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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13
or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-8966
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RHODES, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-0536190
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
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(Address of principal executive offices)
(Zip Code)
(404) 264-4600
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(Registrant's telephone number, including area code)
NONE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of June 30, 1994: 9,778,933 shares of common stock
without par value.
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RHODES, INC.
INDEX
Part I. Financial Information
Background
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - -
May 31, 1994 and February 28, 1994
Condensed Consolidated Statement of Operations
for the Three Months Ended May 31, 1994
and May 31, 1993
Condensed Consolidated Statement of Cash Flows
for the Three Months Ended May 31, 1994
and May 31, 1993
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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<PAGE> 3
RHODES, INC.
PART I
FINANCIAL INFORMATION
BACKGROUND
An important event, the Recapitalization (defined below), occurred
during Rhodes, Inc.'s ("Rhodes" or the "Company") year ended February 28, 1994
which affects the comparison of this year's first quarter with the first
quarter last year. The full impact of this event is best analyzed by reading
the enclosed pro forma results of operations in addition to the historical
financial statements presented herein.
RECAPITALIZATION
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 Recapitalization
significantly reduced the Company's indebtedness and interest expense and
provided additional resources and financial flexibility.
1
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RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1994 1994
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<S> <C> <C>
CURRENT ASSETS:
Cash $ 273 $ 235
Accounts receivable 11,297 2,073
Inventories at LIFO cost 47,450 48,187
Prepaid expenses and other 4,256 4,375
Deferred tax assets 2,941 2,941
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Total Current Assets 66,217 57,811
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PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization of $31,293 at
May 31, 1994 and $29,805 at February 28, 1994 49,211 48,027
-------------- ------------
CAPITALIZED REAL ESTATE LEASES, at cost, less
accumulated amortization of $4,315 at May 31,
1994 and $4,125 at February 28, 1994 7,630 7,819
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INTANGIBLE ASSETS, net
Goodwill 61,667 62,116
Favorable leases 4,557 4,797
Other intangibles 2,564 2,638
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Total Intangible Assets 68,788 69,551
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OTHER ASSETS 2,503 2,396
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TOTAL ASSETS $ 194,349 $ 185,604
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and loans payable $ 5,391 $ 2,471
Current maturities of long-term debt
and capital lease obligations 1,307 1,308
Accounts payable 26,214 27,753
Accrued liabilities 17,625 15,862
Accrued Interest 1,711 759
Deferred income 10,896 8,732
Current income taxes payable 1,227 --
Current portion deferred gain-sale/leasebacks 318 318
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Total Current Liabilities 64,689 57,203
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DEFERRED INCOME TAXES 8,294 8,415
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LONG-TERM DEBT, less current maturities 41,919 42,046
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OBLIGATIONS UNDER CAPITAL LEASES 14,819 15,006
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DEFERRED GAIN-SALE/LEASEBACKS 2,946 3,025
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 20,000 shares
authorized and 9,779 shares issued and outstanding
at May 31, 1994 and 9,777 shares issued and -- --
outstanding at February 28, 1994
Paid-in-Capital 107,124 107,107
Accumulated deficit (45,442) (47,198)
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Total Shareholders' Equity (Deficit) 61,682 59,909
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 194,349 $ 185,604
============== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
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RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER QUARTER
ENDED ENDED
MAY 31, 1994 MAY 31, 1993
<S> <C> <C>
NET SALES $ 82,865 $ 70,448
COST OF GOODS SOLD 41,598 36,230
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GROSS PROFIT 41,267 34,218
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FINANCE CHARGES and
INSURANCE COMMISSIONS 1,166 1,312
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OPERATING EXPENSES:
Selling 14,761 11,325
General and administrative 22,409 19,729
Amortization of intangibles 762 778
Provision for credit losses 19 22
Other (income) expense, net (164) 43
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37,787 31,897
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INCOME BEFORE INTEREST
EXPENSE AND INCOME TAXES 4,646 3,633
Interest expense - net 1,669 5,376
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INCOME (LOSS) BEFORE INCOME TAXES 2,977 (1,743)
PROVISION (BENEFIT) FOR INCOME TAXES 1,221 (583)
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NET INCOME (LOSS) $ 1,756 $ (1,160)
================== ==================
NET INCOME (LOSS) PER SHARE $ 0.18 $ (0.79)
================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 9,885 1,476
================== ==================
PRO FORMA NET INCOME PER COMMON SHARE (NOTE 1)
NET INCOME PER SHARE $ $0.11
==================
PRO FORMA WEIGHTED AVERAGE SHARES (NOTE 1) 9,777
==================
</TABLE>
The accompaning notes are an integral part of these condensed consolidated
statements.
3
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RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, 1994 MAY 31, 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 1,756 $ (1,160)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,709 1,598
Change in deferred income taxes (121) (1,057)
Amortization of intangibles 762 778
Non-cash interest expense -- 1,884
Amortization of gain-sale/leasebacks (79) (79)
Changes in current assets and liabilities:
Receivables, net (9,224) (7,190)
Inventories 737 (1,387)
Prepaid expenses and other 119 (106)
Accounts payable and accrued
liabilities 2,403 5,956
Deferred income on warranties, undelivered
sales and credit commissions 2,164 2,274
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Net cash provided by operating activities $ 226 $ 1,511
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CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net -- 2
Additions to property and equipment (2,690) (736)
Decrease in intangible assets 1
Increase in other assets, net (121) (830)
Decrease in obligations under capital leases (187) (139)
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Net cash used in investing activities $ (2,997) $ (1,703)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of) short-term debt 2,920 1,362
Repayment of long-term debt (128) (1,112)
Exercise of stock options 17 --
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Net cash provided by financing activities $ 2,809 $ 250
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INCREASE IN CASH 38 58
CASH AT BEGINNING OF PERIOD 235 158
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CASH AT END OF PERIOD $ 273 $ 216
============= ============
SUPPLEMENTAL DISCLOSURE:
CASH PAYMENTS FOR:
Interest $ 1,669 $ 3,492
============= ============
Income taxes $ 2 $ 1,060
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated statements.
4
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RHODES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1994
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 May 31, 1994 and February 28, 1994, the results
of operations for the three months ended May 31, 1994 and May 31,
1993, and cash flows for the three months ended May 31, 1994 and May
31, 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 1995 amounts. Because of the
Recapitalization consummated on June 24, 1993, net income per share is
presented on a pro forma basis assuming the Recapitalization had taken
place at the beginning of the period for the three months ended May
31, 1993. The three month period ended May 31, 1994 has no pro forma
adjustments. These financial statements should be read in conjunction
with the historical financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
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 taxes for the three months ended May 31, 1994 in the amount
of $1,221,000 compared with a benefit of $583,000 for income taxes
recorded for the three months ended May 31, 1993.
5
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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.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following table sets forth the unaudited pro forma results of
operations as if the Recapitalization had been completed as of the beginning of
the three months ended May 31, 1993. The three month period ended May 31, 1994
has no pro forma adjustments. Management believes that these pro forma results
present the most meaningful comparison of historical operating performance as a
basis for understanding future operations.
The pro forma financial information does 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. 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.
7
<PAGE> 10
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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MAY 31, 1994 MAY 31, 1993
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<S> <C> <C> <C> <C>
Net Sales $82,865 100.0% $70,448 100.0%
Cost of Goods Sold 41,598 50.2 36,230 51.4
------- ---- ------- ----
Gross Profit 41,267 49.8 34,218 48.6
------- ---- ------- ----
Finance Charge and
Insurance Commissions 1,166 1.4 1,312 1.9
------- ---- ------- ----
Operating Expenses:
Selling 14,761 17.8 11,325 16.1
General and
administrative 22,409 27.0 19,629 27.9
Provision for credit
losses 19 0.0 22 0.0
Amortization of
intangibles 762 0.9 765 1.1
Other (income)
expense, net (164) (0.2) 43 0.1
------- ---- ------- ----
Operating Income 4,646 5.6 3,746 5.3
Interest expense, net 1,669 2.0 1,900 2.7
------- ---- ------- ----
Income before
income taxes 2,977 3.6 1,846 2.6
Provision for income taxes 1,221 1.5 777 1.1
------- --- ------- ----
Net income $ 1,756 2.1% $ 1,069 1.5%
======= === ======= ====
</TABLE>
OPERATING RESULTS
THREE MONTHS ENDED MAY 31, 1994 AND 1993 COMPARED - PRO FORMA BASIS
Net sales increased 17.6% to $82,865,000 from $70,448,000 for the
three months ended May 31, 1994 compared with the same period last year.
Comparable store sales growth was 10.4% for the three months ended May 31,
1994. Net income for the first quarter ended May 31, 1994 increased 64.3% to
$1,756,000, or $.18 per share, compared with $1,069,000, or $.11 per share, for
the same quarter last year.
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<PAGE> 11
During the quarter Rhodes opened two new stores in the Atlanta, Georgia
market to bring the total stores in operation to 80 at May 31, 1994 compared
with 76 in operation at May 31, 1993. Rhodes has also entered into leases for
three future stores and is in final negotiations for leases on three more
stores.
On July 1, 1994 the Company consummated an agreement pursuant to which
it acquired one store in Eustis, Florida and received a cash consideration in
exchange for Rhodes' three Miami stores. The new store acquired was the sixth
Rhodes store in the Orlando market area where the Company also has a regional
distribution center. Comparable store sales growth for the first quarter
calculated without the Miami stores would have been 12.7%, and the effect on
earnings would have been negligible. Management believes the transaction will
have a positive long term effect on sales and earnings.
Gross profit as a percentage of net sales for the three months ended
May 31, 1994, increased to 49.8%, up from 48.6%, compared with the same period
last year. Gross profit 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 3.6x for the quarter ended May 31, 1994 compared
with 4.0x for the same quarter last year. The decrease was due to higher
inventory levels this year. Inventories were approximately $8.7 million higher
at May 31, 1994 than May 31, 1993 due to (i) adding four more stores (ii)
management's anticipation of an improved economic climate and (iii) increasing
the accessory inventory of its stores by approximately $1.6 million to enhance
the appearance of the stores, which management anticipates will stimulate both
furniture and accessory sales.
Finance charge and insurance commission income derives from
commissions earned under the Company's merchant agreement whereby all newly
created accounts receivable are sold to Beneficial National Bank U.S.A. ("BNB")
and from commissions on credit insurance on credit customer balances. The
amounts earned decreased for the three months ended May 31, 1994, principally
because less finance charge commission is earned on sales made with
interest-free and deferred payment credit promotions.
Selling expense for the three months ended May 31, 1994 increased as
a percentage of net sales to 17.8% this year, compared with 16.1%, for the same
period last year. The increase is because interest-free and deferred payment
credit promotions for the first quarter this year were used more frequently and
for longer periods of time than the first quarter of the prior year. The
increased expense of the credit promotions was partially offset by less
discounting of merchandise sold this year compared with the prior year.
9
<PAGE> 12
General and administrative expenses for the quarter ended May 31, 1994
increased to $22,409,000 (27.0% of net sales) from $19,629,000 (27.9% of net
sales) for the three months last year. The increased expense is due to adding
four new stores plus increases in employee expenses. The improvement in the
percentage of net sales is due principally 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.
THREE MONTHS ENDED MAY 31, 1994 AND 1993 COMPARED - HISTORICAL BASIS
On a historical basis, the three months ended May 31, 1994 are not
comparable with the prior year due to the Recapitalization which took place on
June 24, 1993. 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 "Three Months ended May
31, 1994 and 1993 Compared--Pro Forma Basis."
General and administrative expenses for the quarter ended May 31, 1994
increased to $22,409,000 (27.0% of net sales) from $19,729,000 (28.0% of net
sales) for the three months last year. The increased expense is due to adding
four new stores plus increases in employee expenses. The improvement in the
percentage of net sales is due to the increased sales volume.
Interest expense for the three months ended May 31, 1994 decreased to
$1,669,000 compared with $5,376,000 for the same three months last year as a
result of the Recapitalization and the related reduction in the Company's
indebtedness.
INCOME TAXES
The Company adopted 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 taxes for the three months ended May 31, 1994 in the amount of
$1,221,000 compared with a benefit of $583,000 for income taxes recorded for
the three months ended May 31, 1993.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
On June 24, 1993 the Company completed the Recapitalization to enhance
the Company's strategic, financial and operating flexibility by increasing
shareholders' equity and reducing indebtedness and interest expense.
Management believes that the new capital structure provides sufficient cash
flow to fund the planned expansion, remodeling, and refurbishing programs and
debt service requirements.
Currently, the Company's principal sources of liquidity are cash flow
from operations and additional borrowing capacity under its revolving credit
agreement described below. Net cash provided by operating activities for the
first quarter ended May 31, 1994 was lower ($.2 million) than for the same
period last year ($1.5 million) due primarily to approximately $1.9 million
more cash-in-transit at the end of the first quarter this year from the daily
sale of accounts receivable to BNB than the prior years' quarter end. Such
additional cash-in-transit also caused accounts receivables on the balance
sheet to be $1.9 million higher than May 31, 1993 and $9.2 million higher than
February 28, 1994.
The Company's principal uses of cash are debt service obligations,
capital expenditures and working capital needs. The Company's capital
expenditures for equipment and expansion and remodeling or refurbishing of
stores are estimated at $12.0 million for fiscal 1995 compared with $6.9
million for fiscal 1994. The increase reflects the cost of the Company's plan
to remodel or refurbish 18 stores and open ten new stores during fiscal 1995.
The Company plans to have capital expenditures of approximately $9.1 million in
fiscal 1996 to fund the remodeling or refurbishing of approximately 16 stores
and the opening of approximately eight new stores.
The Company maintains a revolving credit agreement for up to $30.0
million or 50% of eligible inventory with Wachovia National Bank. The
agreement is secured by substantially all of the inventory of the Company. As
of July 11, 1994, there was no loan balance outstanding under the revolving
loan agreement and approximately $21.0 million remained available under the
agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RHODES, INC.
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(Registrant)
DATE: July 14, 1994 By: s/Joel H. Dugan
-----------------
Joel H. Dugan
Senior Vice President--
Finance and Administration
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