<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
----------- -----------
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 No.)
4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 264-4600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED:
- ------------------- ------------------------------------------
Common Stock, without par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.
----
AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT: $59,456,813
As of May 10, 1995 the registrant had outstanding 9,364,198 shares of
its Common Stock (without par value), its only outstanding class of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement
relating to the 1995 Annual Meeting of Shareholders of Rhodes, Inc. are
incorporated by reference into Part III.
<PAGE> 2
PART I
ITEM 1. BUSINESS
BACKGROUND
An important event, the Recapitalization (defined below), occurred
during Rhodes, Inc.'s ("Rhodes" or the "Company") fiscal year ended February
28, 1994 which affects its comparison with this year's financial statements.
The results of operations for the year ended February 28, 1995 are best
analyzed by comparison with the pro forma results of operations for the prior
year ended February 28, 1994 which have been adjusted to reflect the
Recapitalization, in addition to comparison with the historical financial
statements presented herein.
RECAPITALIZATION
On June 24, 1993, the Company completed 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
The Company offered 4,167,000 shares of Common Stock for sale to the
public at $12.00 per share in an initial public offering (the "Offering"), of
which Green Capital Investors, L.P. ("Green Capital") purchased 250,000 shares.
Green Capital is controlled by Holcombe T. Green, Jr., who was Chairman of the
Board of the Company until July, 1994. Mr. Green is currently a Director of the
Company and Chairman of the Executive Committee of the Board of Directors. The
net proceeds from the Offering (after deducting underwriting discounts and
expenses paid by the Company) were approximately $45.5 million.
SENIOR SECURED FINANCING
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 a $30.0 million aggregate principal amount maturing in 1999 and
bearing interest at a rate of 9% per annum and a $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 $38.7 million. The Senior Secured Financing is secured by liens
on all of the real estate owned by the Company.
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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 Company's 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 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).
REPAYMENT OF INDEBTEDNESS
12% SECURED TERM LOAN
As part of the Recapitalization, the Company repaid the $36.2 million
principal amount of its 12% Secured Term Loan with Jackson National Life
Insurance Co. ("Jackson National"). The 12% Secured Term Loan, which was
scheduled 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 principal amount of the Company's 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 all 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.
MISCELLANEOUS
In order to consummate the Recapitalization, the Company borrowed
approximately $4.0 million under a committed, unsecured line of credit
maintained with Green Capital. Borrowings under this line of credit had an
annual interest rate of 8.0%. All amounts outstanding under this line of credit
have been repaid and the line of credit was terminated prior to the end of
fiscal 1994.
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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.
GENERAL INFORMATION
BACKGROUND
Rhodes is one of the largest specialty furniture retailers in the
United States. Founded in 1875, the Company operates 80 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.
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 salespeople and convenient
locations.
In September, 1988 Rhodes was acquired (the "Acquisition") by a group
of investors led by Holcombe T. Green, Jr., who was Chairman of the Board of
Directors of the Company until July, 1994. Mr. Green is currently a Director of
the Company and Chairman of the Executive Committee of the Board of Directors.
As of April 28, 1995, Mr. Green beneficially owned approximately 31.2% of the
outstanding shares of Common Stock.
STORE BASE
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 is designed to provide 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. Through the end of fiscal
1995, thirty-six stores had been remodeled or refurbished pursuant to the
program. An additional fifteen stores are scheduled to be remodeled or
refurbished in fiscal 1996.
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 1996
is anticipated to be approximately $400,000. 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
1996 is anticipated to be approximately $125,000. Stores generally remain open
during a remodeling or refurbishing and the event is advertised as an
opportunity for customers to enjoy increased savings.
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The Company also has a program designed to increase its store base by
adding stores in existing markets and, when possible, new markets. In pursuing
this program, the Company seeks to add new cluster stores that may be served
from existing regional distribution centers ("RDCs"). In fiscal 1995, seven new
stores were opened, all in existing markets, including a replacement store in
Columbia, South Carolina. Single stores were opened in Chattanooga and
Knoxville, Tennessee in fiscal 1994. 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
Nashville and five stores in Birmingham.
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. Expansion or opening of new RDC's will be considered as needed
to support the expansion. 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.
The table below summarizes as of May 1, 1995 openings, closings and
remodelings or refurbishings of stores during the fiscal years indicated and
the Company's current plans for fiscal years 1996 and 1997.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
--------------------------------------------------------
1997(1) 1996(1) 1995 1994 1993 1992 1991
------- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of stores at
beginning of year 87 80 78 76 76 75 72
Opened or acquired 10 12 7 (5) 3 1 1 6
Closed or sold (1) (5) (5)(5) (1) (1)(2) -- (3)
--- --- --- --- --- --- ---
Number of stores at
end of year 96 87 80 78 76 76 75
--- --- --- --- --- --- ---
Stores remodeled or
refurbished --(6) 15 16 16(4) 4 2(3) 1(3)
</TABLE>
(1) Proposed
(2) On August 24, 1992, Hurricane Andrew destroyed one of the
Company's four Miami stores.
(3) Remodelings and refurbishings prior to fiscal 1993 were not
part of the Company's current remodeling and refurbishing
program and therefore are not comparable.
(4) Includes refurbishment of one store that subsequently was
destroyed by fire.
(5) Includes relocation of one store.
(6) The status of the Company's 14 stores that have not been
remodeled, or scheduled for remodeling in fiscal 1996, has not
been determined. Whether or not individual stores will be
remodeled, refurbished or relocated will depend on a number of
factors such as the lease terms, availability of expansion
space in some cases, or suitable relocation space to lease.
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 programs by analyzing changes in the profile of
the resulting customer base. The Company has identified its target group as
between the ages of 25 and 54 with an annual family income of $30,000
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to $75,000. An extensive marketing study commissioned by the Company as of
October 13, 1994 confirmed that the majority of Rhodes' customers fit the
target profile.
STORE FORMAT AND SITE SELECTION
The Company's stores average 31,387 square feet of display space.
Furniture typically is displayed in model room settings, complete with
accessories. 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 new stores. 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,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Living Room Furniture 49.6% 49.3% 50.9%
Bedroom Furniture 25.1 24.5 23.0
Dining Room Furniture 10.4 11.8 12.2
Bedding 11.7 11.7 10.7
All Other Merchandise
and Accessories 3.2 2.7 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-known brands
such as Alan White, Armstrong, Bassett, Berkline, Broyhill, Dunmore, Kincaid,
Klaussner, La-Z-Boy, Natuzzi, Peoplounger, River Oaks, Sealy, Samuel Lawrence,
Simmons and Universal. As of February 28, 1995, one manufacturer, making
products under the brand names La-Z-Boy and Kincaid, accounted for
approximately 14.5% of the Company's total purchases. 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.
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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 year ended February 28, 1995, newspaper and print media advertising
accounted for approximately 38.9% 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 inventory control and
point-of-sale information system. 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 has completed a successful test of bar coding
in one RDC, which it will be adding to all RDC's in fiscal 1996.
The Company believes that the centralization and standardization of
its operating systems, and the present successful operation of these systems in
all 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
The Company's 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 divisional vice president have a
combined 109 years of experience with Rhodes.
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.
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DISTRIBUTION AND DELIVERY
Inventories are maintained in RDCs, from which merchandise is shipped
to the appropriate store for delivery to the customer's home. The seven RDCs,
which collectively had more than 600,000 square feet at year end, have
cantilever racking and computer-controlled inventory storage. An additional
98,000 square feet is being added to the Powder Springs facility, which will be
completed in May, 1995.
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.
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 71.9% of the Company's sales in the year ended February
28, 1995 were made through the Rhodes credit card, which operates as a
revolving charge account. All credit applications, sales and many payments on
account are processed electronically through the Company's point-of-sale
system. The terms for the Rhodes credit card purchases are flexible and on most
purchases allow up to 48 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 sold its portfolio of customer
installment receivables (the "Receivables Sale") to Beneficial National Bank
U.S.A. ("BNB") in the amount of approximately $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 "Merchant Agreement")). Under the
Merchant Agreement, the Company also contracted to sell 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 advance against future
revenue to be earned by the Company under the Merchant Agreement. Repayment of
the advance was completed in fiscal 1995. 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. It is the Company's intention to
continue with the Merchant Agreement.
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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 for calendar 1994, the Company was the
third largest conventional furniture retailer in the United States; however,
the 10 largest conventional furniture retailers accounted for less than 13.3%
of industry sales in 1994. 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, convenient locations and a 30 day
unconditional return policy.
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 March 31, 1995 the Company employed 2,690 persons, including
2,337 in sales and store operations, 210 in its RDCs and 143 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.
ITEM 2. PROPERTIES
PROPERTIES
The Company's stores are free-standing units or are located in
shopping centers, and have display space ranging from approximately 17,000
square feet to approximately 78,000 square feet (with an average of
approximately 31,000 square feet). As of February 28, 1995, the Company owned
13 of its stores and leased the remaining 67, of which nine were leased
pursuant to sale/leaseback arrangements. See Notes 5 and 6 to Consolidated
Financial Statements.
Store leases have initial terms which will expire at various dates
through 2023, with an average lease term, including renewal options, of
approximately 13 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.
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The Company's principal executive offices are located in a 30,366
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.
ITEM 3. LEGAL PROCEEDINGS
On April 17, 1995, several individuals, as members of a purported
plaintiff class of customers, filed suit in the Circuit Court of Jefferson
County, Alabama against the Company and certain other defendants, including
Sears, Roebuck & Company, Inc., Service Merchandise Company, Inc., Friedman's
Inc., Alabama Power Company, Lowe's Home Centers, Inc., and Rex Radio and
Television, Inc., alleging violations of the Code of Alabama and fraud and
conspiracy arising from the sale of "extended service contracts" in connection
with the credit purchase of consumer goods. In their prayer for relief, the
plaintiffs seek damages equal to all principal and finance charges under the
credit agreements in question, a judgment voiding the credit agreements,
injunctive relief, the reimbursement of all costs associated with the action,
other compensatory damages and unspecified punitive damages. The Company
believes that its practices with respect to extended service contracts comply
with Alabama law and it intends to vigorously defend this action.
Due to the nature of the Company's business, it is from time to time a
party to other legal proceedings arising in the ordinary course of its
business, none of which, in the judgment of management, would have a material
adverse effect on its operations or financial condition if adversely
determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1995.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to
each person who is an executive officer of the Company, as indicated below.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
Irwin L. Lowenstein 59 Chairman and Chief Executive Officer
Joel T. Lanham 39 President and Chief Operating Officer
Joel H. Dugan 56 Senior Vice President, Finance and Administration
James A. Welch 45 Senior Vice President, Operations
Jack A. Hurst 62 Senior Vice President, Training and Human Resources
Donald M. Parker 51 Senior Vice President, Merchandising
Barbara W. Snow 37 Vice President and Corporate Controller
</TABLE>
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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. In 1994 he was elected Chairman of the Board and Chief Executive
Officer.
Joel T. Lanham joined the Company in 1976. For the past five years he
has served as Senior Vice President and Executive Vice President, Operations
and in 1994 he was elected President and Chief Operating Officer. 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 & Co., was elected Vice
President, Accounting and Information Services in 1985 and Senior Vice
President, Finance and Administration in 1988.
James A. Welch joined the Company in 1986. For the past five years he
has served as Regional Manager and Division Manager and in 1994 he was elected
Senior Vice President, Operations.
Jack A. Hurst joined the Company in 1957 and has served as Senior Vice
President, Training & Human Resources since 1986. Mr. Hurst has informed the
Company he will tender his resignation for retirement effective July 31, 1995.
Donald 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 Merchandising in May 1993. Prior to joining the Company,
Mr. Parker served as General Manager for Maxwell Furniture, a furniture
retailer.
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 elected to Corporate Controller.
In 1994 Ms. Snow was elected to the additional office of Vice President.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was quoted on The Nasdaq Stock Market from
June 17, 1993, the date of the Recapitalization, through March 23, 1994.
Beginning March 24, 1994 the Common Stock was listed on the New York Stock
Exchange. The following table sets forth the high and low sales prices of the
Common Stock as reported by The Nasdaq Stock Market or the New York Stock
Exchange, as applicable, for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1994:
Second Quarter (June 17, 1993 through August 31, 1995) $12 1/4 $ 8 3/4
Third Quarter (ended November 30, 1993) $14 3/4 $10 3/4
Fourth Quarter (ended February 28, 1994) $19 1/4 $13 1/4
FISCAL 1995:
First Quarter (ended May 31, 1994) $20 1/4 $13 1/2
Second Quarter (ended August 31, 1994) $16 $ 9
Third Quarter (ended November 30, 1994) $10 1/2 $ 9 1/4
Fourth Quarter (ended February 28, 1995) $12 7/8 $ 8 3/8
FISCAL 1996:
First Quarter (through May 10, 1995) $11 7/8 $ 8 5/8
</TABLE>
As of April 28, 1995, there were approximately 253 holders of record
of the Company's common stock.
The Company has paid no cash dividends since the Acquisition in 1988
and it has no plans to commence payment of cash dividends on its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following information with respect to the Company's consolidated
financial statements for the fiscal years ended February 28, 1995, 1994, 1993,
February 29, 1992 and February 28, 1991 has been derived from, and should be
read in conjunction with, the Company's audited consolidated financial
statements.
The following financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company appearing
elsewhere in this Annual Report.
12
<PAGE> 13
CERTAIN DEFINITIONS
INVENTORY TURNOVER: Cost of Goods Sold on a FIFO basis for the fiscal
year divided by the average of FIFO inventory levels at the beginning of the
fiscal year and at the end of each month during the fiscal year.
AVERAGE DISPLAY SQUARE FOOTAGE: Average of the total square feet of
display area open at the beginning of the fiscal year and at the end of each
month during the fiscal year.
COMPARABLE STORE SALES GROWTH: Growth in furniture and services sold
and delivered by stores open for the same months in each comparative period.
SALES PER SQUARE FOOT: Net sales for the fiscal year divided by the
average square feet of display area of those stores open at the beginning of
the fiscal year and at the end of each month during the fiscal year.
SALES PER NON-SALES EMPLOYEE: Net sales for the fiscal year divided by
the average number of non-selling forty hour units at the end of each month
during the fiscal year. A forty-hour unit is the equivalent of one employee
working forty hours each work. Sales employees, who work on commission only,
are excluded.
SALES PER STORE: Net sales for the fiscal year divided by the average
number of stores open at the end of each month during the fiscal year.
13
<PAGE> 14
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, OR 29,
-------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 361,238 $ 325,255 $ 286,527 $ 265,924 $ 256,594
Cost of Goods Sold 185,995 168,425 150,344 139,876 135,473
--------- --------- --------- --------- ---------
Gross Profit 175,243 156,830 136,183 126,048 121,121
--------- --------- --------- --------- ---------
Finance Charges and
Insurance Commissions 4,935 4,892 13,853 37,725 37,816
--------- --------- --------- --------- ---------
Operating Expenses:
Selling, general and
administrative 151,111 136,269 129,225 127,446(1) 118,971
Provision for credit losses 164 213 4,803 7,413(1) 12,958
Amortization of
intangibles 3,074 3,132 3,253 3,433 2,700
Nonrecurring items -- -- -- -- 5,000
Other (income)
expense, net 197 8 (575) 868 236
--------- --------- --------- --------- ---------
154,546 139,622 136,706 139,160 139,865
--------- --------- --------- --------- ---------
Operating Income 25,632 22,100 13,330 24,613 19,072
Nonrecurring items -- -- -- 1,162 --
Interest Expense, Net 6,109 11,545 24,306 33,920 36,856
--------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes,
Change in Accounting
Principle and
Extraordinary Item 19,523 10,555 (10,976) (10,469) (17,784)
Provision (Benefit) for
Income Taxes 8,004 4,508 (1,145) (1,234) (4,253)
--------- --------- --------- --------- ---------
Net Income (Loss)
Before Change in
Accounting Principle
and Extraordinary
Item(2) 11,519 6,047 (9,831) (9,235) (13,531)
Cumulative Effect on
Prior Years of
Change in Accounting
for Income Taxes -- -- -- (719) --
Extraordinary Item(2) -- (2,727) -- -- --
--------- --------- --------- --------- ---------
Net Income (Loss) $ 11,519 $ 3,320 $ (9,831) $ (9,954) $ (13,531)
========= ========= ========= ========= =========
Per Share Data:
Net Income (Loss)
Before Extraordinary
Item(2) $ 1.18 $ 0.83 $ (6.68) $ (8.85) $ (13.77)
Net Income (Loss) 1.18 0.45 (6.68) (8.85) (13.77)
Dividends -- -- -- -- --
Weighted Average Shares
Outstanding (000's) 9,760 7,302 1,472 1,125 983
OTHER OPERATING DATA:
Depreciation and
Amortization $ 9,796 $ 9,531 $ 9,717 $ 10,021 $ 9,197
Non-Cash Interest Expense -- 2,626 6,653 6,257 5,756
Capital Expenditures 14,101 6,860 3,405 2,769 2,589
Gross Profit Percentage 48.5% 48.2% 47.5% 47.4% 47.2%
FIFO Inventory Turnover 3.6x 3.8x 3.8x 3.7x 3.3x
STORE DATA:
Stores Open at Period End 80 78 76 76 75
Average Display Square
Footage (000's) 2,411 2,270 2,184 2,182 2,143
Total Store Sales Growth 11.1% 13.5% 7.7% 3.6% 2.3%
Comparable Store Sales
Growth 7.1% 10.0%(3) 7.0%(4) (0.6)% (2.5)%
Sales Per Square Foot 150 143 131 122 120
Sales Per Non-Sales
Employee(000's) 239 231 213 185 176
Sales Per Store (000's) 4,607 4,229 3,795 3,538 3,467
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (at end of period):
Working Capital $ 171 $ 608 $ (10,077) $ (9,759) $ (7,975)
Total Assets 198,410 185,604 175,754 349,152 356,055
Total Debt (including
Obligations Under
Capital Leases) 55,002 60,831 145,706 307,821 317,374
Shareholders' Equity
(Deficit) 67,500 59,909 (23,850) (14,073) (9,764)
</TABLE>
(1) In fiscal 1992, the Company sold, without recourse, a portion of its
written-off accounts to an affiliate. The effect of these transactions
was to reduce the provision for credit losses by $1,001,000 and
increase selling, general and administrative expenses by $494,000.
(2) In the year ended February 28, 1994, the Company recorded an
extraordinary charge, net of taxes, against net income of $2,727,000,
or $(0.38) per share, which resulted from the early retirement of debt
principally in connection with the Recapitalization.
(3) Comparable store sales growth for fiscal 1994, excluding the results
of three Florida stores that were favorably impacted in fiscal 1993 by
increased sales following Hurricane Andrew, was 12.2% compared with
fiscal 1993.
(4) Comparable store sales growth for fiscal 1993, excluding the three
Florida stores that were favorably impacted in fiscal 1993 by
increased sales following Hurricane Andrew, was 6.2% for fiscal 1993
compared with fiscal 1992.
15
<PAGE> 16
ITEM 7. 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
fiscal 1994 and 1993. Additionally, fiscal 1993 was adjusted to reflect the
Receivables Sale. There are no pro forma adjustments to the financial
statements for year ended February 28, 1995. 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 information for fiscal 1993 and 1994 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.
16
<PAGE> 17
PRO FORMA RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL PRO FORMA PRO FORMA
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 361,238 $ 325,255 $ 286,527
Cost of Goods Sold 185,995 168,425 150,344
---------- ---------- ----------
Gross Profit 175,243 156,830 136,183
---------- ---------- ----------
Finance Charges and
Insurance Commissions 4,935 4,892 5,102
---------- ---------- ----------
Operating Expenses:
Selling 57,720 51,865 47,793
General and
administrative 93,391 84,285 77,218
Provision for credit
losses 164 213 240
Amortization of
intangibles 3,074 3,118 3,119
Other (income)
expense, net 197 8 (271)
---------- ---------- ----------
Operating Income 25,632 22,233 13,186
Interest Expense, net 6,109 7,032 8,086
---------- ---------- ----------
Income Before Income
Taxes and
Extraordinary Item 19,523 15,201 5,100
Provision for Income Taxes 8,004 6,096 2,203
---------- ---------- ----------
Net Income Before
Extraordinary Item $ 11,519 $ 9,105 $ 2,897
========== ========== ==========
PER SHARE DATA:
Net Income Before
Extraordinary Item $ 1.18 $ 0.92 $ 0.30
Weighted Average Shares
Outstanding (000's) 9,760 9,901 9,781
OTHER OPERATING DATA:
Depreciation and
Amortization $ 9,796 $ 9,398 $ 9,517
</TABLE>
17
<PAGE> 18
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, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
FISCAL YEARS PRO FORMA
ENDED YEARS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- ---------------
1995 1994 1993 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 51.5 51.8 52.5 51.8 52.5
----- ----- ----- ----- -----
Gross Profit 48.5 48.2 47.5 48.2 47.5
----- ----- ----- ----- -----
Finance Charges and Insurance Commissions 1.4 1.5 4.8 1.5 1.8
----- ----- ----- ----- -----
Operating Expenses:
Selling 16.0 15.9 16.7 15.9 16.7
General and administrative 25.9 26.0 28.3 25.9 26.9
Amortization of intangibles 0.9 1.0 1.1 1.0 1.1
Provision for credit losses -- 0.1 1.7 0.1 0.1
Other (income) expense, net 0.1 -- (0.2) -- (0.1)
----- ----- ----- ----- -----
42.8 42.9 47.6 42.9 44.7
----- ----- ----- ----- -----
Operating Income 7.1 6.8 4.7 6.8 4.6
Interest Expense, net 1.7 3.5 8.5 2.2 2.8
Income (Loss) Before Income Taxes,
Change in Accounting for Taxes and
Extraordinary Item 5.4 3.3 (3.8) 4.7 1.8
Net Income (Loss) Before Extraordinary Item 3.2 1.9 (3.4) 2.8 1.0
</TABLE>
FISCAL YEARS 1995 AND 1994 COMPARED - PRO FORMA BASIS
Net sales increased 11.1% to $361,238,000 from $325,255,000 for fiscal
1995 compared with the prior fiscal year. Comparable store sales growth was
7.1% for fiscal 1995. Comparable store sales represent furniture and services
sold and delivered by stores open for the same months in each comparative
period. Operating income for fiscal 1995 of $25,632,000 (7.1% of net sales)
increased 15.3% compared with $22,233,000 (6.8% of net sales) for the prior
fiscal year. Net income for fiscal 1995 increased 26.5% to $11,519,000, or
$1.18 per share, compared with $9,105,000, or $.92 per share for the prior
year.
During fiscal 1995 Rhodes opened three new stores in Atlanta, Georgia,
one in Birmingham, Alabama, one in St. Louis, Missouri and one in Eustis,
Florida, which was acquired in an exchange for the Company's three Miami
stores. One store was also opened in Columbia, South Carolina to replace a
store that was closed at the same time. The Company also lost one store to a
fire in Jacksonville, Florida, bringing the total stores in operation at
February 28, 1995 to 80, compared to 78 stores in operation at February 28,
1994. After fiscal year end, one new store was opened in the Jacksonville,
Florida market and one of the two Jackson, Mississippi stores was closed and
the real estate owned by the Company was sold. The Company plans to replace the
Jackson, Mississippi store as soon as practical. The Company has leases signed
on six additional stores and is in final lease negotiations for five more new
stores, all of which are expected to open in the next fiscal year. Three of
these six stores with completed leases will be located in Atlanta, Georgia, two
in Charlotte, North Carolina, and one in Memphis, Tennessee (a new market). The
Company plans to close several stores in fiscal 1996, most of which are stores
in Atlanta which will be too close to new, larger stores. Sixteen stores were
remodeled or refurbished in fiscal 1995 and the Company plans to remodel or
refurbish approximately
18
<PAGE> 19
fifteen stores in fiscal 1996. The status of fourteen stores that have not been
remodeled or scheduled for remodeling in fiscal 1996 has not yet been
determined. Whether or not individual stores will be remodeled, refurbished or
relocated will depend on a number of factors such as the lease terms,
availability of expansion space in some cases, or suitable relocation space to
lease.
Gross profit as a percentage of net sales for the year increased to
48.5% from 48.2%, compared with last year. The gross profit improvement is
attributable to improved gross profit on furniture sales and improved sales
penetration of extended warranties which have a higher gross profit.
Finance charge and insurance commission income derives from
commissions earned from BNB on new credit sales under the Merchant Agreement
and from commissions on credit insurance on credit customer balances. Income
increased due to additional insurance commissions earned on customers'
accounts, partially offset by lower commissions earned from BNB.
Selling expense for fiscal 1995 increased slightly as a percentage of
net sales to 16.0% compared with 15.9% last year due to an increase in
advertising expenses, which were offset, in part, by lower net costs on credit
promotions charges. Selling expense varies as a percentage of sales due to a
number of factors including the level of advertising, credit promotions and the
opening of new stores.
General and administrative expenses for the year increased to
$93,391,000 (25.9% of net sales) from $84,285,000 (25.9% of net sales) last
year. The increased expense for the year is due to having seven new stores this
year, less the three Miami stores sold in the second quarter plus increases in
employee expenses. The net increases were the same percentage of sales due to
increased sales volume.
Other expense for fiscal 1995 includes an accrual of $375,000 in
anticipation of the losses expected to be incurred upon closing two stores in
fiscal 1996.
Interest expense 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.
FISCAL YEARS 1995 AND 1994 COMPARED - HISTORICAL BASIS
On a historical basis, the results of fiscal 1995 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 significantly from the pro forma information set forth under "Fiscal
Years 1995 and 1994 Compared - Pro Forma Basis".
Interest expense for the year ended February 28, 1995 decreased to
$6,109,000 compared with $11,545,000 for last year as a result of the
Recapitalization and the related reduction in the Company's indebtedness.
19
<PAGE> 20
FISCAL YEARS 1994 AND 1993 COMPARED--PRO FORMA BASIS
Net sales increased 13.5% to $325,255,000 from $286,527,000 for fiscal
1994 compared with the prior fiscal year. Comparable store sales growth was
10.0% for fiscal 1994. Comparable store sales growth, excluding the three
stores that were favorably impacted in fiscal 1993 by increased sales following
Hurricane Andrew, was 12.2% for fiscal 1994. Pro forma operating income for
fiscal 1994 of $22,233,000 (6.8% of net sales) increased 68.6% compared with
$13,186,000 (4.6% of net sales ) for fiscal 1993 on a net sales increase of
$38,728,000. Pro forma net income before extraordinary item for fiscal 1994
increased 214% to $9,105,000, or $.92 per share, compared with $2,897,000, or
$.30 per share, for the prior fiscal year.
During fiscal 1994, Rhodes opened one new store in Chattanooga,
Tennessee, acquired one new store in Knoxville, Tennessee and opened a new
store in Clarksville, Indiana (a suburb of Louisville, Kentucky), to bring the
total stores in operation to 78 compared with 76 stores in operation at
February 28, 1993. The Company closed one store in Sarasota, Florida in January
1994, which closing had no adverse impact on the Company.
Gross profit as a percentage of net sales for fiscal 1994 increased to
48.2% from 47.5%, compared with fiscal 1993. 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 3.8x for each of the
fiscal years 1994 and 1993. Inventories were approximately $10.9 million higher
at February 28, 1994 than February 28, 1993 due to three more stores in
operation 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 credit insurance commissions.
Selling expense for fiscal 1994 declined substantially as a percentage
of net sales to 15.9%, compared with 16.7% for 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 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 fiscal 1994.
Pro forma general and administrative expenses for fiscal 1994
increased to $84,285,000 (25.9% of net sales) from $77,218,000 (26.9% of net
sales) for 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.
20
<PAGE> 21
FISCAL YEARS 1994 AND 1993 COMPARED--HISTORICAL BASIS
On a historical basis, results for fiscal 1994 are not comparable with
the prior fiscal 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 "Fiscal Years 1994 and 1993 Compared--Pro
Forma Basis."
Finance charges and insurance commissions income was $4,892,000 for
fiscal 1994, compared with $13,853,000 for 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 year ended February 28,
1994 increased to $84,404,000 (26.0% of net sales) from $81,432,000 (28.4% of
net sales) for fiscal 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 $4,803,000 reported for fiscal 1993
decreased to $213,000 for fiscal 1994 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 fiscal 1994 decreased to $11,545,000, compared
with $24,306,000 for fiscal 1993 as a result of the Recapitalization and
Receivables Sale and related reduction in the Company's indebtedness.
In fiscal 1994 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.
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.
21
<PAGE> 22
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 ended February 28,
1995, 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.
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 by operating activities of
approximately $25.9 million, $19.4 million and $6.2 million (adjusted for the
short-term debt paydown related to the Receivables Sale), in fiscal years 1995,
1994 and 1993, respectively. The Company's principal uses of cash are capital
expenditures, working capital needs and debt service obligations.
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.
At the end of fiscal years 1995, 1994, and 1993, LIFO inventories were
$54.4 million, $48.2 million, and $37.3 million, respectively. FIFO inventory
turns in these years have decreased to 3.6x for fiscal 1995 from 3.8x in fiscal
years 1994 and 1993. Inventories have been increased due to addition of new,
larger stores and due to management's anticipation of a continued favorable
economic climate. Also, accessory inventories were increased during fiscal 1995
from $6.8 million to $11.2 million to enhance the appearance of the furniture
in the stores, which management believes has stimulated both furniture and
accessory sales. The Company has historically had low or negative working
capital, primarily as a result of its tight inventory controls, low cash
balances and the inclusion in current liabilities of deferred revenues, such as
merchandise sold but not delivered and deferred warranty revenue.
The Company made additions to property and equipment of approximately
$14.1 million, $6.9 million and $3.4 million for fiscal years 1995, 1994 and
1993, respectively. These expenditures have been both for the opening of new
stores and capital replacements in existing stores, including the remodeling
completed for sixteen stores in fiscal 1995, sixteen stores in fiscal 1994 and
four stores in fiscal 1993. 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
22
<PAGE> 23
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 approximately $17.0 million in fiscal 1996 and $14.0 million in 1997.
Capital expenditures in excess of $15.0 million in any one year will require
aproval under the Company's Revolving Credit Agreement. These increases reflect
the cost of remodeling or refurbishing fifteen stores in 1996 and the addition
of twenty-two new stores over the two year period. 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.
In connection with its previously announced intent to repurchase up to
$5.0 million of its common stock from time to time, the Company had expended
$3.7 million to repurchase 311,400 shares of its common stock as of February
28, 1995. The repurchase program was completed on March 20, 1995 with an
aggregate of 436,000 shares of common stock repurchased at an aggregate cost of
$5.0 million.
The Company's consolidated funded indebtedness at February 28, 1995
including obligations under capital leases, was $55.0 million, down from $60.8
million at February 28, 1994 and $145.7 million at February 28, 1993 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.
Fiscal 1996 $0
Fiscal 1997 $7.5 million
Fiscal 1998 $7.5 million
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 May 10, 1995, borrowings under the Revolving Credit Agreement
were approximately $9.0 million and approximately $16.0 million remained
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 was scheduled to terminate in
February 1996, but was renewed until February 27, 1997.
23
<PAGE> 24
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of the Company are set forth herein beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
24
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item X hereof and incorporated herein by reference to the annual
proxy statement relating to the 1995 annual meeting of shareholders of the
Company.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the annual proxy statement relating to
the 1995 annual meeting of shareholders of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the annual proxy statement relating to
the 1995 annual meeting of shareholders of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Incorporated by reference to the annual proxy statement relating to
the 1995 annual meeting of shareholders of the Company.
25
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements (beginning on page
F-1 - F-21) are filed under Item 8 of this Annual
Report:
Report of Independent Public Accountants
Consolidated balance sheets as of February
28, 1995 and February 28, 1994
Consolidated statements of operations for
the years ended February 28, 1995, February
28, 1994 and February 28, 1993
Consolidated statements of shareholders'
equity for the years ended February 28,
1995, February 28, 1994 and February 28,
1993
Consolidated statements of cash flows for
the years ended February 28, 1995, February
28, 1994 and February 28, 1993
Notes to consolidated financial statements
for the years ended February 28, 1995,
February 28, 1994 and February 28, 1993
2. The following financial statement schedules
(beginning on page F-22 - F-23) are filed as part of
this Annual Report:
Report of Independent Public Accountants
Schedule II - Valuation and qualifying
accounts for the three years ended February
28, 1995
3. Exhibits.
The Exhibits listed in (c) below are filed as part of
this Annual Report.
(b) Reports on Form 8-K
None
26
<PAGE> 27
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 -- Restated and Amended Articles of Incorporation of the
Registrant dated as of April 8, 1993 (incorporated by
reference to Exhibit 3.1 to Registrant's Registration
Statement on Form S-1, as amended (File No. 33-60962)).
3.2 -- Amended Bylaws of the Registrant dated as of April 7, 1993
(incorporated by reference to Exhibit 3.2 to Registrant's
Registration Statement on Form S-1, as amended (File No.
33-60962)).
4.1 -- Loan and Security Agreement (the "Loan and Security
Agreement") dated as of February 24, 1994 between the
the Registration and Wachovia Bank of Georgia, N.A.
and Master Note between the Registrant payable to Wachovia
Bank of Georgia, N.A. as of February 24, 1994 (incorporated
by reference to Exhibit 4.2 to Registrant's Annual Report on
Form 10-K for the fiscal year ended February 28, 1994).
4.2 -- Letter of Extension, dated November 9, 1994, of Loan and
Security Agreement and First Amendment to the Loan and
Security Agreement, dated January 4, 1995.
4.3 -- Form of Note Purchase Agreement between the Company, Sun Life
Insurance Company of America, The Equitable Private Income
and Equity Partnership II, L.P., The Life Insurance Company
of Virginia and Protective Life Insurance Company
(incorporated by reference to Exhibit 10.25 to the
Registrant's Registration Statement on Form S-1, as amended
(File No. 33-60962)).
10.1 -- Rhodes, Inc. Employees' Savings Plan (incorporated by
reference to Exhibit 10.6 to Registrant's Annual Report on
Form 10-K for the year ended February 28, 1986).
10.2 -- Form of Exchange Agreement by and between Rhodes, Inc. and
Green Capital Investors, L.P. (incorporated by reference to
Exhibit 10.9 to Registrant's Registration Statement on Form
S-1, as amended (File No. 33-60962)).
10.3 -- Rhodes, Inc. 1991 Stock Option Plan (incorporated by
reference to Exhibit 10.35 to Registrant's Annual Report on
Form 10-K for the year ended February 28, 1991).
10.4 -- Master Note by RHD Holdings Corp. (predecessor to the
Registrant) payable to Green Capital Investors, L.P., dated
as of December 15, 1989 (incorporated by reference to Exhibit
10.37 to Registrant's Annual Report on Form 10-K for the year
ended February 28, 1991).
10.5 -- First Amendment to Master Note by RHD Holdings Corp.
(incorporated by reference to Exhibit 10.14 to Registrant's
Registration Statement on Form S-1, as amended (File No.
33-60962)).
27
<PAGE> 28
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.6 -- Policy issued by Life Insurance Company of North America,
dated March 1, 1989 covering the Rhodes, Inc. Employee
Disability Plan (incorporated by reference to Exhibit 10.38
to Registrant's Annual Report on Form 10-K for the year ended
February 28, 1991).
10.7 -- Form of Compensation (changes and controls) Agreement
between Irwin L. Lowenstein and Rhodes, Inc.
10.8 -- Merchant Agreement by and between Beneficial National Bank
USA and Rhodes, Inc., dated as of May 15, 1992 (incorporated
by reference to Exhibit 10.42 to Registrant's Annual Report
on Form 10-K for the year ended February 29, 1992).
10.9 -- Form of Option Agreement between the Registrant and James V.
Napier (incorporated by reference to Exhibit 10.23 to the
Registrant's Registration Statement on Form S-1, as amended
(File No. 33-60962))
10.10 -- Form of Option Agreement between the Registrant and Don L.
Chapman (incorporated by reference to Exhibit 10.24 to the
Registrant's Registration Statement on Form S-1, as amended
(File No. 33-60962))
11 -- Rhodes, Inc. Computation of Net Income Per Share
21 -- List of subsidiaries of the Registrant (incorporated by
reference to Exhibit 22 to Registrant's Registration
Statement on Form S-1, as amended (File No. 33-60962))
23(a) -- Consent of Independent Public Accountants
27 -- Financial Data Schedule (for SEC use only)
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
RHODES, INC.
By: /s/ JOEL H. DUGAN
------------------
Joel H. Dugan
Senior Vice President,
Finance and Administration
Date: May 25, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE OFFICER:
/s/ IRWIN L. LOWENSTEIN
- ----------------------------
Irwin L. Lowenstein
Chairman of the Board and
Chief Executive Officer
Date: May 25, 1995
PRINCIPAL OPERATING OFFICER:
/s/ JOEL T. LANHAM
- ----------------------------
Joel T. Lanham
President and
Chief Operating Officer
Date: May 25, 1995
PRINCIPAL FINANCIAL OFFICER:
/s/ JOEL H. DUGAN
- ----------------------------
Joel H. Dugan
Senior Vice President,
Finance and Administration
Date: May 25, 1995
29
<PAGE> 30
PRINCIPAL ACCOUNTING OFFICER:
/s/ BARBARA SNOW
- ----------------------------
Barbara Snow
Vice President and
Corporate Controller
Date: May 25, 1995
DIRECTORS:
/s/ IRWIN L. LOWENSTEIN
- ----------------------------
Irwin L. Lowenstein
Date: May 25, 1995
/s/ HOLCOMBE T. GREEN, JR.
- ----------------------------
Holcombe T. Green, Jr.
Date: May 25, 1995
/s/ JAMES R. KUSE
- ----------------------------
James R. Kuse
Date: May 25, 1995
/s/ JAMES V. NAPIER
- ----------------------------
James V. Napier
Date: May 25, 1995
/s/ DON L. CHAPMAN
- ----------------------------
Don L. Chapman
Date: May 25, 1995
30
<PAGE> 31
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 28, 1995
and 1994 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended February
28, 1995. 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 28, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
February 28, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 21, 1995
F-1
<PAGE> 32
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
ASSETS 1995 1994
- ----------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,268 $ 235
Accounts receivable 3,398 2,073
Inventories at LIFO cost 54,386 48,187
Prepaid expenses and other 5,356 4,375
Deferred tax assets 861 2,941
------------ ------------
Total Current Assets 67,269 57,811
------------ ------------
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and
amortization of $34,007 at February 28, 1995 and $29,805 at February 28, 1994 55,142 48,027
------------ ------------
CAPITALIZED REAL ESTATE LEASES, at cost, less accumulated amortization
of $4,882 at February 28, 1995 and $4,125 at February 28, 1994 7,062 7,819
------------ ------------
INTANGIBLE ASSETS, net
Goodwill 60,319 62,116
Favorable leases 3,825 4,797
Other intangibles 2,387 2,638
------------ ------------
Total Intangible Assets 66,531 69,551
------------ ------------
OTHER ASSETS 2,406 2,396
------------ ------------
TOTAL ASSETS $ 198,410 $ 185,604
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes and loans payable $ --- $ 2,471
Current maturities of long-term debt and capital lease obligations 967 1,308
Accounts payable 35,403 27,753
Accrued interest 781 759
Accrued liabilities 19,374 15,862
Deferred income 9,795 8,732
Current portion deferred gain--sale/leasebacks 318 318
Current income taxes payable 460 ---
------------ ------------
Total Current Liabilities 67,098 57,203
------------ ------------
DEFERRED INCOME TAXES 7,070 8,415
------------ ------------
LONG-TERM DEBT, less current maturities 40,000 42,046
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASES 14,035 15,006
------------ ------------
DEFERRED GAIN--SALE/LEASEBACKS 2,707 3,025
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common Stock, no par value, 20,000 shares authorized and
9,463 and 9,777shares outstanding at February 28, 1995 and 1994 --- ---
Paid-in Capital 103,179 107,107
Accumulated deficit (35,679) (47,198)
------------ ------------
Total Shareholders' Equity 67,500 59,909
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 198,410 $ 185,604
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE> 33
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 361,238 $ 325,255 $ 286,527
COST OF GOODS SOLD 185,995 168,425 150,344
------------ ------------ ------------
GROSS PROFIT 175,243 156,830 136,183
------------ ------------ ------------
FINANCE CHARGES AND INSURANCE COMMISSIONS 4,935 4,892 13,853
------------ ------------ ------------
OPERATING EXPENSES:
Selling 57,720 51,865 47,793
General and administrative 93,391 84,404 81,432
Provision for credit losses 164 213 4,803
Amortization of intangibles 3,074 3,132 3,253
Other expense (income), net 197 8 (575)
------------ ------------ ------------
154,546 139,622 136,706
------------ ------------ ------------
OPERATING INCOME 25,632 22,100 13,330
Interest expense, net 6,109 11,545 24,306
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 19,523 10,555 (10,976)
PROVISION (BENEFIT) FOR INCOME TAXES 8,004 4,508 (1,145)
------------ ------------ ------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 11,519 6,047 (9,831)
EXTRAORDINARY ITEM-EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX EFFECT (NOTE 11) --- (2,727) ---
------------ ------------ ------------
NET INCOME (LOSS) $ 11,519 $ 3,320 $ (9,831)
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK BEFORE
EXTRAORDINARY ITEM $ 1.18 $ 0.83 $ (6.68)
EXTRAORDINARY ITEM PER SHARE OF COMMON STOCK --- (0.38) ---
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $ 1.18 $ 0.45 $ (6.68)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING 9,760 7,302 1,472
============ ============ ============
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE BEFORE
EXTRAORDINARY ITEM (UNAUDITED) (NOTE 1) $ 0.92 $ 0.30
============ ============
PRO FORMA WEIGHTED AVERAGE SHARES 9,901 9,781
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 34
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 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 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)
Net income --- --- --- 3,320 3,320
Accrual of cumulative dividends on
Series A Preferred Stock 479 --- (479) --- ---
Issuance of common stock, net of
issuance expenses (Note 9) --- --- 45,499 --- 45,499
Exchange of long-term debt for Common Stock --- --- 34,309 --- 34,309
Exchange of preferred stock and accumulated
dividends for Common stock (14,660) --- 14,660 --- ---
Issuance of common stock, from
exercise of stock options --- --- 631 --- 631
------------ ---------- ---------- ---------- ----------
BALANCE, February 28, 1994 --- --- 107,107 (47,198) 59,909
Net income --- --- --- 11,519 11,519
Registration expenses incurrred in
secondary offering --- --- (262) --- (262)
Repurchase of Common stock --- --- (3,684) --- (3,684)
Issuance of common stock, from
exercise of stock options --- --- 18 --- 18
------------ ---------- ---------- ---------- ----------
BALANCE, February 28, 1995 $ --- $ --- $ 103,179 $ (35,679) $ 67,500
============ ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 35
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
------------ ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,519 $ 3,320 $ (9,831)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Extraordinary item-early retirement of debt --- 3,527 ---
Depreciation and amortization 6,722 6,399 6,464
Change in deferred income taxes 735 2,373 (1,145)
Amortization of intangibles 3,074 3,132 3,253
Noncash interest expense --- 2,626 6,653
Amortization of gain-sale/leasebacks (318) (318) (318)
Write-off of intangible assets --- --- 297
Changes in current assets and liabilities:
Receivables, net (1,325) 840 169,305
Inventories (6,199) (10,861) 1,159
Prepaid expenses and other (981) (223) (830)
Accounts payable and accrued liabilities 11,644 8,206 (6,213)
Deferred income on warranties and undelivered sales 1,063 423 3,512
------------ ------------ ---------------
Net cash provided by operating activities 25,934 19,444 172,306
------------ ------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net 1,079 97 327
Additions to property and equipment (14,101) (6,860) (3,405)
Additions to intangible assets (54) (1,407) ---
Increase in other assets (68) (1,511) (493)
------------ ------------ ---------------
Net cash used in investing activities (13,144) (9,681) (3,571)
------------ ------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt, net (2,471) (4,976) (163,506)
Repayment of long-term debt (2,568) (88,363) (5,006)
(Decrease) increase in obligations under capital leases (790) 147 (256)
Prepayment penalty for early retirement of debt --- (2,624) ---
Proceeds from the Senior Secured Financing --- 40,000 ---
Expenses incurred for stock registration (262) --- ---
Repurchase of stock (3,684) --- ---
Proceeds from sale of stock --- 45,499 ---
Exercise of stock options 18 631 54
------------ ------------ ---------------
Net cash (used in) financing activities (9,757) (9,686) (168,714)
------------ ------------ ---------------
INCREASE IN CASH 3,033 77 21
CASH AT BEGINNING OF YEAR 235 158 137
------------ ------------ ---------------
CASH AT END OF YEAR $ 3,268 $ 235 $ 158
============ ============ ===============
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 6,109 $ 8,919 $ 17,652
============ ============ ===============
Income taxes $ 6,689 $ 1,320 $ 105
============ ============ ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Reduction of long-term debt in stock for debt exchange $ --- $ 34,309 $ ---
============ ============ ===============
Exchange of preferred stock and accumulated dividends for Common Stock $ --- $ 14,660 $ ---
============ ============ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 36
RHODES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1995, 1994 AND 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 (the
"Acquisition") Rhodes was the surviving corporation. As a result of the
Acquisition, Rhodes became a wholly owned subsidiary of RHD Holdings. For
financial statement purposes, the Acquisition was accounted for by the purchase
method of accounting effective September 21, 1988. Upon approval by the board
of directors of 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.
Rhodes was the surviving corporation in the 1991 Merger.
INITIAL PUBLIC OFFERING
In April 1993, the Company's board of directors approved a plan of
recapitalization (the "Recapitalization") whereby it would offer a certain
number of shares of Common Stock for sale to the public (the "Offering") and
Green Capital Investors, L.P. ("Green Capital") would exchange its Class A
Preferred Stock (including accumulated, unpaid dividends) and Junior Discount
Subordinated Redeemable Debentures Due 2000 for Common Stock of the Company
(the "Exchange"), at an exchange price equal to the stock price in an initial
public offering. The Company 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 refinanced and repaid 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. Also, all share and per share amounts in the accompanying
financial statements were 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.
BASIS OF PRESENTATION
The consolidated financial statements of Rhodes include the accounts
of the Company and all subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-6
<PAGE> 37
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications of prior years' amounts have been made to
conform with the current year's presentation.
BUSINESS SEGMENT
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 Receivables Sale (see Note 10), 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 Beneficial National
Bank USA ("BNB") (see Note 10). Finance charge income previously earned by the
Company on installment receivables is no longer earned following the
Receivables Sale.
The Company offers credit insurance coverage through third parties in
connection with its furniture sales and earns monthly commissions.
INVENTORIES
Inventories are stated at the lower of cost (last in, first out method
- -- LIFO) or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are stated at their fair value in
the accompanying financial statements at February 28, 1994; at February 28,
1995 the Company's financial instruments are stated at their fair value with
the exception of long-term debt (see Note 3).
PROPERTY AND EQUIPMENT
Depreciation is provided using the straight-line method for financial
reporting and accelerated methods for income tax purposes. The ranges of annual
depreciation percentages, which reflect estimated useful lives, are as follows:
buildings--2% to 4% and equipment and other assets--10% to 25%. Capitalized
real estate leases are amortized on a straight-line basis over the terms of the
leases which range from 18 to 25 years. Leasehold improvements are amortized
over the life of the asset or the lease term, whichever is shorter. Repair and
maintenance costs are expensed as incurred.
F-7
<PAGE> 38
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land $ 8,416 $ 8,313
Buildings 30,045 30,899
Leasehold improvements, equipment
and other 50,688 38,620
--------- ---------
89,149 77,832
Less accumulated depreciation
and amortization (34,007) (29,805)
--------- ---------
$ 55,142 $ 48,027
========= =========
</TABLE>
Capitalized real estate leases are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Land $ 2,267 $ 2,267
Buildings 9,677 9,677
-------- --------
11,944 11,944
Less accumulated amortization (4,882) (4,125)
-------- --------
$ 7,062 $ 7,819
======== ========
</TABLE>
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over identifiable
assets acquired at the time of the Acquisition and is being amortized on a
straight-line basis over 40 years. Amortization expense for goodwill totaled
$1,798,000 for fiscal 1995, 1994, and 1993. Accumulated amortization for
goodwill totaled $11,590,000 and $9,792,000 as of February 28, 1995 and 1994,
respectively. Subsequent to the Acquisition, the Company continually evaluates
whether events and circumstances have occurred which would indicate the
remaining estimated useful life of goodwill may warrant revision. When factors
indicate that goodwill should be evaluated for possible impairment, the Company
uses an estimate of undiscounted net income over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
Favorable leases represent the difference between market rates and
contract rates of store leases as of the time of the Acquisition and are being
amortized over the remaining terms of the leases. Amortization expense for
favorable leases totaled $953,000, $1,091,000 and $1,149,000 for fiscal 1995,
1994, and 1993, respectively. Accumulated amortization for favorable leases
totaled $7,646,000 and $6,752,000 as of February 28, 1995 and 1994,
respectively.
Other intangibles include deferred loan costs incurred in connection
with the Acquisition and subsequent refinancing, which are being amortized over
the terms of the applicable debt. Amortization expense for these items
(exclusive of the fiscal 1994 write-off of loan costs related to the
Recapitalization (see Note 11)) for fiscal 1995, 1994, and 1993, totaled
approximately $323,000, $190,000 and $306,000, respectively. Accumulated
amortization for deferred loan costs totaled $690,000 and $367,000 as of
February 28, 1995 and 1994, respectively.
F-8
<PAGE> 39
WARRANTY CONTRACTS
The Company markets extended warranty contracts to its customers on
certain merchandise at the time of the initial sale. Extended warranty contract
revenue is deferred and recognized over the contract period on a straight-line
or other reasonable basis. 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 income recognition on warranties
is adjusted accordingly. As a result, net warranty sales of $1,878,000,
$1,587,000, and $1,272,000 less net direct expenses of $413,000, $349,000, and
$280,000, respectively, were deferred to future periods in fiscal 1995, 1994,
and 1993, respectively.
EARNINGS PER SHARE
The historical net income (loss) per common share is calculated by
dividing net income (loss) applicable to Common Stock by the weighted average
shares of Common Stock outstanding. All stock options were antidilutive for
earnings per share calculations for fiscal 1995, fiscal 1994 and fiscal 1993.
Unaudited pro forma earnings per share in the consolidated statement
of operations are presented on a pro forma basis assuming the Recapitalization
and the Receivables Sale had taken place at the beginning of the periods for
February 28, 1994 and 1993.
2. FEDERAL AND STATE INCOME TAXES
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the
determination of deferred income taxes using the liability method under which
deferred tax assets and liabilities are determined based on the differences
between the financial accounting and tax basis of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the currently enacted tax rate expected to apply to taxable income in the
periods in which the deferred tax asset or liability is expected to be settled
or realized.
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total deferred tax liabilities $ 16,403 $ 17,488
Total deferred tax assets (13,124) (14,944)
Valuation allowance 2,930 2,930
-------- --------
Net deferred tax liabilities $ 6,209 $ 5,474
======== ========
</TABLE>
The net deferred tax liabilities are classified on the Company's
balance sheets as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Net current deferred tax assets $ (861) $(2,941)
Net non-current deferred income taxes 7,070 8,415
------- -------
Net deferred tax liabilities $ 6,209 $ 5,474
======= =======
</TABLE>
F-9
<PAGE> 40
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 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Stepped-up basis in fixed assets $ 6,263 $ 6,854
Favorable leases 1,492 1,871
Acquisition costs 1,340 1,663
Depreciation 3,108 2,822
Inventories 3,491 3,429
Other 709 849
-------- --------
$ 16,403 $ 17,488
======== ========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS:
Capitalized leases $ 2,763 $ 2,690
Gain--Sale/leaseback 1,056 1,180
Gain on property disposals 1,395 1,175
Deferred rent 692 730
Accrued expenses 1,792 1,453
Deferred revenues 2,049 2,059
Uniform inventory cost capitalization 848 764
Net operating loss carryforwards 2,404 4,674
Other 125 219
-------- --------
$ 13,124 $ 14,944
======== ========
</TABLE>
The Company has established a valuation allowance of $2.9 million as
of February 28, 1995 and 1994 because of the uncertainty regarding the
realizability of certain deferred tax assets.
The consolidated provision (benefit) for income taxes before
extraordinary item consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 7,269 $ 1,335 $ --
Deferred 735 3,173 (1,145)
-------- -------- --------
$ 8,004 $ 4,508 $ (1,145)
======== ======== ========
</TABLE>
F-10
<PAGE> 41
The tax provision (benefit) differed from the amounts resulting from
multiplying the income (loss) before income taxes and extraordinary item by the
statutory federal income tax rates. The reasons for these differences were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax
provision (benefit)
at statutory rates $ 6,833 $ 3,694 $ (3,732)
State income tax
provision (benefit),
net of federal income
tax provision (benefit) 780 422 (439)
Amortization of intangible
assets not deductible
for tax purposes 701 717 698
Limitation on recognition
of tax benefit -- -- 1,534
Increase in net deferred
tax liabilities from
fiscal 1994 tax rate
change -- 31 --
Other (310) (356) 794
-------- -------- --------
$ 8,004 $ 4,508 $ (1,145)
======== ======== ========
</TABLE>
As of February 28, 1995, the Company had net operating losses
available to be carried forward or carried back of approximately $6,200,000,
which expire beginning in the year 2006.
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Senior Secured Notes:
Tranche A, 9%, due June 15, 1999 $ 30,000 $ 30,000
Tranche B, 10%, due June 15, 2000 10,000 10,000
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 -- 2,395
Other, with interest rates from
5.5% to 12% due in installments
to May 2001 -- 167
-------- --------
40,000 42,562
Less current portion -- (516)
-------- --------
$ 40,000 $ 42,046
======== ========
</TABLE>
F-11
<PAGE> 42
The aggregate annual payments required for the above notes during each
of the next five fiscal years are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 $ 0
1997 $7,500
1998 $7,500
1999 $7,500
2000 $7,500
</TABLE>
FAIR VALUE OF DEBT
In accordance with SFAS No. 107, "Disclosures About Fair Value of
Financial Investments," the fair value of short-term debt is estimated to be
its carrying value. The fair value of long-term debt is estimated based on
approximate market interest rates for similar issues. The estimated fair value
of long-term debt at February 28, 1995 was approximately $41,300,000 and at
February 28, 1994 the estimated fair value of long-term debt was equal to the
carrying amount included in the accompanying balance sheet.
TERMS
The Senior Secured 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 Secured Notes are secured by all real
property owned by the Company.
On November 20, 1991, the Company signed an agreement of renewal and
extension of the 10% mortgage note. The new repayment terms called 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. The
note was secured by property having an original cost of $3,700,000. The 10%
mortgage note was prepaid in full on July 22, 1994.
The terms of the revolving loan (see Note 8) and the Senior Secured
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 loan and
the Senior Secured Notes also require the Company to comply with certain
specified financial ratios and tests. The Company was in compliance with the
restrictive covenants at February 28, 1995.
F-12
<PAGE> 43
4. INVENTORIES
The Company uses the LIFO method for valuing inventories in order to
more closely match current costs with related revenue. Under this method,
current costs are charged to cost of sales through application of Department
Store Price Indices published by the Bureau of Labor Statistics. If LIFO
inventories were valued at current costs, the inventory amounts would have been
$2,383,000 and $1,282,000 higher than those reported as of February 28, 1995
and 1994, respectively.
As discussed in Note 8, the Company has a revolving loan with a bank,
which is secured by a priority lien on the Company's inventories.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain store locations under operating lease
agreements with various expiration dates through 2023. Rentals under all store
leases were approximately $11,901,000, $10,464,000, and $9,651,000 for fiscal
1995, 1994, and 1993, respectively. As of February 28, 1995, the minimum
obligations under lease commitments with original terms beyond one year are as
follows:
<TABLE>
<S> <C>
1996 $ 13,325
1997 14,075
1998 12,849
1999 11,675
2000 10,593
After 2000 90,083
--------
$152,600
========
</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
On April 17, 1995, several individuals, as members of a purported
plaintiff class of customers, filed suit in the Circuit Court of Jefferson
County, Alabama against the Company and certain other defendants alleging
improper practices relating to extended warranty contracts. In their prayer for
relief, the plaintiffs seek damages equal to all principal and finance charges
under the credit agreements in question, a judgment voiding the credit
agreements, injunctive relief, the reimbursement of all costs associated with
the action, other compensatory damages and unspecified punitive damages. The
Company believes that its practices with respect to extended service contracts
comply with Alabama law and it intends to vigorously defend this action.
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.
F-13
<PAGE> 44
The Company has a compensation (change in control) agreement with its
Chairman and Chief Executive Officer. Under such agreement, severance payments
and benefits would become payable under certain events, such as change of
control (as defined) of the Company. The maximum contingent liability of the
Company at February 28, 1995 is approximately $3 million.
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, 1995:
<TABLE>
<S> <C>
1996 $ 2,732
1997 2,699
1998 2,691
1999 2,602
2000 2,630
After 2000 12,502
Total minimum lease payments 25,856
Less amount representing interest at rates of 11.89% to 12.83% 10,854
-------
Present value of total minimum obligation 15,002
Less current portion 967
-------
Long-term obligations under capital leases $14,035
=======
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially
all employees. 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 1995, 1994,
and 1993 includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Service cost for benefits
earned during the period $ 502,000 $ 660,000 $ 568,000
Interest cost on projected
benefit obligation 857,000 916,000 865,000
Actual return on assets 467,000 (786,000) (214,000)
Net amortization and
deferral (1,596,000) (390,000) (1,002,000)
----------- ----------- -----------
Net pension expense for
period $ 230,000 $ 400,000 $ 217,000
=========== =========== ===========
</TABLE>
F-14
<PAGE> 45
The funded status of the defined benefit plan as of February 28, 1995
and February 28, 1994 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
<S> <C> <C>
Actuarial present value of:
Vested benefits $ 9,428,000 $ 9,533,000
Nonvested benefits 297,000 305,000
------------ ------------
Accumulated benefit obligation 9,725,000 9,838,000
Effect of projected future
compensation levels 675,000 1,068,000
Projected benefit obligation 10,400,000 10,906,000
Plan assets at fair value (10,451,000) (11,507,000)
Plan assets in excess of projected
benefit obligation 51,000 601,000
Unrecognized prior service cost 70,000 (15,000)
Unrecognized net gain (961,000) (998,000)
Unrecognized net asset from
initial application of SFAS No. 87 (1,650,000) (1,846,000)
------------ ------------
Pension liability recognized in the
balance sheet $ (2,490,000) $ (2,258,000)
============ ============
</TABLE>
The projected benefit obligation was calculated using an 8.75% and
8.0% assumed discount rate as of February 28, 1995 and 1994, respectively, and
an assumed long-term compensation increase rate of 4.9% in fiscal 1995 and
fiscal 1994. Pension expense was determined using an 8% and 9% assumed
long-term rate of return on plan assets for the years ended February 28, 1995
and 1994, respectively. At February 28, 1995, plan assets consisted primarily
of equity securities (54%), fixed income securities (29%) and money market
instruments (17%).
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 savings plan expense was
$400,000, $345,000 and $365,000 in fiscal 1995, 1994 and 1993, respectively.
Prior to the consummation of the Acquisition, 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 $0.08 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. All options under the Stock Option Plan were exercised during
fiscal 1994.
F-15
<PAGE> 46
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, 1995, a maximum of 700,000 shares 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"). At February 28, 1995,
options to acquire 694,000 shares of common stock were outstanding under the
1991 Stock Option Plan.
The option price of each 1991 Option is set by a committee of the
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 than, less than or equal to the fair market value of such
stock on the date the Non-ISO is granted but may not be less than an amount
which the Committee determines to be adequate consideration. The options carry
a 5 year vesting period.
Also, options to purchase an additional 15,000 shares of Common Stock
have been granted to certain directors of the Company.
The following table details the Company's stock option activity for
the past three fiscal years:
<TABLE>
<CAPTION>
OPTIONS OPTION PRICES
------- -------------
<S> <C> <C>
Options outstanding at February 29, 1992 68,703 $ .04
Options Granted -- --
Options Exercised (7,126) $ .04
Options Cancelled or Terminated (7,875) $ .04
-------- ------------
Options outstanding at February 28, 1993 53,702 $ .04
Options Granted 660,000 $12.00-18.25
Options Exercised (53,702) $ .04
-------- ------------
Options outstanding at February 28, 1994 660,000 $12.00-18.25
Options Granted 71,000 $11.88-16.00
Options Exercised (1,500) $ 12.00
Options Canceled or Terminated (20,500) $12.00-18.25
-------- ------------
Options outstanding at February 28, 1995 709,000 $11.88-18.25
======== ============
Options exercisable at February 28, 1995 231,000 $12.00-18.25
======== ============
</TABLE>
F-16
<PAGE> 47
8. SHORT-TERM DEBT
NOTES AND LOANS PAYABLE
At February 28, 1993, the Company had a revolving credit facility with
Security Pacific Business Credit, Inc. ("SPBC"), which was secured by a
priority lien on the Company's inventory. Effective December 7, 1992, the
Company and SPBC agreed to the extension of the revolving loan agreement until
November 30, 1994 with automatic annual renewals thereafter unless 60 days'
written notice of non-renewal was given by either party.
On February 24, 1994, the Company cancelled its revolving credit
facility with SPBC and entered into a revolving credit agreement ("Revolving
Credit Agreement") with Wachovia Bank of Georgia, N.A. (the "Senior Lender").
The maximum availability of funds under the Revolving Credit Agreement is the
lesser of $30 million or 50% of eligible inventory. The Revolving Credit
Agreement is secured by substantially all of the inventory of the Company.
Loans outstanding under the Revolving Credit Agreement generally will bear
interest at one or 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 Company is required to pay a commitment fee of 0.375% per
annum of the average daily unused portion of the Senior Lender's commitment
under the Revolving Credit Agreement. The Revolving Credit Agreement was
scheduled to terminate in February 1996, but has been extended to February 24,
1997. At February 28, 1995 the Company had no loans outstanding under the
Revolving Credit Agreement. The amount available under the Revolving Credit
Agreement at February 28, 1995 is $21,783,000.
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 fiscal 1995, 1994, and 1993 is
interest of $294,000, $506,000, and $2,796,000, respectively, related to
short-term debt.
9. RELATED-PARTY 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.
F-17
<PAGE> 48
Green Capital previously 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 line of credit was terminated upon execution by the Company of the
Revolving Credit Agreement on February 24, 1994. The maximum amount outstanding
in the period beginning March 1, 1991 and ending February 24, 1994 was $7.8
million and total interest paid to Green Capital during such period was
$478,000.
In December, 1993, January, February, and December, 1994 and January,
1995, the Company had outstanding advances to Green Capital in varying amounts,
with the largest principal amount outstanding at any time being $3.0 million.
Interest accrued on outstanding principal at a rate of 8% or 10% per annum, and
total interest paid by Green Capital to the Company for these advances was
approximately $22,000. No advances were outstanding as of February 28, 1995 or
1994.
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 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 (see Note 11).
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.
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 devoted
substantial efforts on the Company's behalf in his capacity as Chairman of the
Board of the Company, Mr. Green received no directors' fees or other
compensation from the Company. Payment of the monthly management fee terminated
effective upon consummation of the Recapitalization. Upon Mr. Lowenstein
becoming Chairman of the Board of Directors in July, 1994, Mr. Green began to
receive the same remuneration as the other outside directors.
F-18
<PAGE> 49
On March 24, 1994 affiliates of Mr. Holcombe T. Green, Jr., Chairman
of the Board and beneficial owner of 52.8% of the outstanding common stock of
the Company, sold 2,240,494 shares in a secondary offering at $18.50 per share.
Jackson National Life sold 248,880 shares in the same offering. Consummation of
the sale reduced Mr. Green's beneficial ownership to 29.8%. No shares were sold
by the Company in this offering. Upon consummation of the secondary offering,
the Company became listed on the New York Stock Exchange.
10. 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 to sell to Beneficial National Bank USA all outstanding customer
installment receivables in the approximate amount of $174,000,000 (the
"Receivables Sale"). The Receivables 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 removed the need for Rhodes to fund that
portion of the accounts receivable not financed by the commercial paper
facility and eliminated 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 Receivables 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 $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 continues to
receive the credit insurance commission income and a commission on certain
classes of credit sales sold to BNB.
The net proceeds of the Receivables Sale are set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Proceeds from Receivables 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.
F-19
<PAGE> 50
The effect of the Receivables Sale on fiscal 1993 loss before income
taxes is set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Proceeds from the Receivables Sale
and advances, net of contingency deposit $ 174,312
Other advances--net of contingency deposit 4,262
Interest Earned 44
---------
Net Receivables Sale Price 170,006
Net book value of installment receivables
sold 165,468
Expenses, including non-cash expenses 4,234
---------
Effect of Receivables Sale on loss before
income taxes--gain $ 304
=========
</TABLE>
Under its on-going Merchant Agreement with BNB, Rhodes continues 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 the fiscal year 1993 before the Receivables Sale:
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28, 1993
-----------------
<S> <C>
Finance charge revenue $ 9,033
Operating expenses:
General and administration 3,814
Provision for credit losses, net 4,563
Amortization of intangibles 83
Other (income) expense, net (304)
--------
Operating income 877
Interest expense, net 2,312
--------
Net income (loss) before income taxes (1,435)
Provision (benefit) for income taxes (149)
--------
Net income (loss) $ (1,286)
========
</TABLE>
11. EXTRAORDINARY ITEM
During fiscal 1994, the Company expensed certain charges incurred
principally in connection with the Recapitalization (see Note 1). These
extraordinary items represent nonrecurring prepayment penalties of $2,624,000
for early retirement of debt and write-off of $903,000 in related deferred loan
costs, less an income tax benefit of $800,000.
F-20
<PAGE> 51
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited
results of operations for the years ended February 28, 1995 and 1994:
<TABLE>
<CAPTION>
==================================================================================================================
FISCAL 1995 FISCAL 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------
Total 1st 2nd 3rd 4th 1st 2nd 3rd 4th
Company Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $ 82,865 $ 88,809 $ 95,785 $ 93,779 $ 70,448 $ 82,560 $ 86,179 $ 86,068
- ------------------------------------------------------------------------------------------------------------------
Gross Profit $ 41,267 $ 43,140 $ 45,801 $ 45,035 $ 34,218 $ 39,299 $ 41,920 $ 41,393
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before $ 1,756 $ 2,616 $ 4,591 $ 2,556 $ (1,160) $ 1,489 $ 3,444 $ 2,274
extraordinary item
- ------------------------------------------------------------------------------------------------------------------
Extraordinary item -- -- -- -- -- $ (2,727) -- --
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,756 $ 2,616 $ 4,591 $ 2,556 $ (1,160) $ (1,238) $ 3.444 $ 2,274
- ------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA:
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) before $ 0.18 $ 0.27 $ 0.47 $ 0.26 $ (0.79) $ 0.19 $ 0.35 $ 0.23
extraordinary item
- ------------------------------------------------------------------------------------------------------------------
Extraordinary item -- -- -- -- $ (0.35) -- --
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.18 $ 0.27 $ 0.47 $ 0.26 $ (0.79) $ (0.16) $ 0.35 $ 0.23
==================================================================================================================
</TABLE>
F-21
<PAGE> 52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
THE SHAREHOLDERS OF RHODES, INC.
We have audited in accordance with generally accepted auditing
standards the consolidated financial statements of Rhodes, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon
dated April 21, 1995. Our audits were made for the purpose of forming opinions
on the basic financial statements taken as a whole. The schedule listed in Item
14(a)(2) in this Form 10-K is the responsibility of the Company's management
and is presented for purposes of complying with the Security and Exchange
Commission's Rules and Regulations and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial, statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 21, 1995
F-22
<PAGE> 53
RHODES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED FEBRUARY 28, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED BALANCE
AT TO AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD
- ------------------------------ ---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
YEAR ENDED
FEBRUARY 29, 1993
- ------------------------------
Allowance for credit losses $ 8,400 $ 4,803 $ (13,203)(A) $ ---
========== ========== ========== ========
YEAR ENDED
FEBRUARY 28, 1994
- ------------------------------
Allowance for credit losses $ --- $ --- $ --- (A) $ ---
========== ========== ========== ========
YEAR ENDED
FEBRUARY 28, 1995
- ------------------------------
Allowance for credit losses $ --- $ --- $ --- (A) $ ---
========== ========== ========== ========
</TABLE>
(A) Charges to the allowance for purposes for which the allowance was created.
F-23
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
RHODES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN:
We have audited the accompanying statement of net assets available for
purchase of stock of Rhodes, Inc. 1994 Employee Stock Purchase Plan as of
February 28, 1995 and the related statement of changes in net assets available
for purchase of stock for the period from September 1, 1994 (date of inception)
to February 28, 1995. These financial statements are the responsibility of the
Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the net assets available for purchase of
stock of Rhodes, Inc. 1994 Employee Stock Purchase Plan at February 28, 1995
and the changes in net assets available for purchase of stock for the period
from September 1, 1994 (date of inception) to February 28, 1995 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 21, 1995
<PAGE> 55
RHODES, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS
AVAILABLE FOR PURCHASE OF STOCK
<TABLE>
<CAPTION>
FEBRUARY 28,
1995
-------------
<S> <C>
Cash $ 184,677
=============
Net assets available for purchase of stock $ 184,677
=============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
AVAILABLE FOR PURCHASE OF STOCK
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION TO
FEBRUARY 28, 1995
-----------------
<S> <C>
Additions to net assets:
Employee contributions $ 184,677
-------------
Deductions from net assets:
Stock purchases ---
Refunds ---
-------------
---
-------------
Change in net assets for the period 184,677
Net assets, beginning of period ---
-------------
Net assets, end of period $ 184,677
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 56
RHODES, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995
NOTE 1 - PLAN DESCRIPTION
The Rhodes, Inc. 1994 Employee Stock Purchase Plan (the "Plan") was
created to encourage employees (each a "Participant") of Rhodes, Inc. (the
"Company") to invest in the Company's common stock. All employees of Rhodes,
Inc. who have at least one year of service, who customarily work more than 20
hours a week and who are customarily employed for more than five (5) months in
any calendar year are eligible to participate.
The Plan, which was approved by the Board of Directors of the Company
on May 11, 1994 and will continue for an indefinite period, is administered by
the Company. All expenses of administering the Plan are paid by the Company.
Two hundred fifty thousand (250,000) shares of the Company's common
stock have been reserved for issuance under the Plan. As of February 28, 1995,
no shares had been issued under the Plan.
Eligible employees may commence participation in the Plan on the first
investment date (March 1 and September 1) after they have become eligible to
participate. Participant contributions to the Plan can only be made by
authorized payroll deductions. Deductions must be in whole dollar amounts of
not less than $150 nor more than $12,500 for the entire purchase period. The
Company accumulates payroll deductions in the name of each Participant during
each purchase period. All funds collected by the Plan are held by the Company
in individual accounts established in the name of each Participant until
expiration of the applicable investment period. The Plan does not pay interest
on funds held in any Participant's investment account.
On the first day of each purchase period, each Participant is granted
an option to purchase the number of shares of stock determined by the plan
administrator by dividing the total payroll deductions which the Participant
has elected to make for such purchase period by the option price for a share of
Company common stock as of such date, rounding down to the nearest whole
number. Each such option is exercisable by the Participant in accordance with
the terms of the Plan on the last day of the purchase period.
Shares purchased under the Plan are distributed to the Participants as
soon as practical after the end of the investment period.
STOCK PURCHASE PRICE
The purchase price for each share of stock is the lesser of 85% of the
fair market value of the stock on the first or last day of the purchase period.
<PAGE> 57
The fair market value of the stock on each investment date is the
closing price of the stock as quoted in the Wall Street Journal.
TERMINATION OF PARTICIPATION
A Participant may elect to withdraw from participation in the Plan
with respect to any purchase period by so notifying the plan administrator
prior to the end of the purchase period. After receipt of notice, the payroll
deductions credited to the Participant's account with respect to the purchase
period will be paid to him or her promptly (without interest) and no further
payroll deductions will be made on behalf of the Participant during the
purchase period.
LIMITATION ON STOCK PURCHASES
No Participant may purchase stock under the Plan if such Participant,
immediately after an option is granted to purchase stock, would own stock
possessing 5% or more of the total combined voting power or value of all
classes of stock of the Company or its subsidiaries.
No Participant will be granted options under the Plan to purchase
stock with a fair market value in excess of $25,000 in any calendar year.
NOTE 2 - FEDERAL INCOME TAXES
Management believes the Plan meets the requirements of Section 423 of
the Internal Revenue Code and is not subject to any provisions of the Employee
Retirement Income Security Act of 1974.
NOTE 3 - SUBSEQUENT EVENT
On March 1, 1995, 21,265 shares of the Company's common stock were
purchased under the Plan for $178,477. The net assets available for purchase of
stock at February 28, 1995 represent the $178,477 purchase price of the stock,
refunds due of $1,230 and contributions made for the next purchase period.
These shares were subsequently distributed to the participants. The price per
share of $8.39 is equal to 85% of the September 1, 1994 fair market value of
the Company's common stock. Subsequent to the purchase, 228,735 shares remained
available for purchase under the Plan.
<PAGE> 1
EXHIBIT 4.2
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment")
is made and entered into this 4th day of January, 1995, by and between RHODES,
INC., a Georgia corporation (hereinafter referred to as "Borrower") with its
chief executive office and principal place of business at 4370 Peachtree Road,
N.E., Atlanta, Georgia 30319, and WACHOVIA BANK OF GEORGIA, N.A., a national
banking association (hereinafter referred to as "Lender") with an office at 191
Peachtree Street, N.E., Atlanta, Georgia 30303.
R e c i t a 1 s:
Lender and Borrower are parties to a certain Loan and Security
Agreement dated February 24, 1994 (as at any time amended, the "Loan
Agreement") pursuant to which Lender has made certain revolving credit loans to
Borrower.
The parties desire to amend the Loan Agreement as hereinafter set
forth.
NOW, THEREFORE, for and in consideration of TEN DOLLARS ($10.00) in
hand paid and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, agree as follows:
1. DEFINITIONS. All capitalized terms used in this Amendment,
unless otherwise defined herein, shall have the meaning ascribed to such terms
in the Loan Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby
amended as follows:
<PAGE> 2
(a) By deleting the definition of "Credit Card Receivables
Collateral" contained in Section 1.1 of the Loan Agreement in its entirety and
by substituting the following in lieu thereof:
"Credit Card Receivables Collateral" shall mean any and all
rights to payment that Borrrower may now or hereafter have from a
customer or any other Person in connection with any purchase of goods
from Borrower by such customer through the customer's use of a credit
card, including, without limitation, any and all rights to payment
that Borrower may have at any time under or by virtue of the
Beneficial Agreement or any other present or future agreement and
pursuant to which Borrower is entitled to payment or remittance by
reason of Borrower's honoring of any credit card of a customer.
(b) By deleting Section 9.3 of the Loan Agreement in its entirety
and by substituting the following in lieu thereof:
9.3 Capital Expenditures and Leases. Borrower shall not
make capital expenditures (including, without limitation, by way of
capital leases) which in the aggregate, as to Borrower and its
Subsidiaries, exceed (i) $15,000,000 for the fiscal years ending
February 28, 1995 and February 28, 1996, and (ii) $10,000,000 for each
fiscal year of Borrower thereafter.
(c) By deleting Section 9.5 of the Loan Agreement in its entirety
and by substituting the following in lieu thereof:
9.5 Distributions. Borrower shall not make any
Distributions; provided, however, that, so long as no Default
Condition or Event of Default exists at the time of or would result
from the making of such Distribution, Borrower may make Distributions
to its shareholders in an amount not to exceed, in the aggregate
during the term of this Agreement (i) $5,000,000 plus (ii) commencing
with the fiscal quarter beginning on March 1, 1995, thirty-five
percent (35%) of Consolidated Net Income for each fiscal quarter of
Borrower, on a cumulative basis.
(d) Exhibit A to the Loan Agreement is hereby deleted in its
entirety and Exhibit A attached to this Amendment is hereby substituted in lieu
thereof.
-2-
<PAGE> 3
3. AMENDMENT FEE. In consideration of Lender's willingness to
enter into this Amendment, Borrower hereby agrees to pay to Lender an amendment
fee of $2,500, in immediately available funds, on the date hereof.
4. RATIFICATION AND REAFFIRMATION. Borrower hereby ratifies and
reaffirms each of the Loan Documents and all of Borrower's covenants, duties
and liabilities thereunder.
5. ACKNOWLEDGEMENTS AND STIPULATIONS. Borrower acknowledges and
stipulates that the Loan Agreement and the other Loan Documents executed by
Borrower are legal, valid and binding obligations of Borrower that are
enforceable against Borrower in accordance with the terms thereof; all of the
Obligations are owing and payable without defense, offset or counterclaim (and
to the extent there exists any such defense, offset or counterclaim on the date
hereof, the same is hereby waived by Borrower); the security interests and
liens granted by Borrower in favor of Lender are duly perfected, first priority
security interests and liens; and the unpaid principal amount of the Revolver
Loans on January 4, 1995, totalled $0.00.
6. REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants to Lender, to induce Lender to enter into this Amendment, that no
Default Condition or Event of Default exists on the date hereof; the execution,
delivery and performance of this Amendment have been duly authorized by all
requisite corporate action on the part of Borrower and this Amendment has been
duly executed and delivered by Borrower; and after giving effect to this
Amendment,
-3-
<PAGE> 4
all of the representations and warranties made by Borrower in the Loan
Agreement are true and correct on and as of the date hereof.
7. EXPENSES OF LENDER. Borrower agrees to pay, on demand, all
costs and expenses incurred by Lender in connection with the preparation,
negotiation and execution of this Amendment and any other Loan Documents
executed pursuant hereto and any and all amendments, modifications, and
supplements thereto, including, without limitation, the costs and fees of
Lender's legal counsel.
8. RELEASE OF CLAIMS. To induce Lender to enter into this
Amendment, Borrower hereby releases, acquits and forever discharges Lender, and
the officers, directors, agents, employees, successors and assigns of Lender
from all liabilities, claims, demands, actions or causes or actions of any kind
(if there be any), whether absolute or contingent, disputed or undisputed, at
law or in equity, or known or unknown that it now has or ever had against
Lender arising under or in connection with any of the Loan Documents or
otherwise.
9. GOVERNING LAW. The Amendment shall be binding upon and
construed in accordance with the internal laws of the State of Georgia.
10. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
11. NO NOVATION. ETC.. Except as otherwise expressly provided in
this Amendment, nothing herein shall be deemed to amend or modify any provision
of the Loan Agreement or any of the other
-4-
<PAGE> 5
Loan Documents, each of which shall remain in full force and effect. This
Amendment is not intended to be, nor shall it be construed to create, a
novation or accord and satisfaction, and the Loan Agreement as herein modified
shall continue in full force and effect. Notwithstanding any prior mutual
temporary disregard of any of the terms of any of the Loan Documents, the
parties agree that the terms of each of the Loan Documents shall be strictly
adhered to on and after the date hereof.
12. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties to this Amendment on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any
signature delivered by a party by facsimile transmission shall be deemed to be
an original signature hereto.
13. WAIVER OF JURY TRIAL. To the fullest extent permitted by
applicable law, the parties hereto each hereby waives the right to trial by
jury in any action, suit, counterclaim or proceeding arising out of or related
to this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed under seal in Atlanta, Georgia, and delivered by their
respective duly authorized officers on the date first written above.
ATTEST: RHODES, INC.
("BORROWER")
/s/ Barbara W. Snow By: /s/ Joel H. Dugan, Senior Vice
- -------------------- ------------------------------
Barbara W. Snow, Joel H. Dugan, Senior Vice
Assistant Secretary President
[Signatures continued on following page]
-5-
<PAGE> 6
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ Kevin B. Harrison
-------------------------------
Title: Assistant Vice President
------------------------
<PAGE> 7
EXHIBIT "A"
COLLATERAL LOCATIONS
2507 Dawson Road
Albany, Georgia 31707
1071 Patton Avenue
Asheville, North Carolina 28806
P.O. Box 6468
Athens, Georgia 30604
119-C N. Cobb Parkway
Marietta, Georgia 30062
369 N. Central Avenue
Hapeville, Georgia 30354
3655 Memorial Drive
Decatur, Georgia 30032
3380 Florence Road
Powder Springs, Georgia 30073
4363 N.E. Exp. Access Road
Doraville, Georgia 30341
6851 Shannon Parkway
Union City, Georgia 30291
5955 Stewart Parkway
Douglasville, Georgia 30135
2338 Henry Clower Boulevard
Snellville, Georgia 30278
1680-J Highway 138
Conyers, Georgia 30208
633 Holcomb Bridge Road
Roswell, Georgia 30076
3360 Wrightsboro Road
Augusta, Georgia 30909
2700 19th Street North
Birmingham, Alabama 35207
1686 Montgomery Highway
Hoover, Alabama 35216
<PAGE> 8
1970 Bessemer Road
Birmingham, Alabama 35208
1632 Center Point Road
Center Point, Alabama 35215
1847 Crestwood Boulevard
Birmingham, Alabama 35210
4836 14th Street West
Bradenton, Florida 34207
1290 Highway 7
Charleston, South Carolina 29407
8570 Rivers Avenue
North Charleston, South Carolina 29418
6191 E. Independence Boulevard
Charlotte, North Carolina 28212
5533 Westpark Drive
Charlotte, North Carolina 28217
4430 Tamiami Trail
Charlotte Harbor, Florida 33950
6933 Lee Highway
Chattanooga, Tennessee 37421
1500 Two Notch Road
Columbia, South Carolina 29204
3166 Macon Road
Columbus, Georgia 31907
2700 Ross Clark Circle
Dothan, Alabama 36301
4521 Chapel Hill Boulevard
Durham, North Carolina 27707
P.O. Box 35168
Fayetteville, North Carolina 28303
5370 Cleveland Avenue
Ft. Myers, Florida 33907
328 Racetrack Road
Ft. Walton, Florida 32548
2305 N.W. 13th Street
Gainesville, Florida 32601
<PAGE> 9
3407 Highpoint Road
Greensboro, North Carolina 27417
P.O. Box 6309 Station B
Greenville, South Carolina 29606
429 Pass Road
Gulfport, Mississippi 39507
2501 University Drive, N.W.
Huntsville, Alabama 35816
4290 Lakeland Drive, E.
Jackson, Mississippi 39208
4025 Northview Drive
Jackson, Mississippi 39206
4700 Walgreen Road
Jacksonville, Florida 32209
5960 Beach Boulevard
Jacksonville, Florida 32207
266-25 Blanding Boulevard
Orange Park, Florida 32073
4700 Walgreen Road
Jacksonville, Florida 32209
410 North Peters Road
Knoxville, Tennessee 37922
2601 Nicholasville Road
Lexington, Kentucky 40503
P.O. Box 36126
Louisville, Kentucky 40233
P.O. Box 36126
Louisville, Kentucky 40233
P.O. Box 36126
Louisville, Kentucky 40233
2086 Eisenhower Parkway
Macon, Georgia 31206
7535 W. Fourth Avenue
Hialeah, Florida 33016
7685 Pines Boulevard
Pembroke Pines, Florida 33024
<PAGE> 10
3712 Airport Boulevard
Mobile, Alabama 36608
2525 Eastern Bypass
Montgomery, Alabama 36117
5295 N. Tamiami Trail
Naples, Florida 33940
15115 Old Hickory Boulevard
Nashville, Tennessee 37211
1028 Gallatin Road, S.
Madison, Tennessee 37115
2235 Gallatin Road, N.
Madison, Tennessee 37115
344 White Bridge Road
Nashville, Tennessee 37209
2418 E. Colonial Drive
Orlando, Florida 32803
5510 W. Colonial Drive
Orlando, Florida 32803
420 W. State Road, #436
Altamonte Springs, Florida 32714
901 Landstreet Road
Orlando, Florida 32824
9421 Orange Blossom Trail
Orlando, Florida 32837
298 S. Yonge Street
Ormond Beach, Florida 32174
1318 W. Fifteenth Street
Panama City, Florida 32401
5316 N. Davis Highway
Pensacola, Florida 32503
527 E. Fontaine Street
Pensacola, Florida 32503
5920 Glenwood Avenue
Raleigh, North Carolina 27612
3501 Spring Forest Road
Raleigh, North Carolina 27604
<PAGE> 11
105 Tibet Avenue
Savannah, Georgia 31406
300 W. Blackstock Road
Spartanburg, South Carolina 29301
5690 Campus Parkway
Hazelwood, Missouri 63042
5690 Campus Parkway
Hazelwood, Missouri 63042
3900 Union Road
St. Louis, Missouri 63125
105 Commerce Lane
Fairview Heights, Illinois 62208
411 Midrivers Mall Drive
St. Peters, Missouri 63376
1122 Thomasville Road
Tallahassee, Florida 32303
1266 South 41 By-Pass
Venice, Florida 34292
460 S. College Road
Wilmington, North Carolina 28403
1590 Peters Creek Parkway
Winston-Salem, North Carolina 27103
870 Cobb Place Boulevard
Suite 200
Kennesaw, Georgia 30144
1972 Mt. Zion Road
Morrow, Georgia 30260
2340 Pleasant Hill Road
Duluth, Georgia 30136
277 Harbison Boulevard
Columbia, South Carolina 29212
349 Plaza Drive
Eustis, Florida 32726
<PAGE> 12
RHODES, INC.
4370 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30319
(404) 264-4625
FAX (404) 264-4701
JOEL H. DUGAN
SENIOR VICE-PRESIDENT
FINANCE AND ADMINISTRATION
November 9, 1994
AIRBORNE EXPRESS
Mr. Kevin B. Harrison
Assistant Vice President
Wachovia Bank of Georgia
191 Peachtree Street NE
Atlanta, GA 30303-1757
Dear Mr. Harrison:
In accordance with Section 2.8 of the Loan and Security Agreement by and
between Rhodes, Inc. (the "Borrower") and Wachovia Bank of Georgia, N.A. (the
"Lender"), dated February 24, 1994, requests that the Lender extend the
Original Term for an additional period of one year which will extend the
expiration date from February 24, 1996 to February 24, 1997.
If the Lender agrees, please sign below and return one executed copy to my
attention.
Very truly yours,
/s/ Joel H. Dugan
Joel H. Dugan
AGREED:
WACHOVIA BANK OF GEORGIA, N.A.
BY: /s/ Ken B. Harrison
---------------------------
DATE: 11/20/94
-------------------------
<PAGE> 1
EXHIBIT 10.7
RHODES, INC.
FURNITURE GENERAL OFFICE, 4370 PEACHTREE ROAD, N.E. ATLANTA, GA 30319
(404) 264-4600
July 26, 1994
Mr. Irwin L. Lowenstein
Rhodes, Inc.
4370 Peachtree Road
Atlanta, Georgia 30310
Dear Irwin:
This will confirm our understanding with respect to your election as
Chairman and Chief Executive Officer of Rhodes, Inc. In the event that anything
should happen to me or if we should sell control of Rhodes to a third party, I
have agreed that, notwithstanding any such event, Rhodes would continue to pay
your full annual base salary (at not less than the amount you are currently
paid) through and including the fiscal year ending February 28, 1999. In
addition, you would be paid by Rhodes the same annual minimum guaranteed bonus
as was paid during the fiscal year ended February 1994. You would also continue
to receive the same benefits, including clubs dues, etc., as are currently
provided to you by Rhodes.
I am very grateful for all of your hard work since we acquired Rhodes
in 1987, and I am happy to assure you of your continued compensation.
Congratulations also on your well deserved promotion.
I am sending a copy of this letter to Joel Dugan so that he can retain
this memorandum of our understanding among the corporate records.
Sincerely,
/s/ Holcombe T. Green, Jr.
Holcombe T. Green, Jr.
HTGjr:rj
cc: Joel H. Dugan
<PAGE> 1
EXHIBIT 11
RHODES, INC.
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Weighted average common shares outstanding 9,760 7,145 1,472
Additional shares assuming exercise of stock options
using treasury stock method --- 157 --- (1)
------------ ------------ ------------
Average common shares as adjusted 9,760 7,302 1,472
============ ============ ============
Income before extraordinary item $ 11,519 $ 6,047 $ (9,831)
Extraordinary item (net of tax) --- (2,727) ---
------------ ------------ ------------
Net income (loss) $ 11,519 $ 3,320 $ (9,831)
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Before extraordinary item $ 1.18 $ 0.83 $ (6.68)
Extraordinary item --- (0.38) ---
------------ ------------ ------------
Net income $ 1.18 $ 0.45 $ (6.68)
============ ============ ============
</TABLE>
(1) No additional shares as effect would be antidilutive.
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE INCORPORATION OF
OUR REPORTS INCLUDED IN THIS FORM 10-K, INTO THE COMPANY'S PREVIOUSLY FILED
REGISTRATION STATEMENT FILE NO. 33-53969.
ARTHUR ANDERSEN LLP
ATLANTA, GEORGIA
MAY 18, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT OF RHODES, INC. FOR THE YEAR/QUARTER ENDED FEBRUARY 28, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-START> MAR-01-1994
<PERIOD-END> FEB-28-1995
<CASH> 3,268
<SECURITIES> 0
<RECEIVABLES> 3,398
<ALLOWANCES> 0
<INVENTORY> 54,386
<CURRENT-ASSETS> 67,269
<PP&E> 89,149
<DEPRECIATION> 34,007
<TOTAL-ASSETS> 198,410
<CURRENT-LIABILITIES> 67,098
<BONDS> 40,000
<COMMON> 0
0
0
<OTHER-SE> 67,500
<TOTAL-LIABILITY-AND-EQUITY> 198,410
<SALES> 361,238
<TOTAL-REVENUES> 361,238
<CGS> 185,995
<TOTAL-COSTS> 185,995
<OTHER-EXPENSES> 154,382
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> 6,109
<INCOME-PRETAX> 19,523
<INCOME-TAX> 8,004
<INCOME-CONTINUING> 11,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,519
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
</TABLE>
