581 5,041
Accounts payable............................................................................ 19,864 19,279
Accrued sales tax........................................................................... 5,232 249
Accrued interest............................................................................ 3,450 3,058
Accrued liabilities......................................................................... 13,726 13,583
Deferred income............................................................................. 4,797 8,309
Current portion deferred gain -- sale/leasebacks............................................ 318 318
Current income taxes payable................................................................ -- --
------------ -----------
Total Current Liabilities............................................................. 223,921 57,284
------------ -----------
DEFERRED INCOME TAXES......................................................................... 4,356 3,101
------------ -----------
LONG-TERM DEBT, less current maturities....................................................... 115,955 118,171
------------ -----------
OBLIGATIONS UNDER CAPITAL LEASES.............................................................. 15,332 15,047
------------ -----------
DEFERRED GAIN -- SALE/LEASEBACKS.............................................................. 3,661 3,343
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Class A Preferred Stock, cumulative dividends, no par value, 1 share authorized and issued
at February 29, 1992 and February 28, 1993,............................................... 10,000 14,181
Common Stock, no par value, 10,000 shares authorized, 1,467 and 1,476 shares issued and
outstanding at February 29, 1992 and February 28, 1993.................................... -- --
Paid-in Capital............................................................................. 16,614 12,487
Accumulated deficit......................................................................... (40,687) (50,518)
------------ -----------
Total Shareholders' Equity (Deficit).................................................. (14,073) (23,850)
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................ $349,152 $ 173,096
------------ -----------
------------ -----------
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3
<PAGE> 41

RHODES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES............................................ $256,594 $265,924 $286,527
COST OF GOODS SOLD................................... 135,473 139,876 150,344
------------ ------------ ------------
GROSS PROFIT......................................... 121,121 126,048 136,183
------------ ------------ ------------
FINANCE CHARGES AND INSURANCE COMMISSIONS............ 37,816 37,725 13,853
------------ ------------ ------------
OPERATING EXPENSES:
Selling............................................ 38,347 40,665 47,793
General and administrative......................... 80,624 86,781 81,432
Provision for credit losses, net of $1,001 of
recoveries in 1992 through sale of written-off
accounts to an affiliate (Note 9)............... 12,958 7,413 4,803
Amortization of intangibles........................ 2,700 3,433 3,253
Nonrecurring item (Note 10)........................ 5,000 -- --
Other expense (income), net........................ 236 868 (575)
------------ ------------ ------------
139,865 139,160 136,706
------------ ------------ ------------
OPERATING INCOME..................................... 19,072 24,613 13,330
Nonrecurring item (Note 10)........................ -- 1,162 --
Interest expense, net.............................. 36,856 33,920 24,306
------------ ------------ ------------
LOSS BEFORE INCOME TAXES AND CHANGE IN ACCOUNTING FOR
INCOME TAXES....................................... (17,784) (10,469) (10,976)
BENEFIT FOR INCOME TAXES............................. (4,253) (1,234) (1,145)
------------ ------------ ------------
NET LOSS BEFORE CHANGE IN ACCOUNTING FOR INCOME
TAXES.............................................. (13,531) (9,235) (9,831)
CUMULATIVE EFFECT ON PRIOR YEARS OF CHANGE IN
ACCOUNTING FOR INCOME TAXES (Note 2)............... -- (719) --
------------ ------------ ------------
NET LOSS............................................. $(13,531) $ (9,954) $ (9,831)
------------ ------------ ------------
------------ ------------ ------------
NET LOSS PER COMMON SHARE (Note 1)................... $ (13.77) $ (8.85) $ (6.68)
PRO FORMA NET LOSS PER COMMON SHARE (Note 1)......... $ -- $ -- $ (1.28)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE> 42

RHODES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK, TOTAL
CUMULATIVE COMMON SHAREHOLDERS'
DIVIDENDS, STOCK, PAID-IN ACCUMULATED EQUITY
NO PAR VALUE NO PAR VALUE CAPITAL DEFICIT (DEFICIT)
---------------- ------------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, February 28, 1990...... $ -- $ -- $10,969 $ (17,202) $ (6,233)
Net loss...................... -- -- -- (13,531) (13,531)
Issuance of Class A Preferred
stock, cumulative
dividends.................. 10,000 -- -- -- 10,000
---------------- ------------ ------- ----------- -------------
BALANCE, February 28, 1991...... 10,000 -- 10,969 (30,733) (9,764)
Net loss...................... -- -- -- (9,954) (9,954)
Issuance of common stock, net
of issuance expenses (Note
9)......................... -- -- 5,645 -- 5,645
---------------- ------------ ------- ----------- -------------
BALANCE, February 29, 1992...... 10,000 -- 16,614 (40,687) (14,073)
Net loss...................... -- -- -- (9,831) (9,831)
Accrual of cumulative
dividends on Series A
Preferred Stock (Note
11)........................ 4,181 -- (4,181) -- --
Issuance of common stock, from
exercise of stock
options.................... -- -- 54 -- 54
---------------- ------------ ------- ----------- -------------
BALANCE, February 28, 1993...... $ 14,181 $ -- $12,487 $ (50,518) $ (23,850)
---------------- ------------ ------- ----------- -------------
---------------- ------------ ------- ----------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE> 43

RHODES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $(13,531) $ (9,954) $ (9,831)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization...................................... 6,497 6,588 6,464
Change in deferred income taxes.................................... (435) (1,234) (1,145)
Amortization of intangibles........................................ 2,700 3,433 3,253
Noncash interest expense........................................... 5,756 6,257 6,653
Cumulative effect of change in accounting for
income taxes..................................................... -- 719 --
Amortization of gain-sale/leasebacks............................... (317) (318) (318)
Write-off of intangible assets..................................... 253 -- 297
Changes in current assets and liabilities:
Receivables, net................................................. 562 1,646 169,996
Inventories...................................................... 3,211 668 1,159
Prepaid expenses and other....................................... 88 900 (1,521)
Accounts payable and accrued liabilities......................... (2,993) 1,419 (6,213)
Deferred income on warranties and undelivered sales.............. (191) 1,502 3,512
Deferred income taxes............................................ (2,997) -- --
------------ ------------ ------------
Net cash provided by (used in) operating activities............ (1,397) 11,626 172,306
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net........................... 17 1,034 327
Additions to property and equipment.................................. (2,589) (2,769) (3,405)
Additions to intangible assets....................................... (986) -- --
Decrease (increase) in other assets.................................. (2,278) 271 (493)
Decrease in obligations under capital leases......................... (420) (301) (256)
------------ ------------ ------------
Net cash used in investing activities.......................... (6,256) (1,765) (3,827)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt, net.................................... (18,736) (9,076) (163,506)
Repayment of long-term debt.......................................... (25,643) (519) (5,006)
Expenditures paid in stock for debt exchange......................... -- (269) --
Proceeds from issuance of long-term debt............................. 40,000 -- --
Proceeds from the issuance of Common Stock........................... -- -- 54
Proceeds from issuance of Class A Preferred Stock, cumulative
dividends.......................................................... 10,000 -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities............ 5,621 (9,864) (168,458)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH............................................ (2,032) (3) 21
CASH AT BEGINNING OF YEAR.............................................. 2,172 140 137
------------ ------------ ------------
CASH AT END OF YEAR.................................................... $ 140 $ 137 $ 158
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest............................................................. $ 31,100 $ 27,663 $ 17,652
------------ ------------ ------------
------------ ------------ ------------
Income taxes......................................................... $ 1,846 $ 154 $ 105
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Issuance of Common Stock in stock for debt exchange, net of issuance
expenses........................................................... $ -- $ 5,645 $ --
------------ ------------ ------------
------------ ------------ ------------
Reduction of long-term debt in stock for debt exchange................. $ -- $ 5,915 $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-6
<PAGE> 44

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

Introduction

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 ("1988 Merger") Rhodes
was the surviving corporation. As a result of the 1988 Merger, Rhodes became a
wholly owned subsidiary of RHD Holdings.

For financial statement purposes, the 1988 Merger was accounted for by the
purchase method of accounting effective September 21, 1988. The consolidated
financial statements herein include the accounts of the Company and its
subsidiaries after adjustment as of September 21, 1988 of certain assets and
liabilities to their estimated fair values based on management's estimates,
certain appraisals and other data and after reflecting the costs of the 1988
Merger.

The 1991 Merger

Upon approval by the board of directors of the Company and RHD Holdings on
June 11, 1991, the Company and RHD Holdings entered into an Agreement and Plan
of Merger, which provided for the merger of RHD Holdings with and into the
Company (the "1991 Merger"). Rhodes was the surviving corporation in the 1991
Merger.

Pursuant to the 1991 Merger, each outstanding share of common stock of the
Company was canceled and eight shares of common stock of RHD Holdings
outstanding immediately prior to the 1991 Merger was converted into the right to
receive one newly issued share of common stock, without par value, of the
Company ("Common Stock"). Further, each option to purchase common stock of RHD
Holdings outstanding immediately prior to the 1991 Merger was assumed by the
Company and converted into the right to purchase one share of Common Stock of
the Company for each eight shares of common stock of RHD Holdings (rounded to
the next whole share). The 1991 Merger was accounted for by combining the merged
entities' accounts at their historical cost in a manner similar to a pooling of
interests. The Company's historical financial statements have been restated
accordingly. The effects of this restatement were not material.

Sale of Installment Receivables Portfolio

On May 15, 1992, Rhodes and its wholly owned subsidiary, Rhodes Financial
Services Corp. ("Rhodes Financial"), entered into a definitive agreement with
Beneficial National Bank USA ("BNB") to sell to BNB all outstanding customer
installment receivables in the approximate amount of $174,000,000 (the "Sale").
The Sale was completed on June 18, 1992 (the "Closing Date"). The Company also
contracted to sell all future receivables for the next three years in an
on-going merchant agreement ("Merchant Agreement") whereby BNB will provide
Rhodes with its private label credit facility for future credit sales. This
arrangement removes the need for Rhodes to fund that portion of the accounts
receivable not financed by the commercial paper facility and will eliminate the
risks from credit losses and interest rate fluctuations on its accounts
receivable portfolio. The Merchant Agreement 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 material change in any law or regulation or in the
operation, assets, condition (financial or otherwise), business or ownership of
Rhodes. After the initial three-year term, the Merchant Agreement remains in
effect unless terminated by either party on 180 days notice. BNB has no recourse
against the Company for the accounts receivable acquired under the Sale or under
the Merchant Agreement.

Rhodes received $170,006,000 or approximately 97.77% of the balance of the
outstanding accounts receivable in cash on the Closing Date and in addition,
received approximately $4,262,000, net of a

F-7
<PAGE> 45

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

$500,000 contingency deposit, in advances against future revenue to Rhodes to be
earned under the on-going Merchant Agreement. Under the Merchant Agreement,
Rhodes will continue to receive the credit insurance commission income and a
commission on certain classes of credit sales sold to BNB.

The net proceeds of the Sale are set forth below:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Proceeds from Sale and advances, net of contingency deposit........... $174,312
Payments and expenses:
Commercial paper................................................. 139,695
Deferred sales tax............................................... 4,502
Cash expenses.................................................... 3,740
--------------
Net proceeds.......................................................... $ 26,375
--------------
--------------
</TABLE>

The net proceeds were used to pay down the Company's existing lines of
credit and to repay the outstanding balance of an industrial revenue bond.

The effect of the Sale on fiscal 1993 loss before income taxes is set forth
below:

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Proceeds from Sale and advances, net of contingency deposit........... $174,312
Other advances -- net of contingency deposit.......................... 4,262
Interest Earned....................................................... 44
--------------
Net Sale Price........................................................ 170,006
Net book value of installment receivables sold...................... 165,468
Expenses, including non-cash expenses............................... 4,234
--------------
Effect of Sale on loss before income taxes............................ $ 304
--------------
--------------
</TABLE>

Under its on-going Merchant Agreement with BNB, Rhodes will continue to
offer the Rhodes Credit Card on substantially the same terms to customers.

The following provides the historical results of the Company's credit
operations for fiscal years 1991 and 1992 and for fiscal 1993 before the Sale:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Finance charge revenue............................... $ 33,670 $ 33,254 $ 9,033
Operating expenses:
General and administration......................... 10,683 11,504 3,814
Provision for credit losses, net................... 17,697 7,210 4,563
Amortization of intangibles........................ 169 249 83
Other (income) expense, net........................ -- 770 (304)
------------ ------------ ------------
Operating income..................................... 5,121 13,521 877
Interest expense, net.............................. 15,273 10,749 2,312
------------ ------------ ------------
Net income (loss) before income taxes................ (10,152) 2,772 (1,435)
(Benefit) provision for income taxes................. (2,427) 326 (149)
------------ ------------ ------------
Net income (loss).................................... $ (7,725) $ 2,446 $ (1,286)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-8
<PAGE> 46

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

Commercial Paper Program

The Commercial Paper Program ceased to exist upon closing of the Sale of
the installment receivables portfolio and all obligations related thereto were
paid at that time.

Liquidity and Capital Resources

The Company is highly leveraged with total funded indebtedness of
$145,706,000 at February 28, 1993. Current available sources of funding are
discussed in Notes 3 and 8. Although there can be no assurance as to the
availability of other sources of funding and other sources are subject to
limitations under existing lending arrangements, management believes that
amounts available under the Company's existing credit facilities together with
internally generated funds will be sufficient to fund the Company's present and
proposed operations. See Note 11, "Investment Considerations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Principles of Consolidation

The consolidated financial statements of Rhodes include the accounts of the
Company and all subsidiaries, including the effects of the 1991 Merger discussed
above. All significant intercompany balances and transactions have been
eliminated in consolidation.

Reclassification

Certain reclassifications of prior years' amounts have been made to conform
with the current year's presentation.

Business Segment

The Company 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. As a result
of the Sale, accounts receivable consists primarily of miscellaneous receivables
from customers and amounts awaiting funding.

Finance commissions following the sale of installment receivables are
recognized for the sale of certain installment contracts to BNB. Finance charge
income previously earned by the Company on installment receivables is no longer
earned following the Sale.

The Company offers credit insurance coverage through third parties in
connection with its furniture sales and earns monthly commissions.

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.

F-9
<PAGE> 47

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

Property and equipment are summarized as follows:

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1992 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 8,313 $ 8,313
Buildings................................................ 30,926 30,926
Leasehold improvements, equipment
and other.............................................. 30,233 32,816
------------ ------------
69,472 72,055
Less accumulated depreciation and amortization........... (20,063) (25,210)
------------ ------------
$ 49,409 $ 46,845
------------ ------------
------------ ------------
</TABLE>

Capitalized real estate leases are summarized as follows:

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1992 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................... $ 2,267 $ 2,267
Buildings................................................ 9,677 9,677
------------ ------------
11,944 11,944
Less accumulated amortization............................ (2,609) (3,367)
------------ ------------
$ 9,335 $ 8,577
------------ ------------
------------ ------------
</TABLE>

Intangible Assets

Goodwill represents the excess of the purchase price over identifiable
assets acquired at the time of the 1988 Merger and is being amortized on a
straight-line basis over 40 years. Amortization expense for goodwill totaled
$1,798,000 for the years ended February 28, 1991, February 29, 1992, and
February 28, 1993.

Favorable leases represent the difference between market rates and contract
rates of store leases as of the time of the 1988 Merger and are being amortized
over the remaining terms of the leases. Amortization expense for favorable
leases totaled $557,000, $1,163,000, and $1,149,000 for the years ended February
28, 1991, February 29, 1992 and February 28, 1993, respectively.

Other intangibles include deferred loan costs incurred in connection with
the 1988 Merger and subsequent refinancing, which are being amortized over the
terms of the applicable debt. Amortization expense for these items (exclusive of
the 1990 write-off of deferred loan cost and the 1992 write-off of loan costs
associated with Commercial Paper discussed above) for the years ended February
28, 1991, February 29, 1992, and February 28, 1993, totaled approximately
$345,000, $472,000 and $306,000, respectively.

Warranty Contracts

The Company markets extended warranty contracts to its customers on certain
merchandise at the time of the initial sale. Effective with contracts sold after
February 28, 1991, the Company adopted the provisions of Financial Accounting
Standards Board Technical Bulletin No. 90-1, which requires that extended
warranty contract revenue be deferred and recognized over the contract period on
a straight-line or other reasonable basis. The Company 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

F-10
<PAGE> 48

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

income recognition on warranties is adjusted accordingly. As a result, net
warranty sales of $2,263,000 and $1,272,000 less net direct expenses of $498,000
and $280,000, respectively were deferred to future periods in fiscal 1992 and
1993, respectively.

Earnings Per Share

Because of the planned Recapitalization (Note 11), earnings per share is
shown for fiscal 1993 on a pro forma basis assuming only the Exchange with
resulting pro forma shares outstanding of 4,262,000. Pro forma earnings per
share and weighted average shares are calculated as follows:

<TABLE>
<S> <C>
Historical net loss applicable to Common Stock........................ $(9,831,000)
Pro forma adjustment for interest expense on Junior Discount
Subordinated Redeemable Debentures to be exchanged for Common Stock
(Note 11)........................................................... 4,375,000
-----------
Pro forma net loss applicable to Common Stock......................... $(5,456,000)
-----------
-----------
Historical weighted average shares.................................... 1,472,000
Pro forma adjustment for weighted average shares added as a result of
the Exchange (Note 11).............................................. 2,790,000
-----------
Pro forma weighted average shares..................................... 4,262,000
-----------
-----------
Pro forma earnings per share.......................................... $ (1.28)
-----------
-----------
</TABLE>

The historical net loss per common share was calculated by dividing net
loss applicable to Common Stock by the weighted average shares of Common Stock
outstanding (adjusted for the 1.8-for-1 stock split -- see Note 11). All stock
options were antidilutive for earnings per share calculations for all years.

<TABLE>
<CAPTION>
1991 1992 1993
-------- ------- -------
(IN THOUSANDS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Loss applicable to Common Stock............................ $(13,531) $(9,954) $(9,831)
-------- ------- -------
-------- ------- -------
Common Stock outstanding (weighted average).................... 983 1,125 1,472
-------- ------- -------
-------- ------- -------
Net Loss per share of Common Stock............................. $ (13.77) $ (8.85) $ (6.68)
-------- ------- -------
-------- ------- -------
</TABLE>

Accounting for Postretirement and Postemployment Benefits

In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 106 which establishes
standards for employers' accounting for postretirement benefits other than
pensions. Additionally, in November 1992, the FASB issued SFAS No. 112,
"Employers' Accounting for Postemployment Benefits", which establishes
accounting standards for employers who provide benefits to former or inactive
employees after employment, but before retirement. The Company is required to
adopt these new standards in fiscal 1994 and 1995, respectively; however,
management believes such adoption will not have a material adverse effect on the
Company's financial position or results of operations because such benefits are
limited.

2. FEDERAL AND STATE INCOME TAXES

During fiscal 1992, the FASB issued 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

F-11
<PAGE> 49

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

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 Company elected to adopt SFAS No. 109 during fiscal 1992 and recorded
the effect of the adoption as of March 1, 1991 in a manner similar to the
cumulative effect of a change in accounting principle. Accordingly, as of March
1, 1991, the Company, in accordance with SFAS No. 109, adjusted certain assets
acquired in the 1988 Merger by writing up the net-of-tax amounts to the
respective pre-tax amounts by approximately $7,149,000 and recorded a net
deferred tax liability of approximately $5,590,000. The Company will amortize
this write-up over the remaining useful lives of the related assets.

The components of the net deferred tax liability are as follows:

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1992 1993
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total deferred tax liabilities......................... $ 17,684 $ 17,618
Total deferred tax assets.............................. (13,328) (17,447)
Valuation allowance.................................... -- 2,930
-------------- --------------
Net deferred tax liabilities........................... $ 4,356 $ 3,101
-------------- --------------
-------------- --------------
</TABLE>

The sources of the difference between the financial accounting and tax
basis of the Company's 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,
1992 1993
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Stepped-up basis in fixed assets..................... $ 6,746 $ 7,463
Favorable leases..................................... 2,675 2,238
1988 Merger costs.................................... 3,406 3,406
Depreciation......................................... 3,499 3,123
Other................................................ 1,358 1,388
-------------- --------------
$ 17,684 $ 17,618
-------------- --------------
-------------- --------------
Deferred tax assets:
Allowance for credit losses not yet deductible....... $ 3,192 $ --
Capitalized leases................................... 2,339 2,489
Gain-Sale/leaseback.................................. 1,391 1,270
Gain on property disposals........................... 1,032 1,076
Deferred rent........................................ 686 701
Accrued expenses..................................... 1,123 1,210
Deferred warranty revenues........................... 671 1,020
Uniform inventory cost capitalization................ 619 608
Net operating loss carryforwards..................... 2,011 6,460
Book over tax basis differences in Debentures........ -- 2,090
LIFO Provision....................................... 232 491
Other................................................ 32 32
-------------- --------------
$ 13,328 $ 17,447
-------------- --------------
-------------- --------------
</TABLE>

F-12
<PAGE> 50

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

The Company established a valuation allowance of $2.9 million in fiscal
1993 because of the uncertainty regarding the realizability of certain deferred
tax assets. Also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Income Taxes".

The income tax provision for 1991 was determined under the deferred method
of accounting for income taxes and have not been restated to reflect the
adoption of SFAS No. 109.

During 1991, deferred income taxes resulted from timing differences in the
recognition of certain revenues and expenses for tax and financial statement
purposes. The sources of these differences and the tax effects of each were as
follows:

<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28,
1991
--------------
(IN THOUSANDS)
<S> <C>
Gross profit on installment sales............................... $ (4,954)
Excess of tax over (under) book depreciation.................... (259)
Capital leases treated as operating leases for
tax purposes.................................................. (180)
Amortization of gain-sale/leasebacks for book purposes.......... 121
Uniform inventory cost capitalization for tax purposes.......... 28
Excess of book over tax allowance for credit losses............. (509)
Excess of book over (under) tax LIFO............................ 84
Net operating loss carryfowards................................. --
Excess of book over tax accrued expenses........................ (592)
Limitation on recognition of deferred tax benefit............... 1,900
Other........................................................... (403)
--------------
$ (4,764)
--------------
--------------
</TABLE>

The consolidated provision (benefit) for income taxes consists of the
following:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 437 $ -- $ --
State.......................................... 74 -- --
Deferred:
Federal........................................ (4,062) (1,104) (1,025)
State.......................................... (702) (130) (120)
------------ ------------ ------------
$ (4,253) $ (1,234) $ (1,145)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-13
<PAGE> 51

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

The tax benefit differed from the amounts resulting from multiplying the
loss before income taxes by the statutory federal income tax rate. The reasons
for these differences were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income tax benefit at statutory rate..... $ (6,046) $ (3,559) $ (3,732)
State income tax benefit, net of federal income
tax benefit.................................... (711) (419) (439)
Amortization of intangible assets not deductible
for tax purposes............................... 1,280 709 698
Benefit of rate difference on deferred tax
turnaround..................................... (700) -- --
Limitation on recognition of tax benefit......... 1,900 2,011 1,534
Other............................................ 24 24 794
------------ ------------ ------------
$ (4,253) $ (1,234) $ (1,145)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

At February 28, 1993, the Company had net operating loss carryforwards of
approximately $17,000,000 which can be used to reduce future federal income
taxes. If not utilized, these carryforwards will expire in 2008.

The Internal Revenue Service has completed its examination of the Company's
tax returns for the tax years ended February 28, 1987, February 29, 1988, and
February 28, 1989. The Company has agreed upon a settlement with the Internal
Revenue Service, which is provided for in the consolidated financial statements
as of February 28, 1993.

F-14
<PAGE> 52

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

3. LONG-TERM DEBT

<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1992 1993
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
15% Senior Subordinated Notes due September 20,
1998........................................................... $ 40,000 $ 40,000
12% Secured Term Loan payable in 60 monthly consecutive unequal
installments, commencing May 1, 1992........................... 39,839 37,339
Mortgage Note Payable at 10% interest with interest only payable
until September 1, 1992 and principal payments in quarterly
installments of $125,000 beginning September 1, 1992........... 3,145 2,895
17% Junior Discount Subordinated Redeemable Debentures due
September 20, 2000 (net of discount of $22,107,000 and
$15,454,000 as of February 29, 1992 and February 28, 1993,
respectively) at an effective interest rate of 17.6%........... 34,868 41,521
Industrial revenue bond with an interest rate of 9.1% payable in
quarterly installments to October 1, 2000 (repaid on June 28,
1992).......................................................... 2,141 --
Industrial revenue bond with floating interest at 81.9% of the
prime rate (5.3% and 4.9% as of February 29, 1992 and February
28, 1993, respectively) payable in quarterly installments to
October 1, 2002................................................ 717 650
Other, with interest rates from 5.5% to 12% due in installments
to May 2001.................................................... 252 203
------------ ------------
120,962 122,608
Less current portion............................................. (5,007) (4,437)
------------ ------------
$115,955 $118,171
------------ ------------
------------ ------------
</TABLE>

The aggregate annual payments required for the above notes during each of
the next five fiscal years are as follows:

Fair Value of Debt

The estimated fair value of the Company's long-term debt was approximately
$129,470,000 at February 28, 1993, of which $32,430,000 is owed to related
parties. 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.

Terms

Interest on the 15% Senior Subordinated Notes ("Senior Notes") is payable
semiannually in arrears on March 20 and September 20 until the Senior Notes are
paid at maturity or redeemed prior to maturity. Beginning September 20, 1993,
the Senior Notes will be subject to redemption at the option of the Company, but
with specified prepayment penalties.

F-15
<PAGE> 53

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

The Senior Notes are unsecured and are subordinate in right of payment to
the 12% Secured Term Loan, the revolving loan discussed in Note 8, and all other
indebtedness with the exception of the 17% Junior Discount Subordinated
Redeemable Debentures (the "Debentures"). The holders of the Senior Notes are
shareholders of the Company.

The 12% Secured Term Loan is secured by substantially all of the Company's
property and equipment. Interest on the unpaid principal balance of the 12%
Secured Term Loan is payable monthly in arrears at a fixed rate equal to 12% per
annum. Repayment of the principal amount of the Term Loan will be in 60 monthly
installments commencing on May 1, 1992, as follows: $250,000 per month for 12
months, $333,400 per month for 36 months, $2,083,400 per month for 11 months and
a final payment of $2,080,200.

On November 20, 1991, the Company signed an agreement of renewal and
extension of the 10% mortgage note. The new repayment terms call for 24
consecutive quarterly installments in the amount of $125,000 payable beginning
September 1, 1992 and a final payment of $145,000 due September 1, 1998.

No interest is payable on the Debentures until September 20, 1994. On and
after September 20, 1994, cash interest will accrue and be payable semiannually
in arrears on each March 20 and September 20 starting in calendar 1995. The
Debentures are redeemable beginning September 20, 1992. From that date to
September 20, 1994, the Debentures are redeemable by the Company at their
discounted accreted value. After September 20, 1994, they are redeemable at face
value plus any accrued interest. The Debentures are unsecured, subordinated
obligations of the Company.

The industrial revenue bond is secured by the property for which it was
written, having an original cost of $796,000.

The mortgage note payable at 10% is secured by property having an original
cost of $3,700,000.

The Senior Notes and the 12% Secured Term Loan have, among other
restrictions, covenants whereby the Company 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 terms of the respective
agreements. The agreements also provide, among other things, limitations on the
Company's 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. The Company obtained
a waiver from the Senior Note holders and the lender of the 12% Secured Term
Loan for not meeting certain loan covenants.

4. INVENTORIES

Inventories are stated at the lower of cost (last-in, first-out
method -- "LIFO") or market. 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. As a result of the application of purchase
accounting as of September 21, 1988, the LIFO reserve was eliminated for
financial reporting purposes and a LIFO inventory base was established. A LIFO
provision of $358,000 was recorded during the year ended February 28, 1993. No
additional LIFO provision was recorded during fiscal 1992 and inventories at
LIFO approximate inventories at FIFO ("first-in, first-out" method) as of
February 29, 1992.

As discussed in Note 8, the Company has a revolving loan with the Company's
Senior Lender, which is secured by a priority lien on the Company's inventory.

F-16
<PAGE> 54

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

5. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases certain store locations under operating lease agreements
with various expiration dates through 2005. Rentals under all store leases were
approximately $8,730,000, $9,339,000, and $9,651,000 for the years ended
February 28, 1991, February 29, 1992 and February 28, 1993, respectively. As of
February 28, 1993, the minimum obligations under lease commitments with original
terms beyond one year are as follows:

<TABLE>
<S> <C>
1994....................................................... $ 9,035,000
1995....................................................... 8,383,000
1996....................................................... 7,769,000
1997....................................................... 6,348,000
1998....................................................... 4,683,000
After 1998................................................. 12,631,000
------------
$ 48,849,000
------------
------------
</TABLE>

Certain of the leases above are renewable at the Company's 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

The Company 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
the Company.

6. CAPITAL LEASES

Certain of the property and equipment used in the Company's business is
leased under capital leases. In prior years, the Company completed sale and
leaseback agreements on nine stores previously owned and operated by the Company
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 28, 1993:

<TABLE>
<S> <C>
1994....................................................... $ 2,507,000
1995....................................................... 2,518,000
1996....................................................... 2,557,000
1997....................................................... 2,528,000
1998....................................................... 2,475,000
After 1998................................................. 17,573,000
------------
Total minimum lease payments............................... 30,158,000
Less amount representing interest at rates of 11.89% to
12.83%................................................... (14,507,000)
------------
Present value of total minimum obligation.................. 15,651,000
Less current portion....................................... (604,000)
------------
Long-term obligations under capital leases................. $ 15,047,000
------------
------------
</TABLE>

F-17
<PAGE> 55

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

7. EMPLOYEE BENEFIT PLANS

The Company has a defined benefit pension plan covering substantially all
employees. During fiscal 1991, 1992, and 1993, net pension expense was
approximately $4,000, $210,000 and $217,000, respectively. The Company's policy
is to fund amounts necessary to satisfy the requirements of the Employee
Retirement Income Security Act of 1974.

The pension cost for the defined benefit plan for fiscal 1991, 1992 and
1993 includes the following components:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1991 1992 1993
------------ ------------ ------------
<S> <C> <C> <C>
Service cost for benefits earned during
the period........................... $ 433,000 $ 455,000 $ 568,000
Interest cost on projected benefit
obligation........................... 696,000 795,000 865,000
Actual return on assets................ (181,000) (2,388,000) (214,000)
Net amortization and deferral.......... (944,000) 1,348,000 (1,002,000)
------------ ------------ ------------
Net pension expense for period......... $ 4,000 $ 210,000 $ 217,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The funded status of the defined benefit plan as of February 29, 1992 and
February 28, 1993 was as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1992 1993
------------ ------------
<S> <C> <C>
Actuarial present value of:
Vested benefits................................... $ 7,354,000 $ 8,472,000
Nonvested benefits................................ 446,000 514,000
------------ ------------
Accumulated benefit obligation...................... 7,800,000 8,986,000
Effect of projected future compensation levels...... 2,248,000 2,084,000
------------ ------------
Projected benefit obligation........................ 10,048,000 11,070,000
Plan assets at fair value........................... (11,613,000) (11,283,000)
------------ ------------
Plan assets in excess of projected benefit
obligation........................................ 1,565,000 213,000
Unrecognized prior service cost..................... 119,000 109,000
Unrecognized net gain............................... (1,087,000) (136,000)
Unrecognized net asset from initial application of
SFAS No. 87....................................... (2,240,000) (2,044,000)
------------ ------------
Pension liability recognized in the balance sheet... $ (1,643,000) $(1,858,000)
------------ ------------
------------ ------------
</TABLE>

The projected benefit obligation was calculated using a 9.25% assumed
discount rate for fiscal 1992 and 8.5% for fiscal 1993 and an assumed long-term
compensation increase rate of 5%. Pension expense was determined using a 9%
assumed long-term rate of return on plan assets. At February 28, 1993, plan
assets consisted primarily of equity securities, fixed income securities, money
market instruments and approximately $80,000 of Company Debentures.

The Company has an employees' savings plan. Under the provisions of this
plan, the Company will match 50% of employee contributions which are limited to
a maximum of 6% of pay. The Company's

F-18
<PAGE> 56

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

savings plan expense was $294,000, $320,000, and $365,000 in fiscal 1991, 1992
and 1993, respectively.

Prior to the consummation of the 1988 Merger, the board of directors and
stockholders 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
$0.04 per share, were assumed by the Company 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.

1991 Stock Option Plan

On June 11, 1991, the Company's 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 the Company's capital stock and to
provide such employees with a stake in the future of the Company which
corresponds to the stake of each of the Company's stockholders.

As of February 28, 1993, a maximum of 180,000 shares (adjusted for the 1.8
to 1 stock split -- see Note 11) of Common Stock 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 Internal Revenue Code) or non-qualified
options ("Non-ISO"). As of April 1, 1993, no options had been granted under the
1991 Stock Option Plan.

The option price of each 1991 Option is set by a committee of the 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 stockholder holding stock possessing
more than 10% of the total combined voting power of all classes of stock of the
company (a "Ten Percent Stockholder"), 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, 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 vesting period for options to be
exercised ranges from five to ten years.

F-19
<PAGE> 57

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

The following table details the Company's stock option activity for the
past three fiscal years:

<TABLE>
<S> <C>
Options outstanding at February 28, 1990............................................ 70,896
Options Granted................................................................... --
Options Exercised................................................................. --
Options Cancelled or Terminated................................................... (303)
Options outstanding at February 28, 1991............................................ 70,593
Options Granted................................................................... --
Options Exercised................................................................. (1,890)
Options Cancelled or Terminated................................................... --
Options outstanding at February 29, 1992............................................ 68,703
Options Granted................................................................... --
Options Exercised................................................................. (7,126)
Options Cancelled or Terminated................................................... (7,875)
------
Options outstanding at February 28, 1993............................................ 53,702
------
------
Options exercisable at February 28, 1993............................................ 47,921
------
------
</TABLE>

8. SHORT-TERM DEBT

Commercial Paper

On June 18, 1992, the Company completed the Sale of all its outstanding
customer installment receivables to BNB. The Company also contracted to sell all
future receivables for the next three years under the Merchant Agreement,
whereby BNB will provide Rhodes with its private label credit card facility for
future credit sales. This arrangement removed the need for Rhodes to maintain
the commercial paper facility.

The Company's short-term debt at February 29, 1992 included commercial
paper issued under an agreement with a New York domiciled insurer which was
scheduled to expire (subject to certain material adverse change provisions) in
September 1992. The Company's commercial paper insurer issued a surety bond
unconditionally guaranteeing payment of a maximum of $200 million of the
commercial paper issued by Rhodes Financial. The amount of commercial paper
which could be issued is dependent on, among other things, the level of
underlying eligible accounts receivable (as defined). The Company's commercial
paper insurer has a security interest in the accounts receivable of Rhodes
Financial. The Company's commercial paper insurer charged .875% annually on the
outstanding commercial paper balance. The weighted average interest rates on
commercial paper for the years ended February 28, 1991 and February 29, 1992
were 8.1% and 5.9%, respectively, including commissions paid to brokers Goldman,
Sachs & Co. (see Note 9) and Chemical Securities, Inc. At February 29, 1992, the
maximum amount of unutilized commercial paper available from the commercial
paper facility was $18,250,000 of a total remaining facility of $53,250,000 to
finance future growth in accounts receivable.

Notes and Loans Payable to Bank

At February 28, 1993, the Company had a revolving credit facility with
Security Pacific Business Credit, Inc. (the "Senior Lender"), which is secured
by a priority lien on the Company's inventory. The revolving loan may be
borrowed, repaid and reborrowed (subject to certain terms and conditions) at any
time without penalty. Termination in whole of the revolving loan facility is
subject to early termination fees.

F-20
<PAGE> 58

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

Effective December 7, 1992, the Company and its Senior Lender 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 is
given by either party.

Interest on the revolving credit facility is at the prime rate plus 1.5%.
The maximum availability is the lesser of $20,000,000 or 45% of the value of
eligible inventory. The effective interest rate was 9.6% during fiscal 1992 and
7.9% during fiscal 1993. Maximum additional borrowings available under the
revolving loan as of February 29, 1992 and February 28, 1993 were $5,947,000 and
$12,553,000, respectively. The Company pays a facility fee at the rate of 0.5%
per annum on the average daily amount by which $20,000,000 exceeds the sum of
outstanding revolving loans.

The revolving loan has, among other restrictions, covenants whereby the
Company 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 the Company's 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.

Included in interest expense for the year ended February 28, 1991, February
29, 1992 and February 28, 1993 is interest of $15,733,000, $11,088,000 and
$2,796,000, respectively, related to short-term debt (including interest on
commercial paper).

9. RELATED-PARTY TRANSACTIONS

At February 28, 1993, Green Capital Investors, L.P. ("Green Capital") and
affiliated companies owned 79.8% of the outstanding Common Stock of the Company,
100% of the Class A Preferred Stock and $32,447,000 in accreted value of the
Debentures.

Green Capital maintains an unsecured open line of credit for the Company
for up to $10,000,000 for working capital purposes, and has advanced funds to
the Company 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%. At February
28, 1993, no advance was outstanding to Green Capital from the Company.

Effective May 15, 1990, Rhodes, Inc. issued $6.0 million in Class A
Preferred Stock, cumulative dividends, of the Company (the "Class A Preferred
Stock"), all of which was acquired by Green Capital. In addition, Green Capital
purchased another $4.0 million in Class A Preferred Stock on June 28, 1990. The
Class A Preferred Stock is entitled to cumulative dividends of 15% per annum
payable semiannually. The cumulative undeclared dividend on the Class A
Preferred Stock totalled $4,181,000 at February 28, 1993. The Company also has
2,000 shares of authorized and unissued preferred stock with unspecified terms.
See Note 11.

The Company pays RHD Capital (an affiliate of Green Capital) a monthly
management fee of $33,333 for management services.

In July and August 1991, Rhodes Financial sold, without recourse, a portion
of its previously written-off accounts to Green Financial Services Corp., an
affiliated company ("GFSC") set up for that purpose, and agreed to monitor
future collections of these accounts on behalf of GFSC. The effect of these
transactions was to record net cash proceeds of $742,000, to reduce the
provision for credit losses by $1,236,000 and to increase administrative
expenses by $494,000. In connection with the Sale of the accounts receivable
(Note 1), Rhodes Financial repurchased the remaining written-off accounts
previously sold to GFSC, because it could no longer meet its obligation to
service any accounts. The

F-21
<PAGE> 59

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

repurchase price was the remaining estimated recoverable balance of such
receivables of approximately $235,000. Accordingly, as of February 29, 1992, the
Company increased the provision for credit losses by $235,000 and recorded the
related payable to GFSC. The net effect of the above transaction reduced the
Company's provision for credit losses by $1,001,000 and increased administrative
expenses as noted above. Upon the consummation of the Sale, such receivables
were transferred to BNB.

One shareholder, Jackson National Life Insurance Company ("Jackson
National"), owning more than 5% of the Common Stock of the Company, with certain
demand and piggyback registration rights, also owns $35,000,000 of the
$40,000,000 outstanding Senior Notes and is the lender on the Secured Term Loan,
discussed below, at 12% interest.

On June 28, 1990, the Company concluded a loan agreement with Jackson
National to borrow $40,000,000 under a new Secured Term Loan secured by all real
and personal property excluding inventories. Approximately $23,000,000 of the
proceeds were employed by Jackson National to purchase by assignment the
Company's existing Term Loans (the "Old Term Loans") with the Senior Lender. The
inventories and other assets of the Company continue to serve as collateral for
the revolving credit facility (the "Senior Loan") which continues to be provided
by the Senior Lender. The amount outstanding at February 28, 1993 was
$37,339,000.

On March 28, 1990, East Tower Fund, Inc. ("East Tower Fund"), a subsidiary
of Green Capital, offered to buy up to $20,000,000 stated face amount of the
Debentures at a price of $250 per $1,000 of stated face amount. Debenture
holders tendered $12,725,000 in stated face amount under the offer, which was
completed on April 24, 1990. On September 17, 1990, East Tower Fund offered to
buy up to $10,000,000 stated face amount of Debentures on the same terms as the
March 1990 offer. Debenture holders tendered $11,342,000 in stated face amount
under this offer, which was completed on October 16, 1990. On August 29, 1990,
East Tower Fund completed the acquisition from Goldman, Sachs & Co. and
affiliated entities of a total of 1,540,000 shares of the common stock of RHD
Holdings for an aggregate purchase price of $3,850,000. East Tower Fund was
liquidated on February 28, 1991, and all Debentures and the shares of common
stock of RHD Holdings (which were converted into shares of Common Stock in the
1991 Merger) formerly held by East Tower Fund are owned directly by Green
Capital.

Pursuant to an agreement dated November 15, 1991 between the Company and
Bankers Fidelity Life Insurance Company ("Bankers Fidelity"), an affiliate of
Atlantic American Corporation, Bankers Fidelity exchanged Debentures owned by it
having an aggregate stated face amount of $10,163,000 for an aggregate of
485,398 newly issued shares of Common Stock (an exchange rate of 47.7613 shares
of Common Stock for each $1,000 stated face amount of Debentures). In
conjunction with this exchange the Company incurred approximately $269,000 in
expenses. On November 18, 1991, Green Capital acquired all such shares of Common
Stock from Bankers Fidelity for a purchase price of $3,048,900, thereby
increasing the beneficial ownership by Holcombe T. Green, Jr. and Green Capital
of the outstanding Common Stock of the Registrant, to 79.8% and 56.4%,
respectively. This transaction was accounted for as an increase in shareholders'
equity.

During June and July 1992 Green Capital purchased from Atlantic American
and affiliates Debentures having a face value of $20,059,000 for an aggregate
purchase price of $6,018,000. Following this transaction, Green Capital held
78.1% of the outstanding Debentures having an accreted value of $32,447,000 at
February 28, 1993.

On June 26, 1992 Rhodes redeemed an industrial revenue bond with an
interest rate of 9% (the "Bond"), which had an outstanding principal amount of
$2,140,867. Green Capital owned a participation

F-22
<PAGE> 60

RHODES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FEBRUARY 28, 1991, FEBRUARY 29, 1992 AND FEBRUARY 28, 1993

in the Bond and received the aggregate amount of $987,905 ($945,637 of which
represented principal and $42,268 of which represented accrued and unpaid
interest) in connection with the redemption of the Bond. Green Capital had
acquired its participation in the Bond in September 1991 in satisfaction of an
obligation of Rhodes to effect a partial redemption of the Bond from the
original holder thereof.

10. NONRECURRING ITEMS

Installment Receivables

During fiscal 1990, the collection results of the installment receivables
from credit customers existing at the time of the 1988 Merger continued to
deteriorate. The quality of these receivables had been adversely affected by
credit standards in place at the time of the 1988 Merger and the transition to a
new system of collection. Significant reserves were previously established
related to these receivables, and management determined that an additional
provision of $5,000,000 should be made during fiscal 1991. Because this
additional provision did not relate to current year sales, it has been reflected
as a nonrecurring item in the Company's consolidated statements of operations.
At the time of the 1988 Merger, the total receivables were $145,134,000.

Postponed Public Offering and Exchange

On December 18, 1991, the Company, because of stock market conditions,
postponed a planned public offering (the "1991 Offering") of its Common Stock.
The Company also withdrew its offer to exchange its Common Stock for its
Debentures, which was conditioned on the closing of the 1991 Offering. As a
result of the decision not to complete the 1991 Offering or the exchange offer,
the Company wrote off the associated expenses incurred of $1,162,000 as a
nonrecurring item in fiscal 1992.

11. SUBSEQUENT EVENT

In April 1993, the Company's board of directors approved a plan of
Recapitalization whereby it would offer a certain number of shares of Common
Stock for sale to the public (the "Offering") and Green Capital would exchange
its Class A Preferred Stock (including accumulated, unpaid dividends) and
Debentures for Common Stock of the Company (the "Exchange"), at an exchange
price equal to the stock price in an initial public offering. The Company has
effected a 1.8-for-1 stock split of the Company's Common Stock prior to the
Offering. As a part of the Recapitalization, the Company also plans to refinance
and repay certain of its outstanding debt.

As a result of the Recapitalization, the Company recorded the accumulated,
unpaid Class A Preferred Stock dividends of $4,181,000 as of February 28, 1993
in the accompanying financial statements. Because of the Company's accumulated
deficit, the dividends were recorded as a reduction of Paid-in Capital.
Additionally, the Exchange is reflected in the pro forma presentation of
earnings per share (Note 1) as if it had occurred on March 1, 1992. Also, all
share and per share amounts in the accompanying financial statements have been
restated to reflect the 1.8-for-1 stock split.

In conjunction with the above, the Company also increased the number of
authorized shares of Common Stock to 20,000,000.

F-23
<PAGE> 61

RHODES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

(UNAUDITED)

<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1993 1993
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................................. $ 158 $ 130
Accounts receivable............................................... 2,222 2,322
Inventories at LIFO cost.......................................... 37,326 45,577
Prepaid expenses and other........................................ 4,843 7,543
------------ ------------
Total Current Assets...................................... 44,549 55,572
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and
amortization of $25,210 at February 28, 1993 and $28,654 at
November 30, 1993................................................. 46,845 47,799
------------ ------------
CAPITALIZED REAL ESTATE LEASES, at cost, less accumulated
amortization of $3,367 at February 28, 1993 and $3,936 at November
30, 1993.......................................................... 8,577 8,009
------------ ------------
INTANGIBLE ASSETS, net
Goodwill.......................................................... 63,914 62,566
Favorable leases.................................................. 5,888 5,070
Other intangibles................................................. 2,331 2,564
------------ ------------
Total Intangible Assets................................... 72,133 70,200
------------ ------------
OTHER ASSETS........................................................ 992 1,058
------------ ------------
TOTAL ASSETS.............................................. $173,096 $182,638
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable........................................... $ 7,447 $ 3,312
Current maturities of long-term debt and capital lease
obligations.................................................... 5,041 1,120
Accounts payable.................................................. 19,279 27,525
Accrued sales tax................................................. 249 962
Accrued liabilities............................................... 13,583 15,551
Accrued interest.................................................. 3,058 1,640
Deferred income................................................... 8,309 10,371
Current income taxes payable...................................... -- 2,239
Current portion deferred gain -- sale/leasebacks.................. 318 318
------------ ------------
Total Current Liabilities................................. 57,284 63,038
------------ ------------
DEFERRED INCOME TAXES............................................... 3,101 1,781
------------ ------------
LONG-TERM DEBT, less current maturities............................. 118,171 42,175
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES.................................... 15,047 15,239
------------ ------------
DEFERRED GAIN -- SALE/LEASEBACKS.................................... 3,343 3,105
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Class A Preferred stock, cumulative dividends, no par value, 1
share authorized and issued at February 28, 1993............... 14,181 --
Common stock, no par value, 10,000 shares authorized and 1,476
shares issued and outstanding at February 28, 1993, 20,000
shares authorized and 9,760 shares outstanding at November 30,
1993........................................................... -- --
Paid-in-Capital................................................... 12,487 106,772
Accumulated deficit............................................... (50,518) (49,472)
------------ ------------
Total Shareholders' Equity (Deficit)...................... (23,850) 57,300
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................... $173,096 $182,638
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
balance sheets.

F-24
<PAGE> 62

RHODES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, 1992 NOVEMBER 30, 1993
----------------- -----------------
<S> <C> <C>
NET SALES............................................................. $ 218,093 $ 239,187
COST OF GOODS SOLD.................................................... 114,017 123,750
----------------- -----------------
GROSS PROFIT.......................................................... 104,076 115,437
FINANCE CHARGES & INSURANCE COMMISSIONS............................... 12,698 3,658
----------------- -----------------
OPERATING EXPENSES:
Selling............................................................. 37,678 38,073
General & administrative............................................ 61,440 61,877
Amortization of intangibles......................................... 2,463 2,338
Provision for credit losses......................................... 4,696 116
Other (income) expense, net......................................... (353) (1)
----------------- -----------------
105,924 102,403
----------------- -----------------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES....................... 10,850 16,692
Interest expense -- net............................................. 18,875 9,947
----------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.............. (8,025) 6,745
PROVISION (BENEFIT) FOR INCOME TAXES.................................. (1,145) 2,972
----------------- -----------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........................... (6,880) 3,773
EXTRAORDINARY ITEM -- EARLY RETIREMENT OF DEBT, NET OF INCOME TAX
EFFECT.............................................................. -- (2,727)
----------------- -----------------
NET INCOME (LOSS)..................................................... (6,880) 1,046
ACCUMULATED DEFICIT AT BEGINNING OF PERIOD............................ (40,687) (50,518)
----------------- -----------------
ACCUMULATED DEFICIT AT END OF PERIOD.................................. $ (47,567) $ (49,472)
----------------- -----------------
----------------- -----------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK BEFORE EXTRAORDINARY
ITEM................................................................ $ (4.67) $ 0.59
EXTRAORDINARY ITEM PER SHARE OF COMMON STOCK.......................... -- (0.43)
----------------- -----------------
NET INCOME (LOSS) PER SHARE........................................... $ (4.67) $ 0.16
----------------- -----------------
----------------- -----------------
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING......... 1,472 6,366
----------------- -----------------
----------------- -----------------
PRO FORMA NET INCOME PER COMMON SHARE BEFORE EXTRAORDINARY ITEM (NOTE
1).................................................................. $ 0.27 $ 0.70
----------------- -----------------
----------------- -----------------
PRO FORMA WEIGHTED AVERAGE SHARES (NOTE 1)............................ 9,782 9,815
----------------- -----------------
----------------- -----------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
statements.

F-25
<PAGE> 63

RHODES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, NOVEMBER 30,
1992 1993
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss).............................................................. $ (6,880) $ 1,046
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Extraordinary item -- early retirement of debt............................... -- 3,527
Depreciation and amortization................................................ 4,862 4,741
Change in deferred income taxes.............................................. (1,219) (1,320)
Amortization of intangibles.................................................. 2,463 2,338
Non-cash interest expense.................................................... 4,869 2,626
Amortization of gain -- sale/leasebacks...................................... (238) (238)
Write-off of intangible assets............................................... 296 --
Changes in current assets and liabilities:
Receivables, net........................................................... 168,942 (100)
Inventories................................................................ (1,877) (8,251)
Prepaid expenses and other................................................. (1,166) (2,700)
Accounts payable and accrued liabilities................................... (6,146) 11,755
Deferred income on warranties, undelivered sales and credit commissions.... 4,777 2,062
------------ ------------
Net cash provided by operating activities................................ $ 168,683 $ 15,486
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net..................................... 299 55
Additions to property and equipment............................................ (2,356) (5,135)
Additions to intangible assets................................................. -- (1,261)
Increase in other assets, net.................................................. (495) (165)
Increase in obligations under capital leases................................... (148) 192
------------ ------------
Net cash used in investing activities.................................... (2,700) (6,314)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt................................................... (162,052) (4,135)
Prepayment penalty for early retirement of debt................................ -- (2,624)
Proceeds from the Senior Secured Financing..................................... -- 40,000
Repayment of long-term debt.................................................... (4,060) (88,235)
Proceeds from the sale of stock................................................ -- 45,499
Exercise of stock options...................................................... 54 295
------------ ------------
Net cash used in financing activities.................................... $ (166,058) $ (9,200)
------------ ------------
(DECREASE) IN CASH............................................................... (75) (28)
CASH AT BEGINNING OF PERIOD...................................................... 137 158
------------ ------------
CASH AT END OF PERIOD............................................................ $ 62 $ 130
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE:
CASH PAYMENTS FOR:
Interest..................................................................... $ 14,006 $ 7,321
------------ ------------
------------ ------------
Income taxes................................................................. $ 56 $ 1,246
------------ ------------
------------ ------------
Exchange of long-term debt for Common Stock.................................... $ -- $ 34,309
------------ ------------
------------ ------------
Exchange of preferred stock and accumulated dividends for Common Stock......... $ -- $ 14,660
------------ ------------
------------ ------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
statements.

F-26
<PAGE> 64

RHODES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOVEMBER 30, 1993

1. BASIS OF PRESENTATION

The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
This information reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary to a fair
statement of the financial position of the Company as of February 28, 1993 and
November 30, 1993, the results of operations for the nine months ended November
30, 1992 and November 30, 1993, and cash flows for the nine months ended
November 30, 1992 and November 30, 1993. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
Certain reclassifications of prior years' amounts have been made to conform with
fiscal 1994 amounts. Because of the Recapitalization consummated on June 24,
1993, earnings per share is presented on a pro forma basis assuming the
Recapitalization had taken place at the beginning of the period for the nine
months ended November 30, 1992 and 1993. Additionally, the nine months ended
November 30, 1992 were adjusted for the effect of the Receivables Sale as if it
had taken place at the beginning of the period in calculating pro forma earnings
per share. These financial statements should be read in conjunction with the
historical financial statements and the notes thereto included elsewhere in this
Prospectus.

2. INCOME TAXES

The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 109 during fiscal 1992 and recorded the effect of the adoption retroactive
to March 1, 1991 in a manner similar to the cumulative effect of a change in
accounting principle. 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. Accordingly, the Company
recorded a provision for income tax for the nine months ended November 30, 1993
in the amount of $2,972,000 compared with a benefit of $1,145,000 for income
taxes recorded for the nine months ended November 30, 1992.

3. INTERIM LIFO PROVISIONS

The actual valuation of inventory under the LIFO method can be made only at
the end of each year based on inventory levels, price indices and costs at that
time. Therefore, the interim provisions must be considered as estimates subject
to a final year-end LIFO inventory calculation.

3. EXTRAORDINARY ITEM

During the nine month period ended November 30, 1993 the Company expensed
certain charges incurred principally in connection with the Recapitalization.
These extraordinary items represent non-recurring prepayment penalties of
$2,624,000 for early retirement of debt and write-off of $903,000 in related
deferred loan costs, less income tax benefit of $800,000.

F-27
<PAGE> 65

RHODES, INC. AND SUBSIDIARIES
INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rhodes, Inc. and Subsidiaries --
Review report of independent public accountants on the pro forma consolidated
statement of operations for the year ended February 28, 1993..................... P-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended February 28, 1993.......................................................... P-3
Notes to unaudited pro forma condensed consolidated statement of operations for the
year ended February 28, 1993..................................................... P-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended November 30, 1992................................................... P-5
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine
months ended November 30, 1993................................................... P-6
Notes to unaudited pro forma condensed consolidated financial statements for the
nine months ended November 30, 1992 and 1993..................................... P-7
</TABLE>

P-1
<PAGE> 66

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and
the Shareholders of Rhodes, Inc.

We have reviewed the pro forma adjustments reflecting the transactions
described in Note 1 on P-4 and the application of those adjustments to the
historical amounts in the accompanying pro forma consolidated statement of
operations for the year ended February 28, 1993. No other pro forma statements
have been reviewed by us. This historical consolidated statement of operations
is derived from the historical financial statements of Rhodes, Inc., which were
audited by us, appearing elsewhere herein. Such pro forma adjustments are based
on management's assumptions as described in the accompanying notes. Our review
was conducted in accordance with standards established by the American Institute
of Certified Public Accountants.

A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.

The objective of this pro forma financial information is to show what the
significant effects on the historical information might have been had the
transactions occurred at an earlier date. However, the pro forma consolidated
statement of operations is not necessarily indicative of the results of
operations that would have been attained had the above-mentioned transactions
actually occurred earlier.

Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transactions described in Note 1, that the related pro forma adjustments do not
give appropriate effect to those assumptions, or that the pro forma column does
not reflect the proper application of those adjustments to the financial
statement amounts in the pro forma consolidated statement of operations for the
year ended February 28, 1993.

ARTHUR ANDERSEN & CO.

Atlanta, Georgia
April 14, 1993

P-2
<PAGE> 67

The following pro forma Statement of Operations gives effect to the
Receivables Sale and the Recapitalization as if they had been consummated as of
March 1, 1992. The pro forma financial information and notes thereto do not
purport to represent what the Company's results of operations would actually
have been if such transactions had occurred on such date or project the
Company's results of operations for future periods or dates. The pro forma
adjustments are based upon currently available information and upon certain
assumptions that management of the Company believes are reasonable under the
circumstances. The following pro forma consolidated statement of operations and
the related notes should be read in conjunction with other financial information
pertaining to the Company, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1993
-------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------
RECEIVABLES
HISTORICAL SALE RECAPITALIZATION PRO FORMA
---------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
NET SALES.............................. $ 286,527 -- -- $ 286,527
COST OF GOODS SOLD..................... 150,344 -- -- 150,344
---------- ----------- ---------------- ---------
GROSS PROFIT........................... 136,183 -- -- 136,183
---------- ----------- ---------------- ---------
FINANCE CHARGES & INSURANCE
COMMISSIONS.......................... 13,853 (8,751)(2) -- 5,102
---------- ----------- ---------------- ---------
OPERATING EXPENSES:
Selling.............................. 47,793 -- -- 47,793
General & administrative............. 81,432 (3,814)(2) (400)(3) 77,218
Provision for credit losses.......... 4,803 (4,563)(2) -- 240
Amortization of intangibles.......... 3,253 (83)(2) (51)(4) 3,119
Other (income) expense, net.......... (575) 304(2) -- (271)
---------- ----------- ---------------- ---------
136,706 (8,156) (451) 128,099
---------- ----------- ---------------- ---------
INCOME BEFORE INTEREST EXPENSES and
INCOME TAXES......................... 13,330 (595) 451 13,186
Interest -- net...................... 24,306 (2,972)(2) (13,248)(5) 8,086
---------- ----------- ---------------- ---------
OPERATING INCOME (LOSS)................ (10,976) 2,377 13,699 5,100
PROVISION (BENEFIT) FOR INCOME TAXES... (1,145) -- 3,348(6) 2,203
---------- ----------- ---------------- ---------
NET INCOME (LOSS)...................... $ (9,831) $ 2,377 $ 10,351 $ 2,897
---------- ----------- ---------------- ---------
---------- ----------- ---------------- ---------
NET INCOME (LOSS) PER COMMON SHARE..... $ (6.68) $ 0.30
---------- ---------
---------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING.... 1,472 9,781(8)
---------- ---------
---------- ---------
</TABLE>

See the accompanying Notes to unaudited pro forma
statement of operations on page P-4

P-3
<PAGE> 68

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(FOR THE YEAR ENDED FEBRUARY 28, 1993)

(1) The following is a summary of the adjustments reflected in the Unaudited Pro
Forma Consolidated Statement of Operations for the year ended February 28,
1993 assuming the Company completed the sale of the accounts receivable
("Receivables Sale") and the Recapitalization at the beginning of the year
(March 1, 1992). The Receivables Sale adjustments assume (i) the elimination
of the Company's credit operations, (ii) the application of the net proceeds
therefrom to reduce short term debt, and (iii) the impact of the Merchant
Agreement. (See Note 1 to the Consolidated Financial Statements). Assuming
the Receivables Sale occurred at the beginning of the year, the Company has
also assumed that its change to third-party credit from granting credit
internally has not affected furniture sales. The Recapitalization includes:
(i) the sale of 4,167,000 shares of Common Stock, (ii) the sale of
$40,000,000 of long-term Senior Secured Financing, (iii) the exchange of the
17% Debentures owned by Green Capital at their accreted value and all the
outstanding shares of Class A Preferred Stock owned by Green Capital at
their stated value, plus accumulated, unpaid dividends, (iv) the repayment
of the 12% Secured Term Loan and 15% Notes, (v) the redemption of the
remaining 17% Debentures for cash at their accreted value and (vi) the
payment of prepayment penalties associated with the Recapitalization.
(2) Adjusts for consummation of the Receivables Sale as if it had occurred at
the beginning of fiscal 1993 (i) eliminating the results of the credit
operations incurred in fiscal 1993, (ii) reflecting the application of the
net proceeds therefrom to reduce short-term debt and (iii) reflecting the
impact of the Merchant Agreement. The following chart summarizes the
adjustments:

<TABLE>
<S> <C>
Finance Charges and Insurance Commissions Income........... $ 9,033,000
Less: Finance Commission Income.......................... (282,000)
-----------
8,751,000
Operating Expenses:
Selling, general and administrative...................... 3,814,000
Provision for credit losses.............................. 4,563,000
Amortization of intangibles.............................. 83,000
Other (income) expense, net.............................. (304,000)
-----------
Operating income......................................... 595,000
Interest expense, net...................................... 2,972,000
-----------
Loss Before Income Taxes................................. $(2,377,000)
-----------
-----------
</TABLE>

(3) Reflects the elimination of the management fee payable to RHD Investors of
$400,000 in fiscal 1993.
(4) Reflects the adjustment, net of the amortization of deferred loan costs
relating to debt repaid in the Recapitalization of $51,000 in fiscal 1993
for the reduction of amortization of deferred financing costs as a result of
implementing the Recapitalization.
(5) Reflects the reduction of interest expense of $13,248,000 in fiscal 1993.
(6) Reflects the estimated Provision for Income Taxes utilizing an effective
income tax rate of 43.2%, for fiscal 1993.
(7) In the historical nine months ended November 30, 1993, the Company recorded
an extraordinary charge, net of taxes, against net income of $2,727,000
which resulted from the early retirement of debt principally in connection
with the Recapitalization. Because of its nonrecurring nature, this
extraordinary charge has not been reflected in the pro forma statement of
operations.
(8) Gives pro forma effect to the issuance of 8,247,781 shares of Common Stock
in the Recapitalization.

P-4
<PAGE> 69

The following pro forma Statements of Operations give effect to the
Recapitalization as if it had been consummated as of the beginning of each
period presented and the Receivable Sale as of March 1, 1992 (the Receivable
Sale having been consummated in fiscal 1993). The pro forma financial
information and notes thereto do not purport to represent what the Company's
results of operations would actually have been if such transactions had occurred
on such dates or project the Company's results of operations for future periods
or dates. The pro forma adjustments are based upon currently available
information and upon certain assumptions that management of the Company believes
are reasonable under the circumstances. The following pro forma consolidated
statements of operations and the related notes should be read in conjunction
with other financial information pertaining to the Company, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.

The following pro forma financial statements on pages P-5 and P-6 are not
covered by the review report on page P-2.

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30, 1992
-------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------
RECEIVABLES
HISTORICAL SALE RECAPITALIZATION PRO FORMA
---------- ----------- ---------------- ---------
<S> <C> <C> <C> <C>
NET SALES.............................. $ 218,093 -- -- $ 218,093
COST OF GOODS SOLD..................... 114,017 -- -- 114,017
---------- ----------- ---------------- ---------
GROSS PROFIT........................... 104,076 -- -- 104,076
---------- ----------- ---------------- ---------
FINANCE CHARGES AND INSURANCE
COMMISSIONS.......................... 12,698 (8,751)(1) -- 3,947
---------- ----------- ---------------- ---------
OPERATING EXPENSES:
Selling.............................. 37,678 -- -- 37,678
General and administrative........... 61,440 (3,814)(1) (300)(2) 57,326
Provision for credit losses.......... 4,696 (4,563)(1) -- 133
Amortization of intangibles.......... 2,463 (83)(1) (39)(3) 2,341
Other (income) expense, net.......... (353) 304(1) -- (49)
---------- ----------- ---------------- ---------
105,924 (8,156) (339) 97,429
---------- ----------- ---------------- ---------
INCOME BEFORE INTEREST EXPENSE and
INCOME TAXES......................... 10,850 (595) 339 10,594
Interest -- net...................... 18,875 (2,972)(1) (9,885)(4) 6,018
---------- ----------- ---------------- ---------
OPERATING INCOME (LOSS)................ (8,025) 2,377 10,224 4,576(6)
PROVISION (BENEFIT) FOR INCOME TAXES... (1,145) -- 3,073(5) 1,928
---------- ----------- ---------------- ---------
NET INCOME (LOSS)...................... $ (6,880) $ 2,377 $ 7,151 $ 2,648
---------- ----------- ---------------- ---------
---------- ----------- ---------------- ---------
NET INCOME (LOSS) PER COMMON SHARE..... $ (4.67) $ 0.27(6)
---------- ---------
---------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING.... 1,472 9,782(7)
---------- ---------
---------- ---------
</TABLE>

See the accompanying Notes to unaudited pro forma
statements of operations on page P-7

P-5
<PAGE> 70

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30, 1993
---------------------------------------------
PRO FORMA ADJUSTMENTS
---------------------------------------------
HISTORICAL RECAPITALIZATION PRO FORMA
---------- ---------------- ---------
<S> <C> <C> <C>
NET SALES............................................ $ 239,187 -- $ 239,187
COST OF GOODS SOLD................................... 123,750 -- --
---------- ---------------- ---------
GROSS PROFIT......................................... 115,437 -- 115,437
---------- ---------------- ---------
FINANCE CHARGES & INSURANCE COMMISSIONS.............. 3,658 -- 3,658
---------- ---------------- ---------
OPERATING EXPENSES:
Selling............................................ 38,073 -- 38,073
General & administrative........................... 61,877 (119)(2) 61,758
Provision for credit losses........................ 116 -- 116
Amortization of intangibles........................ 2,338 (14)(3) 2,324
Other (income) expense, net........................ (1) -- (1)
---------- ---------------- ---------
102,403 (133) 102,270
---------- ---------------- ---------
INCOME BEFORE INTEREST EXPENSE AND INCOME TAXES...... 16,692 133 16,825
Interest -- net.................................... 9,947 (4,513)(4) 5,434
---------- ---------------- ---------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM.... 6,745 4,646 11,391(6)
PROVISION FOR INCOME TAXES........................... 2,972 1,588(5) 4,560
---------- ---------------- ---------
NET INCOME BEFORE EXTRAORDINARY ITEM................. 3,773 3,058 6,831
---------- ---------------- ---------
---------- ---------------- ---------
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM....... $ 0.59 $ 0.70(6)
---------- ---------
---------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING.................. 6,366 9,815(7)
---------- ---------
---------- ---------
</TABLE>

See the accompanying Notes to unaudited pro forma
statements of operations on page P-7

P-6
<PAGE> 71

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(FOR THE NINE MONTHS ENDED NOVEMBER 30, 1992 AND 1993)

(1) Adjusts for consummation of the Receivables Sale as if it had occurred at
the beginning of fiscal 1993 (i) eliminating the results of the credit
operations incurred in fiscal 1993, (ii) reflecting the application of the
net proceeds therefrom to reduce short-term debt and (iii) reflecting the
impact of the Merchant Agreement. The following chart summarizes the
adjustments:

(2) Reflects the elimination of the management fee payable to RHD Investors of
$300,000 for the nine months ended November 30, 1992 and $119,000 for the
nine months ended November 30, 1993.
(3) Reflects the adjustment, net of the amortization of deferred loan costs
relating to debt repaid in the Recapitalization of $39,000 for the nine
months ended November 30, 1992 and $14,000 for the nine months ended
November 30, 1993 for the reduction of amortization of deferred financing
costs as a result of implementing the Recapitalization.
(4) Reflects the reduction of interest expense of $9,885,000 for the nine months
ended November 30, 1992 and $4,513,000 for the nine months ended November
30, 1993 from implementing the Recapitalization.
(5) Reflects the estimated Provision for Income Taxes utilizing an effective
income tax rate of 42.1% for the nine months ended November 30, 1992 and
40.0% for the nine months ended November 30, 1993, adjusted for certain
non-deductible items.
(6) In the historical nine months ended November 30, 1993, the Company recorded
an extraordinary charge, net of taxes, against net income of $2,727,000
which resulted from the early retirement of debt principally in connection
with the Recapitalization. Because of its nonrecurring nature, this
extraordinary charge has not been reflected in the pro forma statements of
operations.
(7) Gives pro forma effect to the issuance of 8,247,781 shares of Common Stock
in the Recapitalization.

P-7
<PAGE> 72

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH
SOLICITATION.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Investment Considerations............... 7
Use of Proceeds......................... 8
Price Range of Common Stock............. 8
Selected Historical Consolidated
Financial Data........................ 9
Selected Pro Forma Consolidated
Financial Data........................ 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 12
Business................................ 19
Management.............................. 29
Certain Relationships and
Transactions.......................... 30
Selling Shareholders.................... 32
Shares Eligible for Future Sale......... 33
Underwriting............................ 34
Legal Matters........................... 35
Experts................................. 35
Available Information................... 35
Documents Incorporated By Reference..... 36
Index to Consolidated Financial
Statements............................ F-1
Index to Unaudited Pro Forma Condensed
Consolidated Financial Statements..... P-1
</TABLE>

2,489,374 SHARES

RHODES, INC.

COMMON STOCK
(WITHOUT PAR VALUE)

[LOGO]

SALOMON BROTHERS INC

KIDDER, PEABODY & CO.
INCORPORATED

PROSPECTUS

DATED MARCH , 1994
<PAGE> 73

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses in connection with the issuance and distribution of the
securities being registered are:

<TABLE>
<S> <C>
Filing Fee for Registration Statement......................... $ 17,433
NASD Filing Fee............................................... 5,556
Accounting Fees and Expenses.................................. 50,000
Blue Sky Fees and Expenses.................................... 15,000
Legal Fees and Expenses....................................... 85,000
NYSE Listing Application Fee.................................. 102,100
Transfer Agent's Fees and Expenses............................ 5,000
Printing and Engraving Costs.................................. 125,000
Miscellaneous................................................. 94,911
--------
Total.................................................... $500,000
--------
--------
</TABLE>

The NYSE Listing Application Fee will be paid by the Company. All other
expenses will be paid 50% by the Company and 50% by the Selling Shareholders.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF EXHIBIT
- --------- ---------------------------------------------------------------------------------
<C> <S> <C>
* 1 -- Form of Underwriting Agreement.
4.1 -- Restated and Amended Articles of Incorporation of the Registrant dated as of
April 8, 1993 (incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-60962)).
4.2 -- Amended Bylaws of the Registrant dated as of April 7, 1993 (incorporated by
reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1
(File No. 33-60962)).
* 5 -- Opinion of King & Spalding as to the legality of the securities being registered.
23.1 -- Consent of Arthur Andersen & Co.
*23.2 -- Consent of King & Spalding (included in opinion filed as Exhibit 5).
*24 -- Power of Attorney.
</TABLE>

- ---------------

* Previously filed.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933 (the "Act"), the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of
the registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In

II-1
<PAGE> 74

the event that a claim for indemnification against such liabilities (other
than the payment by a Registrant of expenses incurred or paid by a
director, officer or controlling person of such Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.

II-2
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia on March 4, 1994.

RHODES, INC.

By: /s/ JOEL H. DUGAN
-------------------------------
Joel H. Dugan
Senior Vice President,
Finance & Administrator

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on March 4, 1994.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------------------------
<S> <C>

* Chairman of the Board of Directors
- ------------------------------------------
Holcombe T. Green, Jr.

* Director
- ------------------------------------------
James R. Kuse

* Director
- ------------------------------------------
James V. Napier

* Director
- ------------------------------------------
Don L. Chapman

* Director, President and Chief Executive Officer
- ------------------------------------------ (Principal Executive Officer)
Irwin L. Lowenstein

/s/ JOEL H. DUGAN Senior Vice President, Finance & Administration
- ------------------------------------------ (Principal Financial Officer)
Joel H. Dugan

* Corporate Controller (Principal Accounting
- ------------------------------------------ Officer)
Barbara Snow

*By: /s/ JOEL H. DUGAN
--------------------------------------
Joel H. Dugan
Attorney-in-Fact
</TABLE>

II-3
<PAGE> 76

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ -------------------------------------------------------------------- ------------
<C> <C> <S> <C>
*1 -- Form of Underwriting Agreement.
4.1 -- Restated and Amended Articles of Incorporation of the Registrant
dated as of April 8, 1993 (incorporated by reference to Exhibit 3.1
to the Registrant's Registration Statement on Form S-1 (File No.
33-60962)).
4.2 -- Amended Bylaws of the Registrant dated as of April 7, 1993
(incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 (File No. 33-60962)).
*5 -- Opinion of King & Spalding as to the legality of the securities
being registered.
23.1 -- Consent of Arthur Andersen & Co.
*23.2 -- Consent of King & Spalding (included in opinion filed as Exhibit 5).
*24 -- Power of Attorney.
</TABLE>

- ---------------

* Previously filed.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use in this
registration statement of our reports included or incorporated by reference
herein and to all references to our Firm included in this registration
statement.

ARTHUR ANDERSEN & CO.

Atlanta, Georgia
March 3, 1994