<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-9308
RHODES, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-0536190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
(Address of principal executive offices)
(Zip Code)
(404) 264-4600
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 1996: 9,168,150 shares of common
stock without par value.
<PAGE> 2
RHODES, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Recent Developments
Condensed Consolidated Balance Sheets --
August 31, 1996 and February 29, 1996
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended August 31, 1996
and August 31, 1995
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended August 31, 1996
and August 31, 1995
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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<PAGE> 3
RHODES, INC.
PART I
FINANCIAL INFORMATION
RECENT DEVELOPMENTS
On November 1, 1995 Rhodes, Inc. ("Rhodes" or the "Company")
consummated the acquisition of 21 store operations and two distribution center
operations from Weberg Enterprises, Inc. ("Weberg") in the states of Colorado,
Texas and Illinois. The store locations purchased recorded over $100 million in
sales for the year ended December 31, 1994. The acquisition was accomplished
through a purchase of the inventory and operating assets for approximately $31
million, assumption of operating leases on stores owned by third parties and the
execution of new operating leases on stores owned by Weberg. Financing was
provided primarily through bank credit lines.
On December 15, 1995 Rhodes consummated the acquisition of the
furniture store operations of The Glick Furniture Company ("Glick's") in
Columbus, Ohio, consisting of seven stores and one distribution center. The
store locations purchased recorded over $41 million in sales for year ended
December 31, 1994. The acquisition was accomplished through a purchase of the
inventory and operating assets for approximately $11 million, assumption of
operating leases on stores owned by third parties an the execution of new
operating leases on stores owned by Glick's. Financing was provided through bank
credit lines and a seller note in the amount of $2 million.
For additional information concerning the acquisitions, see note 13
to the Company's Financial Statements for the year ended February 29, 1996.
On April 29, 1996 the Company reported that it had retained Salomon
Brothers Inc to advise the Company concerning strategic alternatives, including
a possible sale of the Company, with an objective of enhancing shareholder
value. On September 17, 1996, the Company reported that agreement had been
reached to merge Rhodes, Inc. with a wholly owned subsidiary of Heilig-Meyers
Company ("HEILIG-MEYERS"). The definitive merger agreement (the "MERGER
AGREEMENT"), which was unanimously approved by the Rhodes' Board of Directors,
entitles Rhodes shareholders to receive one Heilig-Meyers common share for every
two shares of Rhodes common stock, or an aggregate amount of approximately 4.6
million shares of Heilig-Meyers stock for all currently outstanding Rhodes
shares. The merger (the "MERGER") is subject to Hart-Scott-Rodino clearance,
approval by Rhodes shareholders and certain other conditions. The transaction is
currently structured as a tax-free exchange of shares.
On a combined basis, the Company and Heilig-Meyers had sales of
approximately $1.5 billion and 824 stores for the fiscal year ended February 29,
1996.
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<PAGE> 4
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29,
ASSETS 1996 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 716 $ 312
Accounts receivable 7,838 5,212
Inventories at LIFO cost 85,052 87,965
Prepaid expenses and other 8,034 10,072
Deferred tax assets 6,152 2,157
--------- ---------
Total Current Assets 107,792 105,718
--------- ---------
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and
amortization of $43,440 at August 31, 1996 and $39,007 at February 29, 1996 80,563 75,951
--------- ---------
CAPITALIZED REAL ESTATE LEASES, at cost, less accumulated amortization
of $6,019 at August 31, 1996 and $5,640 at February 29, 1996 5,925 6,304
--------- ---------
INTANGIBLE ASSETS, net
Goodwill 61,849 62,482
Favorable leases 2,666 2,962
Other intangibles 2,602 2,488
--------- ---------
Total Intangible Assets 67,117 67,932
--------- ---------
OTHER ASSETS 5,380 5,854
--------- ---------
TOTAL ASSETS $ 266,777 $ 261,759
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes and Loans Payable $ 3,171 $ --
Current maturities of long-term debt and capital lease obligations 14,945 12,695
Accounts payable 47,916 47,745
Accrued interest 1,241 1,000
Accrued liabilities 27,919 25,912
Deferred income 12,236 11,247
Current portion deferred gain-sale/leasebacks 541 318
--------- ---------
Total Current Liabilities 107,969 98,917
--------- ---------
DEFERRED INCOME TAXES 6,862 6,862
--------- ---------
LONG TERM DEBT, less current maturities 72,390 70,642
--------- ---------
OBLIGATIONS UNDER CAPITAL LEASES 12,855 12,928
--------- ---------
DEFERRED GAIN-SALE/LEASEBACKS 1,895 2,390
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, no par value, 20,000 shares authorized and 9,150 and 9,134
outstanding at August 31, 1996 and February 29, 1996, respectively
Paid in Capital 99,838 99,709
Accumulated deficit (35,032) (29,689)
--------- ---------
Total Shareholders' Equity 64,806 70,020
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 266,777 $ 261,759
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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<PAGE> 5
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
AUGUST 31, 1996 AUGUST 31, 1995 AUGUST 31, 1996 AUGUST 31, 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET SALES $119,038 $95,379 $238,764 $184,818
COSTS OF GOODS SOLD 65,743 49,817 131,244 96,161
------- ------ ------- -------
GROSS PROFIT 53,295 45,562 107,520 88,657
------- ------ ------- -------
FINANCE CHARGES and
INSURANCE COMMISSIONS 1,600 1,410 3,397 3,094
------- ------- -------- -------
OPERATING EXPENSES:
Selling 20,561 15,476 40,555 30,356
General and administrative 35,381 24,741 72,672 49,321
Amortization of intangibles 883 722 1,597 1,444
Provision for credit losses 140 21 211 42
Other (income) expense, net 15 (86) (35) (105)
--------- --------- -------- -------
56,980 40,874 115,000 81,058
------- ------ ------- -------
INCOME (LOSS) BEFORE
INTEREST EXPENSE AND
INCOME TAXES (2,085) 6,098 (4,083) 10,693
Interest expense - net 2,463 1,575 4,973 3,107
------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES (4,548) 4,523 (9,056) 7,586
PROVISION (BENEFIT) FOR
INCOME TAXES (1,865) 1,854 (3,713) 3,110
------- ------- ------- -------
NET INCOME (LOSS) $(2,683) $ 2,669 $(5,343) $ 4,476
======== ======= ======= =======
NET INCOME (LOSS)
PER SHARE $ (0.29) $ 0.29 $ (0.58) $ 0.48
========= ======== ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING 9,150 9,331 9,150 9,355
========= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE> 6
RHODES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
AUGUST 31, 1996 AUGUST 31, 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,343) $ 4,476
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 5,409 3,765
Amortization of intangibles 1,597 1,444
Amortization of gain-sale/leasebacks (272) (159)
Write-off of intangible assets -- 85
Changes in current assets and liabilities:
Receivables, net (2,626) (697)
Inventories 2,913 (6,041)
Prepaid expenses and other 2,607 169
Deferred tax assets (3,995) --
Accounts payable and accrued liabilities 2,419 2,186
Deferred income on warranties, undelivered sales and credit commissions 989 787
-------- --------
Net cash provided by operating activities $ 3,698 $ 6,015
-------- --------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Retirements of property and equipment, net 182 771
Additions to property and equipment (9,802) (13,299)
Additions to intangible assets (782) --
Decrease (increase) in other assets, net (117) 574
-------- --------
Net cash used in investing activities $(10,519) $(11,954)
-------- --------
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:
Repayment of long-term debt -- (222)
Proceeds from long-term debt 3,998 --
Purchase of stock-employee stock purchase plan 129 178
Repurchase of stock -- (2,490)
Proceeds from short-term debt 3,171 6,593
Decrease in obligations under capital lease (73) (557)
-------- --------
Net cash from financing activities $ 7,225 $ 3,502
-------- --------
INCREASE (DECREASE) IN CASH 404 (2,437)
CASH AT BEGINNING OF PERIOD 312 3,268
-------- --------
CASH AT END OF PERIOD $ 716 $ 831
========= ========
SUPPLEMENTAL DISCLOSURE:
CASH PAYMENTS FOR
Interest $ 4,973 $ 3,107
========= ========
Income taxes $ 62 $ 2,332
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE> 7
RHODES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 1996
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. This information reflects all
adjustments (consisting of normal recurring adjustments) which are,
in the opinion of management, necessary to a fair statement of the
financial position of the Company as of August 31, 1996 and February
29, 1996, the results of operations for the three and six months
ended August 31, 1996 and August 31, 1995, and cash flows for the six
months ended August 31, 1996 and August 31, 1995. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. Certain
reclassifications of prior years' amounts have been made to conform
with fiscal 1997 amounts. These financial statements should be read
in conjunction with the historical financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K.
2. INTERIM LIFO PROVISIONS
The actual valuation of inventory under the LIFO method can
be made only at the end of each year based on inventory levels, price
indices and costs at that time. Therefore, the interim provisions
must be considered as estimates subject to a final year-end LIFO
inventory calculation.
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<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 55.2% 52.2% 55.0% 52.0%
----- ----- ----- -----
Gross Profit 44.8% 47.8% 45.0% 48.0%
----- ----- ----- -----
Finance Charge and Insurance Commissions 1.3% 1.5% 1.4% 1.7%
----- ----- ----- -----
Operating Expenses:
Selling 17.3% 16.2% 17.0% 16.4%
General and Administrative 29.7% 25.9% 30.4% 26.7%
Provision for Credit Losses .1% 0.0% .1% 0.0%
Amortization of Intangibles .7% 0.8% .7% 0.8%
Other (Income) Expense, Net 0.0% 0.0% 0.0% 0.0%
----- ----- ----- -----
47.9% 42.9% 48.2% 43.9%
----- ----- ----- -----
Operating Income (Loss) (1.8%) 6.4% (1.7%) 5.8%
Interest Expense, Net 2.1% 1.7% (2.1%) 1.7%
----- ----- ----- -----
Income (Loss) Before Income Taxes (3.8%) 4.7% (3.8%) 4.1%
Provision (Benefit) for Income Taxes (1.6%) 1.9% 1.6% 1.7%
----- ----- ----- -----
Net Income (Loss) (2.3%) 2.8% (2.2%) 2.4%
===== ===== ===== =====
</TABLE>
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<PAGE> 9
OPERATING RESULTS
THREE MONTHS AND SIX MONTHS ENDED AUGUST 31, 1996 AND 1995 COMPARED
Net sales increased 24.8% to $119,038,000 from $95,379,000 for the
three months ended August 31, 1996 compared with the same period last year and
increased 29.2% to $238,764,000 from $184,818,000 for the six months ended
August 31, 1996 compared with the corresponding period last year. Same store
sales decreased 10.0% and 8.0% for the three months and six months ended August
31, 1996, respectively. The net loss for the second quarter ended August 31,
1996 was $2,683,000, compared with net income of $2,669,000 for the same quarter
last year, and net loss for the six months ended August 31, 1996 was $5,343,000
compared with net income of $4,476,000 for the six months last year. Net loss
per share was $.29 for the second quarter and $.58 for the six months ended
August 31, 1996, compared with earnings per share of $.29 and $.48 for the
quarter and six months ended August 31, 1995, respectively.
At August 31, 1996, the Company had 107 stores in operation compared
with 79 at August 31, 1995. During the quarter, no new stores were opened and
two stores were closed. The Company has entered into leases for two new stores
in Memphis, Tennessee, a new market for the Company, which will be delayed until
fiscal 1998. The Company is also considering new markets for potential store
additions in the future but will delay entering new markets until the recently
acquired stores have been completely integrated into Rhodes and Rhodes is
integrated into Heilig-Meyers following the Merger. The Company did not remodel
any stores during the second quarter, and all remodeling activity has been
indefinitely suspended in the light of the execution of the Merger Agreement and
to allow the stores acquired from Weberg and Glick's to be fully integrated into
Rhodes' operations. See "Recent Developments."
Gross profit as a percentage of net sales for the three months ended
August 31, 1996 decreased to 44.8%, down from 47.8%, compared with the same
period last year and for the six months ended August 31, 1996 decreased to 45.0%
from 48.0%, compared with the same period last year. The decline in the gross
profit percentage was due to the liquidation sale of inventory acquired from
Weberg and Glick's during all of the first quarter and the first month of the
second quarter. The decline in the gross profit percentage during the second
quarter and six months was also due to more aggressive price promotions in all
stores due to the weak retailing environment for mid-priced furniture. The
acquired stores will have lower gross profit in fiscal year 1997 than Rhodes has
had historically as the inventories are liquidated and changed to Rhodes'
line-up and due to the accounting deferral of revenues from warranties sold for
the first time in the acquired stores. The Texas and Colorado stores will
continue to have lower gross profit due to higher freight costs.
Finance charge and insurance commission income derives from
commissions earned under the Company's merchant agreement whereby all newly
created accounts receivable are sold to Beneficial National Bank U.S.A. ("BNB")
and from commissions on credit insurance on credit customer balances. The
amounts earned increased 13.5% and 9.8% for the three and six
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<PAGE> 10
months ended August 31, 1996, respectively, due to an increase in the net
insurance commissions collected on customers' accounts. As the Weberg and
Glick's stores sell credit insurance and customers' aggregate balances increase,
management expects insurance commission income to increase.
Selling expense for the three and six months ended August 31, 1996
increased as a percentage of net sales to 17.3% and 17.0%, respectively,
compared to 16.2% and 16.4%, respectively, for the same periods last year. The
increase as a percentage of net sales is due to a decrease in same store sales
and, in the second quarter, an increase in advertising over prior year levels.
General and administrative expenses for the quarter ended August 31,
1996 increased to $35,381,000 (29.7% of net sales) from $24,741,000 (25.9% of
net sales) for the three months last year, and for the six months ended August
31, 1996 increased to $72,672,000 (30.4% of net sales) from $49,321,000 (26.7%
of net sales) for the same period last year. The increased expense for the three
and six month periods ended August 31, 1996 is due to increases in employee
expenses and the cost of adding 35 new stores. The increase in the percentage of
net sales is due primarily to a decline in same store sales this year compared
with last year. In light of recent disappointing results the Company has
instituted expense saving measures by reducing the employee count by
approximately 200 in the stores and approximately 75 in the corporate office
since year end.
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 described below. Net cash provided by operating activities for the six
months ended August 31, 1996 was approximately $3.7 million compared with $6.0
million cash provided for the six months last year. The Company's principal uses
of cash are debt service obligations, capital expenditures and working capital
needs.
For the three and six months ended August 31, 1996 FIFO inventory
turns decreased to 3.0x and 2.9x, respectively, compared with 3.5x and 3.4x for
the same periods last year. Inventories increased by $24.6 million at August 31,
1996 compared to August 31, 1995 due to the acquisition of approximately $30.3
million in inventory from Weberg and Glick's and the new larger stores. 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 had a working capital
deficit of $.2 million at August 31, 1996.
The Company's capital expenditures for equipment and expansion and
remodeling or refurbishing of stores are estimated at $15.0 million for fiscal
1997 compared with $23.5 million for fiscal 1996, not including $6.3 million in
capital additions related to the Weberg and Glick's
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<PAGE> 11
acquisitions. The Company has for the present suspended the remodeling program
following completion of six stores to allow the stores acquired from Weberg and
Glick's to be fully integrated into Rhodes' operations and to permit Rhodes to
be integrated with Heilig-Meyers following the Merger.
The Company maintains a Revolving Credit Agreement with Wachovia
National Bank and Fleet Credit Corporation for the lesser of $45.0 million or
50% of eligible inventory plus a three year term loan of $20.0 million. The loan
agreement expires on January 12, 1999 and therefore has been classified in the
financial statements as long term debt, with the exception of the portion of the
term loan due within one year. The agreement is secured by substantially all of
the inventory of the Company. As of October 9, 1996, there was $40.9 million
outstanding under the Revolving Credit Agreement and approximately $10.6 million
remains available under the Agreement. In connection with the execution of the
Merger Agreement, on October 15, 1996, the Company entered into an amendment to
the Revolving Credit Agreement pursuant to which certain financial covenants
contained therein were modified.
In June, 1996 the Company arranged a bridge loan of $9.0 million for
60 days as an amendment to the Revolving Credit Agreement. Green Capital
Investors, L.P., an affiliate of the Company, participated in the extension of
the loan to the Company in the amount of $3 million. Proceeds of the loan were
used to make a mandatory prepayment on the Company's senior secured notes in the
amount of $7.5 million and for working capital purposes. The bridge loan was
extended to September 30, 1996, but was repaid in full on September 24, 1996.
On October 21, 1996, the Company obtained a waiver of its fixed
charge coverage ratio covenant for the second quarter from the senior note
holders effective until November 19, 1996 to allow time to negotiate an
agreement that would provide an additional waiver to facilitate the Merger and
would also provide that, upon completion of the Merger, the fixed charge
coverage ratio covenant would be amended, conditioned upon a Heilig-Meyers'
guarantee of the senior secured notes. If an additional waiver is not entered
into by November 19, 1996 (or if, prior to such date, there is a public
announcement that the Merger will not be consummated), the waiver described
above will be null and void and the Company would be in default under the
notes.
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<PAGE> 12
RHODES, INC.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In October 1996, the Company entered into a settlement agreement in
connection with the previously reported purported class action litigation (see
Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 1996) pursuant to which the parties thereto have submitted a joint
motion for dismissal with prejudice regarding the claims of the named plaintiffs
in consideration of payment of a nominal amount.
Due to the nature of Rhodes' business, it is from time to time a
party to other legal proceedings arising in the ordinary course of its business,
none of which, in the judgment of management, would have a material adverse
effect on its operations or financial condition if adversely determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
On July 16, 1996 the shareholders of the Company, acting at the
annual meeting of shareholders, re-elected the then current directors of the
Company, Messrs. Irwin L. Lowenstein, Holcombe T. Green, Jr., James R. Kuse,
James V. Napier, and Don L. Chapman. Shares were cast for each director, or
shares withheld authority from each nominee, as follows:
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<PAGE> 13
<TABLE>
<CAPTION>
DIRECTOR NOMINEE VOTES FOR VOTES WITHHELD
<S> <C> <C> <C>
Irwin L. Lowenstein 8,486,947 1,416
Holcombe T. Green, Jr. 8,486,672 1,691
James R. Kuse 8,486,963 1,400
James V. Napier 8,487,037 1,326
Don L. Chapman 8,486,793 1,570
</TABLE>
At such annual meeting, the shareholders of the Company also ratified
the appointment of Arthur Andersen LLP as the Company's independent auditors for
the fiscal year ending February 28, 1997. An aggregate of 8,486,322 were voted
in favor of such ratification, an aggregate of 1,486 shares were voted against
such ratification and an aggregate of 555 shares abstained.
-13-
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2. Agreement and Plan of Merger, dated as of September 17, 1996,
among Rhodes, Inc., Heilig-Meyers Company and HM Merger
Subsidiary, Inc. (incorporated by reference to Exhibit 2 to
the Registrant's Current Report on Form 8-K dated September
23, 1996).
4.1. Agreement and Waiver, dated as of October 21, 1996, to the
Note Purchase Agreement between the Company and the lenders
named therein.
4.2. Fifth Amendment, dated as of October 11, 1996 to Loan and
Security Agreement, dated as of January 12, 1996, as amended,
among the Company, Wachovia Bank of Georgia, N.A. and Fleet
Capital Corporation.
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed Current Report on Form 8-K on September
23, 1996, which reported the execution of the Merger Agreement
with Heilig-Meyers Company. See "Recent Developments" in Part
I, which is incorporated herein by reference.
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<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RHODES, INC.
--------------------------------
(Registrant)
Date: October 15, 1996 By: /s/ Joel H. Dugan
-----------------------
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<PAGE> 1
CONFORMED COPY
EXHIBIT 4.1
AGREEMENT AND WAIVER TO NOTE PURCHASE AGREEMENT
This Agreement and Limited Waiver to Note Purchase Agreement, dated
October 21, 1996 (this "WAIVER"), relates to that certain Note Purchase
Agreement, dated as of June 17, 1993, as amended to date (the "NOTE AGREEMENT"),
between Rhodes, Inc. (the"COMPANY") and each of the Noteholders listed on the
signature page hereto (each a "NOTEHOLDER"). Capitalized terms used herein, but
not expressly defined herein, shall have the meaning given to such terms in the
Note Agreement.
WHEREAS, the parties hereto desire to waive a certain Event of
Default of the Company with respect to the Note Agreement, in the respects, but
only in the respects, hereinafter set forth; and
WHEREAS, the parties hereto desire that to negotiate the terms of an
additional waiver agreement (the "Additional Waiver") which will provide that
certain Events of Default under Section 8.2 of the Note Agreement will be
waived and immediately upon consummation of the merger between the Company and
Heilig-Meyers Company (the "PURCHASER"), or a subsidiary formed by the
Purchaser to facilitate the merger, if permitted under the Note Agreement after
giving effect to this Waiver and such Additional Waiver (the "MERGER"), the
Purchaser and each Noteholder will amend the financial covenant in Section
8.2 of the Note Agreement and the Purchaser will unconditionally guarantee the
prompt payment and performance of all obligations of the Company under the Note
Agreement.
NOW, THEREFORE, upon the full and complete satisfaction of the
conditions precedent to the effectiveness of this Waiver, and in considerations
of the agreements set forth herein the receipt and sufficiency of which is
hereby acknowledged, the Company and each Noteholder, severally but not
jointly, do hereby agree as follows:
Section 1. Waiver. The failure of the Company to comply with the
financial covenant set forth in Section 8.2 of the Note Agreement on or prior
to the date hereof which failure constitutes an Event of Default under the Note
Agreement (and which Event of Default prohibits the Company's reliance on
Section 8.19(b) of the Note Agreement to consummate the Merger) shall be deemed
to have been waived by each Noteholder solely for the period consisting of the
quarter ended August 31, 1996, which Event of Default has occurred solely as
a result of the Company's failure to maintain the Fixed Charge Coverage Ratio
set forth in Section 8.2 during such second quarter. The Company understands
and agrees that the waiver contained in this Waiver pertains only to the Event
of Default herein described and to the extent so described and not to any other
Default or Event of Default which may exist under the Note Agreement, or any
other matters arising in connection with the Note Agreement.
<PAGE> 2
Section 2. Consent Fee. The Company will pay each Noteholder by wire
transfer in immediately available funds the sum equal to .25% of the outstanding
principal amount of the balance owed such Noteholder under the Note Agreement on
the date of such wire transfer (the "CONSENT FEE") and such other amounts as
are required to be paid under the Note Agreement in connection with obtaining
this Waiver and the Additional Waiver.
Section 3. Additional Waiver. During the term of this Waiver, as
limited by Section 4 hereof, the parties hereto will negotiate in good faith to
enter into the Additional Waiver, which shall include a provision that the
Purchaser, upon consummation of the Merger, will unconditionally guarantee the
prompt payment and performance of all obligations of the Company under the Note
Agreement (as amended by the Additional Waiver) in form and substance
satisfactory to the Noteholder and in no event less beneficial to the
Noteholder than that given by the borrower to the lender under the Purchaser's
senior credit facility.
Section 4. Miscellaneous.
(a) Effective Time; Termination. This Waiver shall become effective
and binding upon the Company and the Noteholder upon the execution of each of
the parties hereto and the receipt by each Noteholder of the Consent Fee;
provided, however, this Waiver shall terminate immediately, and shall be deemed
null and void as of the date hereof with respect to the provisions of Sections 1
and 3, upon the earlier of (i) thirty (30) days from the date hereof or (ii) a
public announcement that the Merger will not be consummated.
(b) Notices. The Company hereby agrees, on behalf of each Noteholder,
to provide notice of this Waiver to each party required to be given notice by
such Noteholder under the Note Agreement or any other document entered into by
such Noteholder in connection with the Note Agreement (including without
limitation the Intercreditor Agreement dated June 17, 1993) (the "LOAN
DOCUMENTS").
(c) Confirmation. Except as expressly provided herein, none of the
provisions of the Note Agreement and the Loan Documents are amended, modified,
impaired or otherwise affected hereby, and the Note Agreement and all of the
Loan Documents are hereby confirmed in full force and effect.
(d) Governing Law. This Waiver shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE> 3
This Agreement and Waiver to Note Purchase Agreement has been
entered into as of the date first above written and may be executed in any
number of counterparts each of which shall constitute an original, but all
together only one agreement.
RHODES, INC.
By: /s/ Joel H. Dugan
------------------------------------
Name: Joel H. Dugan
Title: Senior Vice President, Finance
and Administration
NOTEHOLDERS:
SUNAMERICA LIFE INSURANCE COMPANY
f/k/a SUN LIFE INSURANCE COMPANY OF
AMERICA
By: /s/ Peter McMillian
------------------------------------
Name: Peter McMillian
Title: Authorized Agent
EQUITABLE CAPITAL PRIVATE INCOME
AND EQUITY PARTNERSHIP II, L.P.
BY: EQUITABLE CAPITAL MANAGEMENT
CORPORATION
Its General Partner
By: /s/ U. Peter C. Gummeson
------------------------------------
Name: U. Peter C. Gummeson
Title: Investment Officer
-5-
<PAGE> 1
CONFORMED COPY
EXHIBIT 4.2
FIFTH AMENDMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"AMENDMENT") is made and entered into this 11th day of October, 1996, by and
among 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; the various financial
institutions listed on the signature pages hereof (such financial institutions
and their respective successors and assigns referred to collectively herein as
"LENDERS" and individually as a "LENDER"); and WACHOVIA BANK OF GEORGIA, N.A., a
national banking association (hereinafter referred to as "AGENT") with an office
at 191 Peachtree Street, N.E., Atlanta, Georgia 30303-1757, in its capacity as
collateral and administrative agent for Lenders.
RECITALS:
Agent, Lenders and Borrower are parties to a certain Loan and
Security Agreement dated January 12, 1996, as amended by that certain First
Amendment to Loan and Security Agreement dated May 28, 1996, that certain Second
Amendment to Loan and Security Agreement dated June 12, 1996, that certain Third
Amendment to Loan and Security Agreement dated August 15, 1996 and that certain
Fourth Amendment to Loan and Security Agreement dated August 30, 1996 (the "LOAN
AGREEMENT") pursuant to which Lenders have made certain revolving credit and
term loans to Borrower.
The parties desire to further amend the Loan Agreement as hereinafter
set forth.
NOW, THEREFORE, for TEN DOLLARS ($10.00) in hand paid and other good
and valuable consideration, the receipt and sufficiency of which are hereby
severally 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
by deleting Sections 10.3.1, 10.3.2, 10.3.3 and 10.3.4 in their entireties and
by substituting the following new Sections 10.3.1, 10.3.2, 10.3.3 and 10.3.4 in
lieu thereof:
10.3.1. Minimum EBITDA. Borrower shall at all times
maintain Consolidated EBITDA of at least the amount shown below for
the period corresponding thereto:
<PAGE> 2
2
<TABLE>
<CAPTION>
Period Amount
<S> <C>
Fiscal year ending $39,000,000
February 28, 1997
March 1, 1997 through $47,000,000, calculated quarterly based
February 28, 1998 upon the immediately preceding four (4)
fiscal quarters of Borrower
March 1, 1998 and $48,000,000, calculated quarterly based
thereaafter upon the immediately preceding four (4)
fiscal quarters of Borrower
</TABLE>
10.3.2. Consolidated Fixed Charge Coverage Ratio. Borrower shall at
all times maintain a Consolidated Fixed Charge Coverage Ratio of at least the
ratio shown below for the period corresponding thereto, calculated quarterly
based upon the immediately preceding four fiscal quarters:
<TABLE>
<CAPTION>
Period Ratio
<S> <C>
December 1, 1996 through 1.5 to 1.0
February 28, 1997
March 1, 1997 through 1.75 to 1.0
February 28, 1998
March 1, 1998, and thereafter 2.0 to 1.0
</TABLE>
10.3.3. Minimum Consolidated Net Worth. At all times after September
1, 1996, Borrower shall maintain a Consolidated Net Worth of at least (i)
$64,800,000 plus (ii) 75% of Consolidated Net Income for each fiscal quarter,
commencing with and including the fiscal quarter ending November 30, 1996, on a
cumulative basis, without giving effect to any losses.
10.3.4. Consolidated Leverage Ratio. Borrower shall at all times
maintain a Consolidated Leverage Ratio that does not exceed the ratio shown
below for the period corresponding thereto:
<TABLE>
<CAPTION>
Period Ratio
<S> <C>
October 11, 1996 through 3.25 to 1.0
January 30, 1997
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
January 31, 1997 through 2.75 to 1.0
February 27, 1997
February 28, 1997 through 2.50 to 1.0
February 27, 1998
February 28, 1998, and 2.25 to 1.0
thereafter
</TABLE>
3. RATIFICATION AND REAFFIRMATION. Borrower hereby ratifies and
reaffirms each of the Loan Documents and all of Borrower's covenants, duties and
liabilities thereunder.
4. 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 Liens granted by Borrower in
favor of Agent are duly perfected, first priority Liens; and the unpaid
principal amount of the Revolver Loans on and as of October 11, 1996, totalled
$25,256,000 and the unpaid principal amount of the Term Loan Advances on and as
of October 11, 1996, totalled $16,250,000.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants
to Agent and Lenders, to induce Agent and Lenders to enter into this Amendment,
that except as expressly set forth in Paragraph 6 below, no Default 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 all of the representations and warranties made by Borrower in the
Loan Agreement are true and correct on and as of the date hereof.
6. LIMITED WAIVER OF DEFAULT. Events of Default have occurred and
currently exist under the Loan Agreement as a result of Borrower's breach of the
financial covenants that are set forth in Sections 10.3.1, 10.3.2, 10.3.3 and
10.3.4 of the Loan Agreement as in effect prior to the date hereof
(collectively, the "DESIGNATED DEFAULTS"). Borrower represents and warrants that
the Designated Defaults are the only Events of Default that exist under the Loan
Agreement and the other Loan Documents as of the date hereof. Lender hereby
waives the Designated Defaults in existence on the date hereof. In no event
shall such waiver be deemed to constitute a waiver of (a) any Default or Event
of Default other than the Designated Defaults in existence on the date of this
Amendment or (b) Borrower's obligation to comply with all of the terms and
conditions of the Loan Agreement and the other Loan Documents from and after the
date hereof. Notwithstanding any prior, temporary mutual disregard of the terms
of any contracts between the parties, Borrower hereby agrees that it shall be
required strictly to comply with all of the terms of the Loan Documents on and
after the date hereof.
<PAGE> 4
4
7. AMENDMENT FEE. In consideration of Agent's and Lenders'
willingness to enter into this Amendment and to give the waiver in Paragraph 6
hereof, Borrower agrees to pay to Agent, for the Pro Rata benefit of Lenders, an
amendment fee in the amount of $5,000, in immediately available funds, on the
date hereof.
8. EXPENSES OF AGENT AND LENDERS. Borrower agrees to pay, on demand,
all costs and expenses incurred by Agent and any 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
Agent's and each Lender's legal counsel and any taxes or expenses associated
with or incurred in connection with any instrument or agreement referred to
herein or contemplated hereby.
9. EFFECTIVENESS; GOVERNING LAW. This Amendment shall be effective
upon acceptance by Agent and Lenders in Atlanta, Georgia, whereupon the same
shall be governed by 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 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.
12. COUNTERPARTS; TELECOPIED SIGNATURES. This Amendment may be
executed in any number of counterparts and by different parties to this
Agreement 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. FURTHER ASSURANCES. Borrower agrees to take such further actions
as Agent and Lenders shall reasonably request from time to time in connection
herewith to evidence the amendments set forth herein to the Loan Agreement.
14. SECTION TITLES. Section titles and references used in this
Amendment shall be without substantive meaning or content of any kind whatsoever
and are not a part of the agreements among the parties hereto.
15. RELEASE OF CLAIMS. To induce Agent and Lenders to enter into this
Amendment, Borrower hereby releases, acquits and forever discharges Agent and
each Lender, and all of their respective officers, directors, agents, employees,
successors and assigns, from any and all
<PAGE> 5
5
liabilities, claims, demands, actions or causes of actions of any kind or nature
(if there be any), whether absolute or contingent, disputed or undisputed, at
law or in equity, or known or unknown, that Borrower now has or ever had against
Agent or any Lender arising under or in connection with any of the Loan
Documents or otherwise.
16. WAIVER OF JURY TRIAL. To the fullest extent permitted under
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.
BORROWER:
ATTEST: RHODES, INC.
/s/ Barbara Snow By: /s/ Joel H. Dugan
- ----------------------------- -------------------------------------
Assistant Secretary Joel H. Dugan, Senior Vice President,
[CORPORATE SEAL] Finance and Administration
ADDRESS:
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
Attention: Irwin L. Lowenstein
Telecopier No.: (404) 264-4701
<PAGE> 6
6
LENDERS:
WACHOVIA BANK OF GEORGIA,
N.A.
By: /s/ Kevin B. Harrison
-------------------------------------
Kevin B. Harrison
Vice President
ADDRESS:
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1757
Attention: Ms. Elspeth England
Telecopier No.: (404) 332-6920
FLEET CAPITAL CORPORATION
By: /s/ Elizabeth L. Waller
-------------------------------------
Title: Vice President
ADDRESS:
300 Galleria Parkway
Suite 800
Atlanta, Georgia 30339
Attention: Loan Administration Manager
Telecopier No.: (770) 859-2483
<PAGE> 7
7
AGENT:
WACHOVIA BANK OF GEORGIA,
N.A., as Agent
By: /s/ Kevin B. Harrison
-------------------------------------
Kevin B. Harrison
Vice President
ADDRESS:
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1757
Attention: Ms. Elspeth England
Telecopier No.: (404) 332-6920
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENT OF
RHODES, INC. FOR THE YEAR/QUARTER ENDED AUGUST 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 716
<SECURITIES> 0
<RECEIVABLES> 7,838
<ALLOWANCES> 0
<INVENTORY> 85,052
<CURRENT-ASSETS> 107,792
<PP&E> 124,003
<DEPRECIATION> 43,440
<TOTAL-ASSETS> 266,777
<CURRENT-LIABILITIES> 107,969
<BONDS> 72,390
0
0
<COMMON> 0
<OTHER-SE> 64,806
<TOTAL-LIABILITY-AND-EQUITY> 266,777
<SALES> 238,764
<TOTAL-REVENUES> 238,764
<CGS> 131,244
<TOTAL-COSTS> 131,244
<OTHER-EXPENSES> 114,789
<LOSS-PROVISION> 211
<INTEREST-EXPENSE> 4,973
<INCOME-PRETAX> (9,056)
<INCOME-TAX> (3,713)
<INCOME-CONTINUING> (5,343)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,343)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
