<PAGE> 1
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 November 30, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-8966
--------------------------
RHODES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-0536190
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(404) 264-4600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NONE
- --------------------------------------------------------------------------------
(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 the latest practicable date.
Outstanding at
Class January 7, 1994
------ ---------------
Common Stock, No Par Value 9,777,433
- -------------------------- ---------------
<PAGE> 2
RHODES, INC.
INDEX
Part I. Financial Information
Recent Developments
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - -
February 28, 1993 and November 30, 1993
Condensed Consolidated Statement of Operations
and Accumulated Deficit for the Three
Months and Nine Months Ended November 30, 1992
and November 30, 1993
Condensed Consolidated Statement of Cash Flows
for the Nine Months Ended November 30, 1992
and November 30, 1993
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
i
<PAGE> 3
RHODES, INC.
PART I
FINANCIAL INFORMATION
RECENT DEVELOPMENTS
A number of important events occurred during Rhodes, Inc.'s ("Rhodes"
or the "Company") nine month period ended November 30, 1993. The full impact
of these events is best analyzed by reading the enclosed pro forma results of
operations in addition to the historical financial statements presented herein.
RECAPITALIZATION
On June 24, 1993 Rhodes completed the sale of 4,167,000 shares of its
Common Stock at $12.00 per share in its initial public offering (the
"Offering"). The Offering was an integral step in a series of transactions
(described below) constituting a recapitalization of the Company (the
"Recapitalization"). The Recapitalization enhanced the Company's strategic,
financial and operating flexibility by increasing shareholders' equity and
reducing indebtedness and interest expense. Each component of the
Recapitalization was consummated on June 24, 1993, except for the 17% Debenture
Redemption (defined below) which was consummated on July 26, 1993.
COMMON STOCK OFFERING
As part of the Recapitalization, the Company offered 4,167,000 shares
of Common Stock for sale to the public, of which Green Capital Investors, L.P.
("Green Capital") purchased 250,000 shares. Green Capital is controlled by
Holcombe T. Green, Jr., Chairman of the Board of the Company. The net proceeds
from the Offering (after deducting underwriting discounts and expenses paid by
the Company) were approximately $45.5 million.
SENIOR SECURED FINANCING
On June 24, 1993, certain institutional investors purchased $40.0
million principal amount of long-term indebtedness (the "Senior Secured
Financing") concurrently with the closing of the Offering. The Senior Secured
Financing consists of two tranches, with $30.0 million aggregate principal
amount maturing in 1999 and bearing interest at a rate of 9% per annum and
$10.0 million aggregate principal amount maturing in 2000 and bearing interest
at a rate of 10% per annum. The net proceeds to the Company from the Senior
Secured Financing were approximately $39.1 million. The Senior Secured
Financing is secured by liens on all of the real estate owned by the Company.
1
<PAGE> 4
THE EXCHANGE
On the terms and subject to the conditions contained in an exchange
agreement between the Company and Green Capital (the "Exchange Agreement"), the
Company issued 2,859,115 shares of Common Stock to Green Capital in exchange
for approximately 78.1% of the outstanding 17% Junior Discount Subordinated
Redeemable Debentures Due 2000 (the "17% Debentures"), at their accreted value
($34.3 million as of June 24, 1993), owned by Green Capital. Additionally,
pursuant to the Exchange Agreement, the Company issued 1,221,666 shares of
Common Stock to Green Capital in exchange for all of the outstanding shares of
the Company's Class A Preferred Stock (1,000 shares with a stated value of
$10.0 million and accumulated, unpaid dividends aggregating approximately $4.7
million as of June 24, 1993). Upon completion of the Recapitalization,
Holcombe T. Green, Jr. beneficially owned approximately 56.7% of the
outstanding shares of Common Stock.
REPAYMENT OF INDEBTEDNESS
12% Secured Term Loan
As part of the Recapitalization, on June 24, 1993 the Company repaid
the $36.2 million outstanding principal amount of its 12% Secured Term Loan
with Jackson National Life Insurance Co. ("Jackson National"). The 12% Secured
Term Loan, which was to mature on April 1, 1997, was prepaid by the Company
without penalty.
15% Notes
As part of the Recapitalization, on June 24, 1993 the Company redeemed
the $40.0 million outstanding principal amount of the 15% Senior Subordinated
Notes due September 20, 1998 (the "15% Notes"). Although the 15% Notes were
not redeemable at that date, the consent of the holders thereof to early
redemption was obtained. In connection with the redemption of the 15% Notes;
the Company incurred $2.6 million of prepayment penalties, $2.3 million of
which was payable to Jackson National, the holder of $35.0 million principal
amount of the 15% Notes.
17% Debentures
Upon consummation of the other components of the Recapitalization, the
Company called for redemption of the 17% Debentures that were not subject to
the Exchange in accordance with the provisions of the indenture under which the
17% Debentures were issued (the "17% Debenture Redemption"). The 17% Debenture
Redemption was completed at a redemption price equal to the aggregate accreted
value of the 17% Debentures of approximately $9.7 million on July 26, 1993.
2
<PAGE> 5
MISCELLANEOUS
In order to consummate the Recapitalization, the Company borrowed $3.9
million under a committed, unsecured line of credit maintained with Green
Capital. Borrowings under this line of credit currently bear an annual
interest rate of 8.0%. All amounts outstanding under this line of credit have
been repaid.
Effective upon consummation of the Recapitalization, the Company
terminated the management arrangement with Green Capital pursuant to which
Rhodes paid to Green Capital a $400,000 annual management fee for certain
management services.
SOURCES AND USES OF FUNDS
The following table breaks down the sources and uses of funds in the
Recapitalization, as of the Closing Date.
<TABLE>
<CAPTION>
(In Millions)
<S> <C>
Sources of Funds:
Senior Secured Financing, net $39.1
Common Stock Offering, net 45.5
Borrowing under Green Capital line of credit 3.9
-----
Total Sources of Funds to the Company $88.5
=====
Uses of Funds:
Repayment of 12% Secured Term Loan $36.2
Redemption of 15% Notes 40.0
Redemption of remaining 17% Debentures 9.7
Prepayment penalties 2.6
-----
Total Uses of Funds by the Company $88.5
=====
</TABLE>
3
<PAGE> 6
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1993 1993
------------ -----------
<S> <C> <C>
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 14,181 --
February 28, 1993
Common stock, no par value, 10,000 shares
authorized and 1,476 shares issued and outstanding
at February 28, 1993, 20,000 shares authorized -- --
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.
4
<PAGE> 7
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER QUARTER NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1992 1993 1992 1993
<S> <C> <C> <C> <C>
NET SALES $ 79,071 $ 86,179 $ 218,093 $ 239,187
COST OF GOODS SOLD 40,767 44,259 114,017 123,750
------- ------- ------- -------
GROSS PROFIT 38,304 41,920 104,076 115,437
FINANCE CHARGES &
INSURANCE COMMISSIONS 1,269 1,140 12,698 3,658
------- ------- ------- -------
OPERATING EXPENSES:
Selling 14,206 13,709 37,678 38,073
General & administrative 19,616 21,204 61,440 61,877
Amortization of intangibles 792 787 2,463 2,338
Provision for credit losses 177 37 4,696 116
Other (income) expense, net 3 (94) (353) (1)
------- ------- ------- -------
34,794 35,643 105,924 102,403
------- ------- ------- -------
INCOME BEFORE INTEREST
EXPENSE AND INCOME TAXES 4,779 7,417 10,850 16,692
Interest expense - net 5,618 1,734 18,875 9,947
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (839) 5,683 (8,025) 6,745
PROVISION (BENEFIT) FOR INCOME TAXES - 2,239 (1,145) 2,972
------- ------- ------- -------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (839) 3,444 (6,880) 3,773
EXTRAORDINARY ITEM-EARLY RETIREMENT OF
DEBT, NET OF INCOME TAX EFFECT - - - (2,727)
------- ------- ------- -------
NET INCOME (LOSS) (839) 3,444 (6,880) 1,046
ACCUMULATED DEFICIT AT
BEGINNING OF PERIOD (46,728) (52,916) (40,687) (50,518)
-------- -------- -------- --------
ACCUMULATED DEFICIT AT END OF PERIOD $ (47,567) $ (49,472) $ (47,567) $ (49,472)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE OF COMMON
STOCK BEFORE EXTRAORDINARY ITEM $ (0.57) $ 0.35 $ (4.67) $ 0.59
EXTRAORDINARY ITEM PER SHARE
OF COMMON STOCK - - - (0.43)
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ (0.57) $ 0.35 $ (4.67) $ 0.16
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OF COMMON STOCK OUTSTANDING 1,476 9,838 1,472 6,365
======= ======= ======= =======
PRO FORMA NET INCOME (LOSS) PER COMMON
SHARE (NOTE 1)
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM $ 0.17 $ 0.35 $ 0.27 $ 0.70
EXTRAORDINARY ITEM PER SHARE - - - (0.28)
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ 0.17 $ 0.35 $ 0.27 $ 0.42
======= ======= ======= =======
PRO FORMA WEIGHTED AVERAGE SHARES
(NOTE 1) 9,777 9,838 9,782 9,813
======= ======= ======= =======
</TABLE>
The accompaning notes are an integral part of this condensed consolidated
statement.
5
<PAGE> 8
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
NOVEMBER 30, 1992 NOVEMBER 30, 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 (USED BY) 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 (USED BY) 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.
6
<PAGE> 9
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 three months and 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 three months and nine months ended November 30, 1992
and the nine months ended November 30, 1993. Additionally, the three
months and 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 periods in calculating pro forma earnings per share.
The three month period ended November 30, 1993 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 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.
7
<PAGE> 10
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.
4. 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.
8
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On June 18, 1992, Rhodes sold its portfolio of customer installment
receivables (the "Receivable Sale") to Beneficial National Bank USA ("BNB") in
the approximate amount of $174.3 million (including an advance of $4.3 million
against future revenue to be earned by the Company under a related merchant
agreement. The Company also contracted to sell all future receivables for
three years following the Receivables Sale pursuant to the merchant agreement
whereby BNB provides credit to customers under the Rhodes credit card name.
The net proceeds of the Receivables Sale were used principally to reduce
short-term debt, including terminating the related commercial paper program.
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 and nine months ended November 30, 1992 and the nine months
ended November 30, 1993. Additionally, the three months and nine months ended
November 30, 1992 were adjusted to reflect the Receivables Sale. The three
months ended November 30, 1993 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.
9
<PAGE> 12
Unaudited Pro Forma Results of Operations
(In Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER NOVEMBER NOVEMBER NOVEMBER
30, 1992 30, 1993 30, 1992 30, 1993
--------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET SALES $79,071 100.0% $86,179 100.0% $218,093 100.0% $239,187 100.0%
COST OF GOODS 40,767 51.6 44,259 51.4 114,017 52.3 123,750 51.7
------ ---- ------ ---- --------- ---- ------- ----
GROSS PROFIT 38,304 48.4 41,920 48.6 104,076 47.7 115,437 48.3
------ ---- ------ ---- --------- ---- ------- ----
FINANCE CHARGES &
INSURANCE
COMMISSION 1,269 1.6 1,140 1.3 3,947 1.8 3,658 1.5
------ ---- ------ ---- --------- ---- ------- ----
OPERATING EXPENSES:
Selling 14,206 18.0 13,709 15.9 37,678 17.3 38,073 15.9
General &
administrative 19,516 24.7 21,204 24.6 57,326 26.3 61,758 25.8
Amortization of
intangibles 779 1.0 787 .9 2,341 1.1 2,324 1.0
Provision for
credit losses 104 .1 37 .0 133 .1 116 .0
Other (income)
expense, net 3 .0 (94) (.1) (49) .0 (1) .0
------ ---- ------ ---- --------- ---- ------- ----
34,608 43.8 35,643 41.4 97,429 44.7 102,270 42.8
------ ---- ------ ---- --------- ---- ------- ----
OPERATING INCOME 4,965 6.3 7,417 8.6 10,594 4.9 16,825 7.0
Interest-net 2,247 2.8 1,734 2.0 6,018 2.8 5,434 2.3
------ ---- ------ ---- --------- ---- ------- ----
INCOME BEFORE
INCOME TAXES 2,718 3.4 5,683 6.6 4,576 2.1 11,391 4.8
PROVISION FOR
INCOME TAXES 1,070 1.4 2,239 2.6 1,928 .9 4,560 1.9
------ ---- ------ ---- --------- ---- ------- ----
NET INCOME BEFORE
EXTRAORDINARY ITEM $ 1,648 2.1% $ 3,444 4.0% $ 2,648 1.2% 6,831 2.9%
====== ===== ====== ==== ========= ==== ======= ====
</TABLE>
OPERATING RESULTS
THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1992 AND 1993 COMPARED - PRO
FORMA BASIS
Net sales increased 9.0% to $86,179,000 from $79,071,000 for the three
months ended November 30, 1993 compared with the same period last year and
increased 9.7% to $239,187,000 from $218,093,000 for the nine months compared
with last year. Comparable store sales growth was 5.1% and 7.4% for the three
and nine months ended November 30, 1993, respectively. Comparable store sales
represent furniture and services sold and delivered by stores open for the same
months in each comparative period. Comparable store sales growth, excluding
the three Florida stores that were favorably impacted last year by increased
sales following Hurricane Andrew, was 8.8% and 9.0% for the three and nine
months ended November 30, 1993. Operating income for the quarter ended
November 30, 1993 of $7,417,000 (8.6% of net sales) increased 49.4% compared
with $4,965,000 (6.3% of net sales) for the same period last year on a net
sales increase of $7,108 ,000. Net income for the third quarter ended November
30, 1993 increased 109% to $3,444,000, or $.35 per share, compared with
$1,648,000, or $.17 per share, for the same quarter last year. 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 nine months last year.
10
<PAGE> 13
During the quarter Rhodes opened one new store in Chattanooga,
Tennessee to bring the total stores in operation to 78 compared with 75 stores
in operation at November 30, 1992. The Company anticipates opening a new store
in Clarksville, Indiana (a suburb of Louisville, Kentucky) in January, 1994.
Rhodes has also leased three future stores and is in active negotiations to
lease a number of other stores. The Company is also closing one store in
Sarasota, Florida in January, 1994 which will have no adverse impact on the
Company.
Gross profit as a percentage of net sales for the three months ended
November 30, 1993, increased to 48.6%, up from 48.4%, compared with the same
period last year, and 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
remained the same at 4.0x for the nine months ended November 30, 1993 compared
with the same period last year and 4.0x for the quarter compared with 4.2x for
the quarter last year. 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
for the three months and nine months due to lower net yields on insurance
commissions.
Selling expense for the three and nine months ended November 30, 1993
declined substantially as a percentage of net sales to 15.9% for both periods
this year, compared with 18.0% and 17.3%, respectively, for the same periods
last year. The expense of interest free and deferred payment credit promotions
was more than offset by reduced net advertising expenditures and reduced sales
commissions this year compared with the prior year. Sales commissions have
decreased as a percentage of net sales as a result of revisions made to the
commission structure at the beginning of this fiscal year.
General and administrative expenses for the quarter ended November 30,
1993 increased to $21,204,000 (24.6% of net sales) from $19,516,000 (24.7% of
net sales) for the three months last year and 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 last year. 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 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.
11
<PAGE> 14
THREE MONTHS AND NINE MONTHS ENDED NOVEMBER 30, 1992 AND 1993 COMPARED -
HISTORICAL BASIS
On a historical basis the three and 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 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.
Net sales increased 9.0% to $86,179,000 from $79,071,000 for the three
months ended November 30, 1993, compared with the same period last year and
increased 9.7% to $239,187,000 from $218,093,000 for the nine months compared
with last year. Comparable store sales growth was 5.1% and 7.4% for the three
and nine months ended November 30, 1993, respectively. Comparable store sales
represent furniture and services sold and delivered by stores open for the same
months in each comparative period. Comparable store sales growth, excluding
the three Florida stores that were favorably impacted last year by increased
sales following Hurricane Andrew, was 8.8% and 9.0% for the three and nine
months ended November 30, 1993.
Gross profit as a percentage of net sales for the three months ended
November 30, 1993 increased to 48.6%, up from 48.4%, compared with the same
period last year and 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 sales 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
remained the same at 4.0x for the nine months ended November 30, 1993 compared
with the same period last year and 4.0x for the quarter compared with 4.2x for
the quarter last year.
Finance charge and insurance commission income was $1,140,000 and
$3,658,000 for the three months and nine months ended November 30, 1993,
compared with $1,269,000 and $12,698,000, respectively, for the same periods
last year. As a result of the Receivables Sale, the related finance charge
income is no longer earned by the Company.
Selling expense for the three and nine months ended November 30, 1993
declined substantially as a percentage of net sales to 15.9% for both periods,
compared with 18.0% and 17.3%, respectively, for the same periods last year.
The expense of interest free and deferred payment credit promotions was more
than offset by reduced net advertising expenditures and reduced sales
commissions this year compared with the prior year. Sales commissions have
decreased as a percentage of net sales as a result of revisions made to the
commission structure at the beginning of this fiscal year.
General and administrative expenses for the quarter ended November 30,
1993 increased to $21,204,000 (24.6% of net sales) from $19,616,000 (24.8% of
net sales) for the three months last year. 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. 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 last year due to adding three new stores plus
increases in employee expenses, partially offset by the elimination of the
Company's credit operations following the June 18, 1992 Receivables Sale. The
improvement in the percentage of net sales is due principally to the increased
sales volume.
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The provision for credit losses of $177,000 and $4,696,000 reported
for the three and nine months ended November 30, 1992 decreased to $37,000 and
$116,000, respectively, this year 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 three and nine months ended November 30, 1993
decreased to $1,734,000 and $9,947,000, compared with $5,618,000 and
$18,875,000, respectively, for the three and nine month periods last year as a
result of the Recapitalization and Receivables Sale and 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 tax for the nine months ended November 30, 1993 in the amount of
$2,972,000 on income before extraordinary item. The Revenue Reconciliation Act
of 1993 has little effect on the Company's tax liability.
EXTRAORDINARY ITEM
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 write-off of $903,000 in related
deferred loan costs, less income tax benefit of $800,000.
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 and its unsecured line of credit, as described below. The Company
had net cash provided by operating activities of approximately $15.5 million
for the nine months ended November 30, 1993 compared with approximately $2.7
million (adjusted for the short-term debt paydown related to the Receivables
Sale) for the same period last year.
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The Company's principal uses of cash are debt service obligations,
capital expenditures and working capital needs. Until the Receivables Sale, a
large portion of the Company's sales historically had involved the extension of
credit by the Company and growth of the Company's business traditionally
produced a deficit in cash flow. Much of the Company's liquidity arose from
the issuance of commercial paper by a Rhodes subsidiary to fund 80% of the
purchase price of such receivables.
On June 18, 1992, the Company completed the Receivables Sale. The
Company also contracted to sell all future receivables for the next three years
under the Merchant Agreement, 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.
The Company's capital expenditures for equipment and expansion and
refurbishing of stores are estimated at $7.2 million for fiscal 1994 compared
with $3.4 million for fiscal 1993. The increase reflects the cost of the
Company's plan to remodel 19 stores and open three new stores during fiscal
1994. The Company plans to have capital expenditures of approximately $9.3
million in fiscal 1995 to fund the remodeling of approximately 19 stores and
opening approximately 10 new stores.
The Company maintains an open line of credit with Green Capital for up
to $10 million for working capital purposes and a revolving loan agreement
secured by inventory with Security Pacific Business Credit Inc. The maximum
availability of funds under the revolving loan agreement is the lesser of $20.0
million or 45% of the value of eligible inventory. At January 7, 1994, the
balance outstanding under the revolving loan agreement was $2.2 million and
approximately $13.6 million remained available under the agreement. There were
no amounts outstanding under the Green Capital line of credit. Total funded
indebtedness is subject to the restrictive covenants in the Company's Senior
Secured Financing and the Security Pacific revolving loan 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.
-----------------------------
(Registrant)
DATE: January 13, 1994 By:/s/Joel H. Dugan
---------------- ---------------------------
Joel H. Dugan
Senior Vice President--
Finance and Administration
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