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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 29, 1996
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: 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 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
----
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: $67,431,925 as of May 9, 1996.
As of May 9, 1996 the registrant had outstanding 9,149,964 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 1996 Annual Meeting of Shareholders of Rhodes, Inc. are
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
On November 1, 1995 Rhodes, Inc. ("Rhodes" or the "Company") and
Weberg Enterprises, Inc. ("Weberg") consummated the acquisition of 21 store
operations and two distribution center operations from 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. Four
months of operations of the Weberg stores are included in the Company's results
for the year ended February 29, 1996.
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 and 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. Two and
one-half months of operations of the Glick's stores are included in the
Company's results 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.
GENERAL INFORMATION
BACKGROUND
Rhodes is one of the largest specialty furniture retailers in the
United States. Founded in 1875, the Company operated 108 stores at February
29, 1996 in metropolitan areas of 15 contiguous Southern, Midwestern and
Western states and for many years has focused on selling brand name residential
furniture to middle-income customers. Based on Company internal market
analyses, the Company believes that it has the number one or two share of
furniture sales among specialty furniture retailers in most of the markets in
which it operates.
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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 suites and bedding, dinettes and more formal
dining room suites and desks, lamps and other accessories. The Company has
over the past 18 months instituted a new marketing and merchandising initiative
which seeks to expand its emphasis on slightly higher priced furniture in
response to the preferences of its middle income customer base. The Company
has implemented this strategy through a refocused television and print media
campaign and through increased offerings of higher quality, slightly higher
priced furniture.
In September, 1988 Rhodes was acquired by a group of investors led by
Holcombe T. Green, Jr., who is currently Chairman of the Executive Committee of
the Board of Directors of the Company. In June, 1993, the Company conducted an
initial public offering (the "Initial Public Offering") and an exchange of
stock for outstanding Junior Subordinated Debentures (the "Exchange"). As a
result of the Initial Public Offering, the issuance of senior indebtedness and
the Exchange, the Company retired $120.2 million of indebtedness and $14.7
million of preferred stock. As of May 1, 1996 Mr. Green beneficially owned
31.9% of the outstanding shares of common stock of the Company.
STORE BASE
GENERAL
Consistent with its strategy, the Company has pursued an aggressive
remodeling and refurbishing program and focused store expansion in both
existing and new markets. While the Company will continue to upgrade and
expand its store base in the future, it will do so selectively in order to
permit the integration of the store operations acquired from Weberg and Glick's
and to avoid disruptions in store operations generally. The table below
summarizes openings, closings and remodelings or refurbishments of stores
during the fiscal years indicated and the Company's current plan for fiscal
years 1997 and 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended February 28 or 29,
------------------------------------
Estimated
---------
1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Number of stores at 110 108 80 78 76 76 75
beginning of year
Opened or acquired 12 11 (1) 39 (2) 7 (2) 3 1 1
(3)
Closed or sold (1) (9) (1) (11) (2) (5) (2) (1) (1) (4) -
--- --- --- (3) -- -- -- --
Number of stores at end 121 110 108 80 78 76 76
of year --- --- --- -- -- -- --
Stores remodeled or - (5) 16 (6) 12 16 16 (7) 4 2 (8)
refurbished
</TABLE>
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(1) Includes the planned relocation of six stores.
(2) Includes the relocation of one store.
(3) Includes 28 store operations acquired from Weberg and Glick's. Three
of the stores purchased from Weberg were closed as part of the
Company's acquisition plan.
(4) On August 24, 1992, Hurricane Andrew destroyed one of the Company's
four Miami stores. The remaining three stores were sold in fiscal
1995.
(5) The Company will determine whether to remodel, refurbish or relocate
in fiscal 1998 the nine stores (not including the newly acquired
stores) that have not been remodeled. This determination will be
based upon a number of factors, such as the lease terms, availability
of expansion space in some cases, or suitable relocation space
available for lease.
(6) The Company plans to remodel or refurbish 16 stores in fiscal 1997 of
which six were substantially completed as of May 24, 1996 (and five
of those were stores recently acquired from Weberg); however, the
Company temporarily suspended its remodeling program in the first
quarter of fiscal 1997 to await the results of Salomon Brothers'
recommendations on strategic alternatives and to allow stores acquired
from Weberg and Glick's to be fully integrated into Rhodes' operations.
(7) Includes the refurbishment of one store that subsequently was
destroyed by fire.
(8) Remodelings and refurbishing prior to fiscal 1993 were not part of
the Company's current remodeling and refurbishing program and
therefore are not comparable.
EXPANSION OF STORE BASE
The Company believes that there are attractive opportunities for
growth in new metropolitan markets due to consolidation in the retail furniture
industry. The Company believes it has developed a proven retailing concept and
operating philosophy, and therefore has positioned itself to take advantage of
these opportunities.
The Company is contemplating adding stores in new metropolitan markets
in states where the Company is presently operating. The Company's experienced
management team, coupled with standardized employee training and performance
monitoring systems and sophisticated, centralized systems, allow Rhodes to open
new stores with minimal start-up inefficiencies. While the Company believes it
can operate single stores profitably in new markets, it is targeting the
acquisition of multiple stores within new markets in order to achieve
advertising and distribution efficiencies. Distribution efficiencies are
maximized in situations in which the Company is able to service stores in a new
market from one of its existing Regional Distribution Centers (each an "RDC")
and deliver the sales of several stores from one home delivery location. The
Company currently anticipates that stores in new markets would be serviced from
existing RDCs (including RDCs recently acquired). The Company will consider
expansion or opening of new RDCs as needed to support expansion.
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In fiscal 1996, the Company opened three stores in new markets,
consisting of two stores in Kansas City, Missouri and one store in Cincinnati,
Ohio. Subsequent to year end, the Company opened a third store in Kansas City.
The Company has entered into leases for two new stores in Memphis, Tennessee, a
new market for the Company. There are plans to open one new Cincinnati store
in fiscal 1997, but leases had not been signed at year end. The Cincinnati
stores will be serviced by the RDC purchased in the Glick's acquisition.
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. However, as part
of its business strategy, the Company will continue to evaluate strategic
acquisition opportunities. The Company cannot predict, however, if any
transactions will be consummated, nor the terms or the form of consideration
that may be required.
INCREASE PRODUCTIVITY IN EXISTING MARKETS
The Company's strategy to increase productivity in its existing
markets will be implemented through the completion of its remodeling and
refurbishing program and the opening of new cluster stores in selected existing
markets.
The Company's remodeling and refurbishing program is designed to
significantly upgrade its existing stores and increase sales per store.
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 average cost for the complete remodeling of a store in fiscal 1997
is anticipated to be approximately $18 per square foot of existing display
space plus additional cost if more display space is converted from the
warehouse area. Refurbishing a store typically involves replacing carpet and
wallpaper, repainting and making minor improvements to the store's lighting.
The average cost to refurbish a store in fiscal 1997 is anticipated to be
approximately $200,000. Stores generally remain open during a remodeling or
refurbishment and the event is advertised as an opportunity for customers to
enjoy increased savings.
Remodeling and refurbishing increases per store sales by creating a
more attractive in-store atmosphere and enhancing the appearance of display
merchandise. On a comparable store basis for up to the first 12 months after
completion, all the remodeled and refurbished stores achieved average sales
growth of 7.1% for fiscal 1996, compared to 2.5% for the Company as a whole.
Through the end of fiscal 1996, 48 stores had been remodeled or refurbished
pursuant to the program. An additional 16 stores are scheduled to be remodeled
or refurbished in fiscal 1997, including 13 stores acquired from Weberg and
Glick's, subject to the delay explained under "Store Base - General". The
Company also intends to relocate six stores in fiscal 1997 in situations where
the location, store size or lease terms are not favorable for remodeling.
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The Company continually evaluates each of its existing markets to
identify attractive opportunities for the opening of additional cluster stores.
In fiscal 1996, the Company opened four new stores in Atlanta, Georgia, two new
stores in Charlotte, North Carolina and one new store in Jacksonville, Florida.
Also, one store in the Orlando, Florida market was relocated. The Company
closed several stores in fiscal 1996, four of which were stores in Atlanta
whose customers will be better served by nearby, larger and more attractive
stores. Three other under-performing stores in Venice and Bradenton, Florida
and Jackson, Mississippi were closed. Three of the 21 Weberg stores, two in
Texas and one in Colorado, were closed as part of the acquisition plan. The
opening of new cluster stores in an existing market allows the Company to
benefit from its name recognition and reputation in the market, to spread
advertising and other operating expenses over a greater number of stores and to
benefit from distribution and administrative efficiencies.
STORE OPERATIONS
TARGET MARKET
The Company's retailing strategy is selling quality furniture to a
broad base of middle-income customers. The Company carefully tracks the
demographic profile of its customer base, designs its merchandising and
promotions to appeal to its targeted market and evaluates particular programs
by analyzing changes in the profile of the resulting customer base. In fiscal
1995, the Company commissioned a follow-up marketing study (the "Customer
Survey") of its customers and their furniture shopping needs. Based on the
Customer Survey the Company believes that approximately 80% of its customers
are between the ages of 25 and 54 and that approximately 65% of its customers
have an annual family income of $30,000 to $75,000. The Company's senior
management team has utilized the Customer Survey and other information to
tailor its advertising, merchandising and other operational efforts to the
perceptions and needs of its target customers.
STORE FORMAT AND SITE SELECTION
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 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. The
Company is particularly interested in opening new stores in shopping centers
containing super stores and similar category-dominant merchandising concepts.
Furniture typically is displayed in model room settings, complete with
accessories. The design is intended to make it easy for each customer to shop
at Rhodes stores and to facilitate movement of the customer from the shopping
to the purchasing phase. The Company's existing stores average approximately
34,300 square feet of display space. New stores are expected to average
approximately 35,000 square feet of display space. All stores are open 362 days
each year and at least five evenings each week.
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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 suites and bedding,
dinettes and more formal dining room suites, and desks, lamps and other
accessories. With respect to many upholstered lines, the Company selects its
own fabrics during the manufacturing process, rather than relying on
manufacturer selections.
The table below set forth the percentage of sales derived from the
types of merchandise indicated during each of the last three fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Living Room Furniture 49.5% 49.6% 49.3%
Bedroom Furniture 25.5% 25.1% 24.5%
Dining Room Furniture 10.7% 10.4% 11.8%
Bedding 11.0% 11.7% 11.7%
All Other Merchandise and Accessories 3.3% 3.2% 2.7%
----- ----- -----
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 RDC's. 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, River Oaks, Samuel Lawrence, Sealy, Simmons and Universal,
manufacturing products designed by Alexander Julian. In fiscal 1996, La-Z-Boy,
making products under the brand names La-Z-Boy and Kincaid, accounted for
approximately 11.2% of the Company's total purchases and Universal accounted
for approximately 10.1%. The Company believes its buying power results in
advantageous pricing and delivery and favorable freight costs from vendors,
thereby enhancing competitiveness and profitability. The Company's inventory
control system provides its headquarters group with merchandising information,
and the group also receives information from regional and store managers
regarding local preferences and market conditions.
The Company continually reviews and revises its merchandising mix to
respond to the tastes of its customers. The Company recently added a new line
of affordable home furnishings designed by clothing designer Alexander Julian
and manufactured by Universal. The Company believes that this line, which
includes dining, bedroom and living room furniture, has been attractive to its
customers because it offers designer furnishings at affordable prices.
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PROMOTIONS AND ADVERTISING
The Company relies to a considerable extent upon its promotions and
advertising to produce sales, with much of the Company's marketing also
featuring the availability of in-store credit and special credit plans. The
Company conducts over 40 Company-wide promotional events each year. Sales
events are generally related to holidays and other promotional events. The
staff at the Company's headquarters 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 twice a year in special mailings or newspaper inserts. The Company
highlights its "30-Day Money Back Guarantee" in its new advertising. The
Company believes, based on the results from the Customer Survey, that raising
customer awareness of this policy provides Rhodes with a competitive advantage.
Over the last two years, the Company has shifted the focus of its advertising
program from newspaper and print media to television and radio advertising. In
fiscal 1996, radio and television advertising accounted for approximately
49.3%, of the Company's total advertising expense. Regional managers along with
the staff of the Company's headquarters 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 staff at the Company's
headquarters in conjunction with an outside advertising agency.
CUSTOMER SATISFACTION
The Company is implementing a number of changes designed to respond to
concerns expressed in the Customer Survey. The Presidential Hotline continues
to respond promptly to customer inquiries and monitor responses and follow- up.
In addition, Rhodes has initiated statistical analyses of both the Company's
and manufacturers' timing with respect to responding to complaints, including
the delivery and installation of replacement parts. In addition, the Company
continues to offer all customers a "30 Day Money Back Guarantee".
MANAGEMENT INFORMATION SYSTEM
The Company has developed and installed an advanced inventory control
and point-of-sale information system which enables senior management to improve
individual store performance and to access customer demographics, credit, sales
and inventory information on a real-time basis. This system, which the Company
believes to be one of the most advanced in the furniture retailing industry,
expedites the processing of customer transactions and credit approval, controls
inventory levels and is designed to support future growth. Specifically, the
Company monitors and controls merchandise levels and movements in each store
and RDC from its Atlanta headquarters.
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The Company has successfully completed installation of bar coding in
six RDCs, including the three RDCs acquired from Weberg and Glick's, as of
March 16, 1996. The remaining five RDsC will be put on bar coding during
fiscal 1997. Additionally, all the acquired stores were operating on Rhodes
total inventory and point-of-sale system by March 16, 1996, although additional
training and experience will be required before all the acquired stores and
warehouses are operating efficiently.
Management believes that this system 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 hardware systems, the Company believes that
its existing merchandising, promotional, inventory and training systems will
allow it to add new stores in existing or new markets in a cost-effective
manner.
MANAGEMENT AND TRAINING
One of the competitive strengths of the Company is the experience of
its senior management team. With the exception of the Senior Vice President,
Marketing, who was hired in June 1995 and has over 25 years of experience in
the advertising business, the seven executive officers of the Company have
between 9 and 24 years of experience with Rhodes.
Senior management is supported in each of the Company's 11 operating
regions by a regional manager and, in most regions, area managers. The 11
regional managers and four divisional managers have an average of ten years of
experience with Rhodes. The Company believes that its regional, area and store
managers are attractively compensated with substantial incentive compensation
based on operating results. In addition, all store, sales personnel are
compensated through sales commissions with minimum commission guarantees.
Rhodes management believes that this incentive compensation increases
motivation at the store level and contributes to increased sales in its stores.
Store management personnel undergo extensive and regular training,
which is designed to keep managers and employees informed of all standardized
Company operating policies, including procedures for sales, inventory
maintenance, credit extension, advertising, store administration and
merchandise display. Training programs are conducted both at the Company's
stores and at the Company's headquarters in Atlanta. Through the training
process, management believes it has identified employees whose experience and
training will qualify them to be store managers in stores expected to be opened
or acquired in the current fiscal year.
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DISTRIBUTION AND DELIVERY
Inventories are maintained in 11 RDCs, from which merchandise is
shipped to the appropriate store for delivery to the customer's home. The 11
RDCs, which collectively have more than 1.1 million square feet, have
cantilever racking and computer-controlled inventory storage. The Company
believes that the RDC acquired from Glick's will support the Columbus stores
and store openings or acquisitions in Cincinnati, Ohio and other areas within
an approximately 300-mile radius of Columbus, and the Denver, Colorado RDC
acquired from Weberg will support the Colorado stores and store openings or
acquisitions within an approximately 300 mile radius of Denver. An addition of
98,000 square feet was completed at the Powder Springs, Georgia RDCs in May,
1995. The Company believes its RDCs and inventory control and point-of-sale
information system will provide it with the aggregate capacity needed to
support the presently planned store growth. The Company will consider expansion
or opening of new RDCs as needed to support expansion.
Typically, each store is within 300 miles of one of the RDCs.
Substantially all of the Company's merchandise is distributed to its stores
through its RDCs. The Company operates a fleet of trucks which delivers
merchandise from an RDC to each store several times each week. The Company
believes the use of the RDCs and its inventory control system enable the
Company to make available a broader selection of merchandise, to reduce
inventory requirements at individual stores, to benefit from volume purchasing
and to provide prompt delivery to customers.
Deliveries to customers are made from the Company's stores or home
delivery locations for multiple stores in larger markets by independent
contractors or, in certain markets, by Company-operated trucks. 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 provide 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 72.7% of the Company's sales in fiscal 1996 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. The Company's credit operation was
installed in all stores purchased from Weberg and Glick's upon the closing of
their acquisition.
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Since June of 1992, BNB has operated the Rhodes private-label credit
card program. Pursuant to the Merchant Agreement, the Company sells its
customer installment receivables to BNB and derives income from commissions
earned on certain credit transactions. The Merchant Agreement is terminable by
either Rhodes or BNB on 180 days notice and 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. Upon termination, Rhodes may, at its option, repurchase the total
portfolio of outstanding consumer installment receivables for 106% of the
outstanding principal balances, including accrued interest, subject to certain
rights of BNB to securitize and sell the portfolio. The Company believes that
reduced administrative, bad debt and interest expenses more than offset the
finance charges that it would earn on these receivables, and that it benefits
from the elimination of the interest rate and credit risks inherent in owning a
large portfolio of consumer receivables.
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 magazine for 1995, the Company was the
sixth largest conventional furniture retailer in the United States; however,
the ten largest conventional furniture retailers accounted for less than 16% of
industry sales in 1995. Based on Company internal market analyses, the Company
believes that it has the number one or two share of furniture sales among
specialty furniture retailers in most markets in which it operates. The
Company's competition varies according to geographic area. Rhodes' principal
competitors consist of other local independent specialty furniture retailers,
regional specialty furniture retailers and general merchandisers. Some of the
furniture store chains, department stores and mass merchandisers with which the
Company competes have greater financial and other resources than the Company.
The retail furniture industry competes primarily on the basis of
quality, price and service. Each of the Company's stores offers a broad line of
brand name merchandise, emphasizing good quality and an extensive selection.
The Company employs an aggressive pricing policy, under which it guarantees to
sell each item at the lowest advertised price in the market. Rhodes emphasizes
superior service through in-store credit, prompt delivery of merchandise,
professionally trained salespersons and convenient locations and a 30 day
unconditional return policy.
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SERVICE MARKS
The Company currently conducts its business under the names "Rhodes,"
"Crossroads" (in Kentucky, St. Louis, Missouri and Fairview Heights, Illinois),
"Marks-Fitzgerald" (in Birmingham, Alabama), "Fowler's Furniture Center" (in
Knoxville, Tennessee) "Weberg Furniture Company" (in Colorado, Texas and
Champaign, Illinois), "The Glick Furniture Company" (in Columbus, Ohio) and
holds service marks for each of these names and other service marks. However,
the Company ultimately intends to operate all of its stores under the "Rhodes"
name and has begun to systematically implement changes in signage and other
forms of advertising in the markets where business is conducted under names
other than "Rhodes". In the third quarter of fiscal 1996, the Company recorded
one-time non-recurring charge for certain costs relating to changing the names
of the stores operating as "Crossroads", "Marks-Fitzgerald", "Fowler's
Furniture Center", 'Weberg Furniture Company" and "The Glick Furniture Company"
to "Rhodes".
EMPLOYEES
As of April 30, 1996, the Company employed 3,761 persons, including 3,324 in
sales and store operations, 271 in its RDC and 166 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 92,000 square feet (with an average of
approximately 34,300 square feet). The Company owns eight of its stores and
leases the remaining 100, of which nine are leased pursuant to sale/leaseback
arrangements.
The Company also operates 11 RDCs which are used to warehouse
inventory pending shipment to individual stores. The 11 RDCs collectively have
more than 1.1 million square feet and have cantilever racking and
computer-controlled inventory. Five of the RDCs are owned and six are leased.
In addition, one of the owned RDCs has an attached facility which is leased.
The six leased RDCs have initial terms which will expire at various dates
through 2010, with an average lease term, including renewal options, of
approximately 13 years.
Store leases have initial terms which will expire at various
dates through 2021, with an average lease term, including renewal options, of
approximately 14 years. The Company's leases generally provide for fixed
monthly rentals, although some provide for fixed minimum rentals with a
percentage rental based on sales.
The Company's principal executive offices are located in a 59,289
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 ten-year term.
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ITEM 3. LEGAL PROCEEDINGS
LEGAL
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. 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 1996.
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 60 Director, Chairman of the Board and Chief Executive Officer
Joel T. Lanham 40 President and Chief Operating Officer
Joel H. Dugan 57 Senior Vice President, Finance and Administration
Don M. Parker 52 Senior Vice President, Merchandising and Advertising
James A. Welch 45 Senior Vice President, Operations
Steven L. Hurwitz 49 Senior Vice President, Marketing
Barbara W. Snow 38 Vice President and Corporate Controller
</TABLE>
13
<PAGE> 14
Irwin L. Lowenstein joined the Company in 1972, served as President
and chief operating officer from 1973 until 1994 and has been a Director of the
Company since 1979. In 1989, Mr. Lowenstein was elected Chief Executive
Officer of the Company, and in 1994, Mr. Lowenstein was elected Chairman of the
Board of Directors. Mr. Lowenstein is a director of L.A.T. Sportswear, Inc., a
sportswear manufacturer and distributor.
Joel T. Lanham joined the Company in 1976. In 1994, Mr. Lanham became
President and Chief Operating Officer. For the five years prior thereto he was
Senior Vice President and Executive Vice President, Operations. He is 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.
Don M. Parker joined the Company in 1987 as the Regional Manager for
the Atlanta area stores, and served in that capacity until being named Senior
Vice President, Merchandising and Advertising in May, 1993. Prior to joining
the Company, Mr. Parker served as General Manager for Maxwell Furniture, a
furniture retailer.
James A. Welch joined the Company in 1986. In 1994, Mr. Welch was
elected Senior Vice President, Operations. For the five years prior thereto
he served as Regional Manager and Division Manager.
Steven L. Hurwitz jointed the Company in 1995. He currently serves as
Senior Vice President, Marketing. For the past 14 years prior to joining the
Company, Mr. Hurwitz served as Senior Vice President and Group Account Director
with McCann-Erickson, Inc., a national advertising agency, where he had 25
years of experience.
Barbara W. Snow joined the Company in 1981 and has served as Corporate
Controller since 1988. Ms. Snow, a certified public accountant, served in the
capacity of Accounting Manager prior to being promoted to Corporate Controller.
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.
14
<PAGE> 15
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>
FISCAL 1995 HIGH LOW
<S> <C> <C> <C>
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 Ended May 31, 1995 $12 $ 8 5/8
Second Quarter Ended August 31, 1995 $11 3/8 $ 8 7/8
Third Quarter Ended November 30, 1995 $12 5/8 $ 9 5/8
Fourth Quarter Ended February 29, 1996 $11 1/8 $ 9 3/8
FISCAL 1997
First Quarter Through May 15, 1996 $11 5/8 $10 5/8
</TABLE>
As of May 1, 1996, there were approximately 369 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 29, 1996, February 28,
1995 and 1994, has been derived from, and should be read in conjunction with,
the Company's audited consolidated financial statements.
15
<PAGE> 16
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.
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.
SAME 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.
16
<PAGE> 17
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28 OR 29,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net Sales $ 430,193 $361,238 $325,255 $286,527 $265,924
Cost of Goods Sold 225,953 185,995 168,425 150,344 139,876
---------- -------- -------- -------- --------
Gross Profit 204,240 175,243 156,830 136,183 126,048
---------- -------- -------- -------- --------
Finance Charges and Insurance Commissions 5,822 4,935 4,892 13,853 37,725
---------- -------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative 187,913 151,111 136,269 129,225 127,446(1)
Provision for credit losses 167 164 213 4,803 7,413(1)
Amortization of intangibles 2,933 3,074 3,132 3,253 3,433
Non-recurring charge 2,400 - - - -
Other (income) expense, net (401) 197 8 (575) 868
---------- -------- -------- -------- --------
193,012 154,546 139,622 136,706 139,160
---------- -------- -------- -------- --------
Operating income 17,050 25,632 22,100 13,330 24,613
Non-recurring items - - - - 1,162
Interest Expense, Net 6,898 6,109 11,545 24,306 33,920
---------- -------- -------- -------- --------
Income (Loss) Before Income Taxes, Change in
Accounting Principal and Extraordinary Item 10,152 19,523 10,555 (10,976) (10,469)
Provision (Benefit) for Income Taxes 4,162 8,004 4,508 (1,145) (1,234)
---------- -------- -------- -------- --------
Net Income (Loss) Before Change in Accounting
Principle and Extraordinary Item (2) 5,990 11,519 6,047 (9,831) (9,235)
Cumulative Effect on Prior Years of Change in
Accounting for Income Taxes - - - - (719)
Extraordinary Item(2) - - (2,727) - -
---------- -------- -------- -------- --------
Net Income (Loss) $ 5,990 $ 11,519 $ 3,320 $ (9,831) $ (9,954)
========== ======== ======== ======== ========
PER SHARE DATA:
Net Income (Loss) Before Extraordinary Item (5)$0.80 $ 1.18 (2)$0.83 $ (6.68) $ (8.85)
Net Income (Loss) 0.64 1.18 0.45 (6.68) (8.85)
Dividends - - - - -
Weighted Average Shares Outstanding (000's) 9,304 9,760 7,302 1,472 1,125
OTHER OPERATING DATA:
Depreciation and Amortization $ 11,372 $ 9,796 $ 9,531 $ 9,717 $ 10,021
Non-Cash Interest Expense - - 2,626 6,653 6,257
Capital Expenditures (6)23,477 14,101 6,860 3,405 2,769
Gross Profit Percentage 47.5% 48.5% 48.2% 47.5% 47.4%
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C> <C> <C> <C>
FIFO Inventory Turnover 3.3x 3.6x 3.8x 3.8x 3.7 x
STORE DATA:
Stores Open at Period End 108 80 78 76 76
Average Display Square Footage (000s) 2,950 2,411 2,270 2,184 2,182
Total Store Sales Growth 19.1% 11.1% 13.5% 7.7% 3.6 %
Same Stores Sales Growth 2.5% 7.1% (3)10.0% (4)7.0% (0.6)%
Sales Per Square Foot 146 150 143 131 122
Sales Per Non-Sales Employee (000s) 237 239 231 213 185
Sales Per Store (000s) 4,784 4,607 4,229 3,795 3,538
BALANCE SHEET DATA (AT END OF PERIOD):
Working Capital $ 6,801 $ 171 $ 608 $(10,077) $ (9,759)
Total Assets 261,759 198,410 185,604 175,754 349,152
Total Debt (including obligations Under Capital 96,265 55,002 60,831 145,706 307,821
Leases)
Shareholders' Equity (Deficit) 70,020 67,500 59,909 (23,850) (14,073)
</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) Same 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) Same 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.
(5) In the year ended February 29, 1996, the Company recorded a
non-recurring charge to reflect the cost of changing the names of 33
stores to "Rhodes" and the cost of closing four stores.
(6) Capital expenditures reported does not include capital assets
purchased in the Weberg and Glick acquisition which totaled
$6,273,000.
18
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a
percentage of net sales for the fiscal years ended February 29, 1996, February
28, 1995, and 1994
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
FEBRUARY 28 OR 29,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0%
Cost of Goods Sold 52.5 51.5 51.8
----- ----- -----
Gross Profit 47.5 48.5 48.2
----- ----- -----
Finance Charges and Insurance Commissions 1.4 1.4 1.5
----- ----- -----
Operating Expenses:
Selling 16.8 16.0 15.9
General and Administrative 26.9 25.9 26.0
Amortization 0.7 0.9 1.0
Provision for credit losses - - 0.1
Other (income) expense, net -0.1 0.1 -
----- ----- -----
44.3 42.9 42.9
----- ----- -----
Operating Income 4.5 7.1 6.8
Interest Expense, net 1.6 1.7 3.5
----- ----- -----
Income Before Income Taxes and Extraordinary Item
2.9 5.4 3.3
Net Income Before Extraordinary Item 1.7 3.2 1.9
</TABLE>
The following discussion contains forward-looking statements with
respect to the Company's sales and remodeling and refurbishment plans. The
Company's ability to meet these projections will be subject to general economic
trends, available cash flow and sales trends for the Company and the industry.
19
<PAGE> 20
FISCAL YEARS ENDED 1996 AND 1995 COMPARED
Net sales increased 19.1% to $430,193,000 from $361,238,000 for the
fiscal year ended February 29, 1996, compared with the same period last year.
Same store sales growth was 2.5% for fiscal 1996. Income before a third
quarter non-recurring charge for fiscal 1996 decreased 35.7% to $7,406,000,
compared with $11,519,000 for the same period last year. Earnings per share
for the year before the non-recurring charge was $.80, compared with $1.18 per
share last year, a decrease of 32.2%. Operating income for the year ended
February 29, 1996 before the non-recurring charge was $19,450,000 (4.5% of net
sales) a decrease of 24.1% compared with $25,632,000 (7.1% of net sales) for
the same period.
The Company's same store sales percentage increase was negative in the
fourth quarter of fiscal 1996 reflecting an unfavorable economic climate for
furniture retailing. This sales difficulty has continued into the first
quarter of fiscal 1997, although management is optimistic about the second half
of the coming fiscal year.
In fiscal 1996, the Company opened three stores in new markets, two in
Kansas City, Missouri and one in Cincinnati, Ohio. Subsequent to year end, the
Company opened a third store in Kansas City. Leases have been signed to open a
new market area in Memphis, Tennessee with two stores in fiscal 1997. There
are plans to open one Cincinnati store in fiscal 1997 and another in early
fiscal 1998. The Cincinnati stores will be serviced by the RDC purchased in
the Glick's acquisition.
In existing markets, the Company opened four stores in Atlanta,
Georgia, two stores in Charlotte, North Carolina and one store in Jacksonville,
Florida. Also, one store in the Orlando, Florida market was relocated. The
Company closed 11 stores in fiscal 1996, four of which were stores in Atlanta
whose customers can be better served by nearby, larger and more attractive
stores. Three other under performing stores in Venice and Bradenton, Florida
and Jackson, Mississippi were closed. Three of the 21 Weberg stores, two in
Texas and one in Colorado, were closed as part of the Company's acquisition
plan for Weberg.
The Company completed remodeling nine stores and refurbishing three
stores during fiscal 1996, bringing the total completed to 48 since the program
began in fiscal 1993. Sixteen more stores are scheduled for remodeling or
refurbishment during this fiscal year, including 13 acquired from Weberg and
Glick's, subject to the delay explained under "Store Base - General".
20
<PAGE> 21
Gross profit as a percentage of net sales for fiscal 1996, decreased
to 47.5% from 48.5%, compared with last year. The decline in the gross profit
percentage was due to more aggressive price promotions during the year, and
lower gross profit in the acquired stores. 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 in the first quarter
of fiscal 1997 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.
Due to the decision to accelerate the liquidation of merchandise in
the stores acquired from Weberg and Glick's, to be replaced with Rhodes'
merchandise line-up, the Company expects net income for the first quarter of
fiscal 1997 to be substantially less than last year.
Finance charge and insurance commission income derives from
commissions earned under the Company's merchant agreement (the "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 for fiscal
1996 due to an increase since last year in the amounts paid to the Company by
BNB for origination of new accounts and an increase in the net insurance
commission collected on customers' accounts.
Selling expense for fiscal 1996 increased as a percentage of net sales
to 16.8%, compared with 16.0% last year. The increase is due to more expensive
interest-free and deferred payment credit promotions, compared with the prior
year. Advertising expense was higher as a percentage to net sales, due to more
aggressive advertising late in the year due to the poor furniture retailing
environment.
General and administrative expenses for fiscal 1996 increased to
$115,809,000 (26.9% of net sales) from $93,391,000 (25.9% of net sales) last
year. The increased expense is due to increases in employee expenses and the
cost of adding 39 new stores and four RDCs. The increase in the percentage of
net sales is due primarily to lower comparable store sales growth this year
compared with last year.
The Company also recorded in the third quarter a non-recurring
one-time charge to reflect the cost of changing the names of 33 stores to
"Rhodes" and the cost of closing four stores. The aggregate amount of the
charge was $2,400,000, before income tax benefit of $984,000, for a net charge
of $1,416,000. Net income for fiscal 1996 after deducting the non-recurring
charge was $5,990,000 or $.64 per share.
Interest expense on the Company's indebtedness is expected to increase
in future periods due to the debt incurred to finance the acquisitions of the
Weberg and Glick's stores and distribution center operations.
21
<PAGE> 22
The retail furniture sales environment has slowly deteriorated for the
past year, a situation that management expects to continue, at least through
the first two quarters of fiscal 1997. Management's strategy is to integrate
the newly acquired stores into Rhodes' operations and then continue acquiring
and opening new stores, on a sound fiscal basis, in order to profit from the
next economic cycle of growth from a much larger platform of stores.
FISCAL YEARS 1995 AND 1994 COMPARED
Net sales increased 11.1% to $361,238,000 from $325,255,000 for fiscal
1995 compared with the prior fiscal year. Same store sales growth was 7.1% for
fiscal 1995. Operating income for fiscal 1995 was $25,632,000 (7.1% of net
sales), an increase of 16.0% compared with $22,100,000 (6.8% of net sales) for
the prior fiscal year. Net income for fiscal 1995 increased 90.5% to
$11,519,000, or $1.18 per share, compared with $6,047,000, or $.83 per share
for the prior year before extraordinary item.
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. Sixteen stores were remodeled or refurbished in fiscal 1995.
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 margin.
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 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.
22
<PAGE> 23
General and administrative expenses for the year increased to
$93,391,000 (25.9% of net sales) from $84,404,000 (26.0% of net sales) last
year. The increased expense for the year is due to having seven new stores in
fiscal 1995, less the three Miami stores sold in the second quarter plus
increases in employee expenses. General and administrative expenses, as a
percentage of sales, were approximately the same due to increased sales volume.
Other expenses 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 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 Initial
Public Offering, the issuance of the Senior Notes, the Exchange and the related
reduction in the Company's indebtedness.
The Company reviewed Statements of Financial Accounting Standards
issued by the Financial Accounting Standards Board in fiscal 1996 and believes
that the adoption of these standards will not have a material effect on the
Company's financial statements taken as a whole.
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 29,
1996, 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 Company's revolving credit
agreement with Wachovia Bank of Georgia, N.A. and Fleet Capital Corporation for
an aggregate of $65 million (the "Existing Revolver").
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's principal sources of liquidity are cash flow
from operations and additional borrowing capacity under its Existing Revolver.
The Company had net cash provided by operating activities of approximately
$23.3 million, $25.9 million and $19.4 million, in fiscal years 1996, 1995 and
1994, respectively. The Company's principal uses of cash are capital
expenditures, working capital needs and debt service obligations.
23
<PAGE> 24
At the end of fiscal years 1996, 1995, and 1994, LIFO inventories were
$88.0 million, $54.4 million, and $48.2 million, respectively. FIFO inventory
turns decreased to 3.3x for fiscal 1996 from 3.6x in fiscal 1995 and 3.8x in
fiscal 1994. Inventories have been increased due to the addition of new,
larger stores and the addition of the Kansas City, Missouri RDC and expansion
of the Powder Springs, Georgia RDC. 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
$23.5 million, $14.1 million and $6.9 million for fiscal years 1996, 1995 and
1994, respectively. The fiscal 1996 additions exclude $6.3 million related to
the Weberg and Glick's acquisitions. The expenditures have been both for the
opening of new stores and capital replacements in existing stores, including
the remodeling completed for 12 stores in fiscal 1996, 16 stores in fiscal 1995
and 16 stores in fiscal 1994. The Company plans to spend approximately $27.0
million in fiscal 1997 and $25.0 million in 1998, however, capital expenditures
in excess of $18.0 million in any year after 1996, will require approval under
the Existing Revolver. Although the Company still plans to remodel or
refurbish 16 stores in fiscal 1997, it has for the present temporarily
suspended the remodeling program with completion of six stores both to await
the results of the Salomon Brothers' recommendations on strategic alternatives
and to allow the stores acquired from Weberg and Glick's to be fully integrated
into Rhodes' operation. These increases also reflect the cost of the
additional 17 new stores and the relocation of six stores over the two year
period. 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.
Acquisitions over $3 million or $5 million in the aggregate for any four
consecutive quarters require approval under the Existing Revolver.
Since March 1, 1995, the Company has purchased 368,900 shares of its
Common Stock for an aggregate purchase price of $3.8 million. Under the
Existing Revolver, the Company is generally prohibited from making
distributions. However, the Company may make distributions to its
shareholders, (i) so long as no event of default exists or would result from
any such distribution and (ii) the amount of the distributions during the term
of the Existing Revolver does not exceed, in the aggregate $3.0 million.
24
<PAGE> 25
The Company's consolidated funded indebtedness at February 29, 1996
including obligations under capital leases, was $96.0 million, up from $55
million at February 28, 1995 and $60.8 million at February 28, 1994. Set forth
below are the scheduled principal payments required under the Company's
existing debt agreements.
<TABLE>
<S> <C>
Fiscal 1997 $11.6 million
Fiscal 1998 $14.9 million
Fiscal 1999 $37.7 million
</TABLE>
The maximum availability of funds under the Existing Revolver is the
lesser of $45.0 million or 50% of eligible inventory, plus a three year term
loan of $20.0 million. The Existing Revolver is secured by substantially all
of the inventory of the Company. As of May 9, 1996, borrowings under the
Existing Revolver were approximately $33.8 million and approximately $8.2
million remained available for borrowing. Loans outstanding under the Existing
Revolver generally will bear interest at one of two interest rate options
selected by the Company: (i) Prime Rate or (ii) a quoted LIBOR plus 1.75% per
annum for specified interest periods, and (iii) prime rate plus 1.0% per annum
for the aggregate amount that the total term loan and the revolving loan
exceeds 50% of eligible inventory. 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 0.50% per annum of the average
daily unused portion of the lender's commitment under the Existing Revolver.
The loan agreement expires on January 12, 1999 and therefore has been
classified in the financial statements as long term debt, except for the
current portion of the three year term loan.
The terms of the Existing Revolver 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, effect
stock repurchases and make distributions and (vii) engage in certain actions
with affiliates and subsidiaries. The Existing Revolver also requires 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 its bank leanding arrangements
will be sufficient to fund the Company's present and proposed operations and
capital expenditure program and expansion program.
25
<PAGE> 26
In connection with the acquisitions of Weberg and Glick's the Company
assumed or executed operating leases for an aggregate of 28 store locations and
three distribution centers and paid additional consideration for inventory and
operating assets aggregating approximately $41.0 million. Funding was provided
through bank debt and the issuance of notes aggregating $2.0 million to
Glick's.
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.
26
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item X of Part 1 hereof and incorporated herein by reference to
the annual proxy statement relating to the 1996 annual meeting of shareholders
of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the annual proxy statement relating to
the 1996 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 1996 annual meeting of shareholders of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Incorporated by reference to the annual proxy statement relating to
the 1996 annual meeting of shareholders of the Company.
27
<PAGE> 28
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-28) are filed under Item 8 of this Annual
Report:
Report of Independent Public Accountants
Consolidated balance sheets as of February
29, 1996 and February 28, 1995
Consolidated statements of operations for the
years ended February 29, 1996, February 28,
1995 and February 28, 1994
Consolidated statements of shareholders'
equity for the years ended February 29, 1996,
February 28, 1995 and February 28, 1994
Consolidated statements of cash flows for the
years ended February 29, 1996, February 28,
1995 and February 28, 1994
Notes to consolidated financial statements
for the years ended February 29, 1996,
February 28, 1995 and February 28, 1994
Report of Independent Public Accountants -
Rhodes, Inc. 1994 Employee Stock Purchase
Plan
Statement of Net Assets Available for
Purchase of Stock - Rhodes, Inc. 1994
Employee Stock Purchase Plan
2. The following financial statement schedules are filed
as part of this Annual Report:
None
3. Exhibits.
The Exhibits listed in (c) below are filed as part of
this Annual Report.
(b) Reports on Form 8-K
None
28
<PAGE> 29
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
2.1 -- Asset Purchase Agreement between Weberg Enterprises, Inc., John P. Weberg and the Registrant dated
October 2, 1995, as amended by the first amendment thereto dated October 31, 1995 (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated October 31, 1995).
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 -- 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 -- 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).
10.3 -- 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).
10.4 -- Form of Compensation (change in control) Agreement between Irwin L. Lowenstein and Rhodes, Inc.
(Incorporated by reference to Exhibit 10.7 to Registrant's Annual Report on Form 10-K for the year
ended February 28, 1995).
</TABLE>
29
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
10.5 -- 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).
10.6 -- 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)).
10.7 -- 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)).
10.8 -- Credit Agreement dated as of January 12, 1996 by and among the Registrant, Wachovia Bank of Georgia,
N.A. and Fleet Capital Corporation (incorporated by reference to Exhibit 4.1 to the Registrant's
Quarterly Report on Form 10-Q dated November 30, 1995).
10.9 -- First Amendment to Loan and Security Agreement dated as of May 28, 1996 by and among the Registrant,
Wachovia Bank of Georgia, N.A. and Fleet Capital Corporation.
10.10 -- Compensation Agreement entered into between the Registrant and Joel T. Lanham.
10.11 -- Compensation Agreement entered into between the Registrant and Joel H. Dugan.
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
</TABLE>
30
<PAGE> 31
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 29, 1996
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 29, 1996
PRINCIPAL OPERATING OFFICER:
/s/ JOEL T. LANHAM
- ----------------------------
Joel T. Lanham
President and
Chief Operating Officer
Date: May 29, 1996
PRINCIPAL FINANCIAL OFFICER:
/s/ JOEL H. DUGAN
- ----------------------------
Joel H. Dugan
Senior Vice President,
Finance and Administration
Date: May 29, 1996
31
<PAGE> 32
PRINCIPAL ACCOUNTING OFFICER:
/s/ BARBARA SNOW
- -----------------------------
Barbara Snow
Vice President and
Corporate Controller
Date: May 29, 1996
DIRECTORS:
/s/ IRWIN L. LOWENSTEIN
- -----------------------------
Irwin L. Lowenstein
Date: May 29, 1996
/s/ HOLCOMBE T. GREEN, JR.
- -----------------------------
Holcombe T. Green, Jr.
Date: May 29, 1996
/s/ JAMES R. KUSE
- -----------------------------
James R. Kuse
Date: May 29, 1996
/s/ JAMES V. NAPIER
- -----------------------------
James V. Napier
Date: May 29, 1996
/s/ DON L. CHAPMAN
- -----------------------------
Don L. Chapman
Date: May 29, 1996
32
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
THE SHAREHOLDERS OF RHODES, INC.
We have audited the accompanying consolidated balance sheets of
Rhodes, Inc. (a Georgia corporation) and subsidiaries as of February 29, 1996
and February 28, 1995 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended February 29, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Rhodes, Inc. and
subsidiaries as of February 29, 1996 and February 28, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended February 29, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 25, 1996
F-1
<PAGE> 34
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
ASSETS 1996 1995
- ------------------------------------------------ -------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 312 $ 3,268
Accounts receivable 5,212 3,398
Inventories at LIFO cost 87,965 54,386
Prepaid expenses and other 10,072 5,356
Deferred tax assets 2,157 861
-------------- --------------
Total Current Assets 105,718 67,269
-------------- --------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization of $39,007 at
February 29, 1996 and $34,007 at February 28,
1995 75,951 55,142
-------------- --------------
CAPITALIZED REAL ESTATE LEASES, at cost, less
accumulated amortization of $5,640 at February
29, 1996 and $4,882 at February 28, 1995 6,304 7,062
-------------- --------------
INTANGIBLE ASSETS, net
Goodwill 62,482 60,319
Favorable leases 2,962 3,825
Other intangibles 2,488 2,387
-------------- --------------
Total Intangible Assets 67,932 66,531
-------------- --------------
OTHER ASSETS 5,854 2,406
-------------- --------------
TOTAL ASSETS $ 261,759 $ 198,410
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and
capital lease obligations $ 12,695 $ 967
Accounts payable 47,745 35,403
Accrued interest 1,000 781
Accrued liabilities 25,912 19,374
Deferred income 11,247 9,795
Current portion deferred gain--
sale/leasebacks 318 318
Current income taxes payable - 460
-------------- --------------
Total Current Liabilities 98,917 67,098
-------------- --------------
DEFERRED INCOME TAXES 6,862 7,070
-------------- --------------
LONG-TERM DEBT, less current maturities 70,642 40,000
-------------- --------------
OBLIGATIONS UNDER CAPITAL LEASES 12,928 14,035
-------------- --------------
DEFERRED GAIN--SALE/LEASEBACKS 2,390 2,707
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Common Stock, no par value, 20,000 shares
authorized and 9,134 and 9,463 shares
outstanding at February 29, 1996 and
February 28, 1995 - -
Paid-in Capital
99,709 103,179
Accumulated deficit (29,689) (35,679)
-------------- --------------
Total Shareholders' Equity 70,020 67,500
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 261,759 $ 198,410
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets
F-2
<PAGE> 35
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
NET SALES $ 430,193 $ 361,238 $ 325,255
COST OF GOODS SOLD 225,953 185,995 168,425
------------ ------------ ------------
GROSS PROFIT 204,240 175,243 156,830
------------ ------------ ------------
FINANCE CHARGES AND INSURANCE COMMISSIONS 5,822 4,935 4,892
------------ ------------ ------------
OPERATING EXPENSES:
Selling 72,104 57,720 51,865
General and administrative 115,809 93,391 84,404
Provision for credit losses 167 164 213
Amortization of intangibles 2,933 3,074 3,132
Other expense (income), net (401) 197 8
Non-recurring charge 2,400 - -
------------ ------------ ------------
193,012 154,546 139,622
------------ ------------ ------------
OPERATING INCOME 17,050 25,632 22,100
Interest expense, net 6,898 6,109 11,545
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 10,152 19,523 10,555
PROVISION FOR INCOME TAXES 4,162 8,004 4,508
------------ ------------ ------------
NET INCOME BEFORE EXTRAORDINARY ITEM 5,990 11,519 6,047
EXTRAORDINARY ITEM-EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX EFFECT (NOTE 10) - - (2,727)
------------ ------------ ------------
NET INCOME $ 5,990 $ 11,519 $ 3,320
------------ ------------ ------------
NET INCOME PER SHARE OF COMMON STOCK BEFORE
EXTRAORDINARY ITEM $ 0.64 $ 1.18 $ 0.83
EXTRAORDINARY ITEM PER SHARE OF COMMON STOCK - - (0.38)
------------ ------------ ------------
NET INCOME PER SHARE $ 0.64 $ 1.18 $ 0.45
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 9,304 9,760 7,302
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 36
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
CLASS A
PREFERRED STOCK, TOTAL
CUMULATIVE COMMON SHAREHOLDER'S
DIVIDENDS, STOCK, PAID-IN ACCUMULATED EQUITY
NO PAR VALUE NO PAR VALUE CAPITAL DEFICIT (DEFICIT)
---------------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
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 - - 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 incurred 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
Net income - - - 5,990 5,990
Issuance of Common Stock, from employee
stock purchase plan - - 350 - 350
Repurchase of Common Stock - - (3,820) - (3,820)
------------ -------- ---------- ---------- ----------
BALANCE, February 29, 1996 $ - $ - $ 99,709 $ (29,689) $ 70,020
============ ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-4
<PAGE> 37
RHODES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,990 $ 11,519 $ 3,320
Adjustments to reconcile net income to net cash provided by
operating activities:
Extraordinary item-early retirement of debt - - 3,527
Depreciation and amortization 8,439 6,722 6,399
Change in deferred income taxes (1,504) 735 2,373
Amortization of intangibles 2,933 3,074 3,132
Noncash interest expense - - 2,626
Amortization of gain-sale/leasebacks (317) (318) (318)
Write-off of intangible assets 90 - -
Changes in current assets and liabilities, net of acquistions:
Receivables, net (1,814) (1,325) 840
Inventories (3,308) (6,199) (10,861)
Prepaid expenses and other (3,851) (981) (223)
Accounts payable and accrued liabilities 15,141 11,644 8,206
Deferred income on warranties and undelivered sales 1,452 1,063 423
------------ ------------ ----------
Net cash provided by operating activities 23,251 25,934 19,444
------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Retirements of property and equipment, net 1,319 1,079 97
Purchase of Weberg, net of cash acquired (30,711) - -
Purchase of Glick's, net of cash acquired (10,742) - -
Additions to property and equipment (23,477) (14,101) (6,860)
Additions to intangible assets (437) (54) (1,407)
Decrease (increase) in other assets 48 (68) (1,511)
------------ ------------ ----------
Net cash used in investing activities (64,000) (13,144) (9,681)
------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of short-term debt, net - (2,471) (4,976)
Repayment of long-term debt - (2,568) (88,363)
(Decrease) increase in obligations under capital leases (1,029) (790) 147
Prepayment penalty for early retirement of debt - - (2,624)
Proceeds from the Senior Secured Financing - - 40,000
Proceeds from issuance of long-term debt 42,292 - -
Expenses incurred for stock registration - (262) -
Repurchase of stock (3,820) (3,684) -
Proceeds from sale of stock-employee purchase plan 350 - -
Proceeds from sale of stock - - 45,499
Exercise of stock options - 18 631
------------ ------------ ----------
Net cash provided by (used in) financing activities 37,793 (9,757) (9,686)
------------ ------------ ----------
INCREASE (DECREASE) IN CASH (2,956) 3,033 77
CASH AT BEGINNING OF YEAR 3,268 235 158
------------ ------------ ----------
CASH AT END OF YEAR $ 312 $ 3,268 $ 235
============ ============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID FOR:
Interest $ 6,898 $ 6,109 $ 8,919
============ ============ ==========
Income taxes $ 7,580 $ 6,689 $ 1,320
============ ============ ==========
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> 38
RHODES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 1996, FEBRUARY 28, 1995 AND 1994
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
INTRODUCTION
Rhodes is one of the largest specialty furniture retailers in the
United States. Founded in 1875, the Company operated 108 stores at February
29, 1996 in metropolitan areas of 15 contiguous Southern, Midwestern and
Western states and for many years has focused on selling brand name residential
furniture to middle-income customers.
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.
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> 39
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.
Pursuant to an ongoing merchant agreement Beneficial National Bank USA ("BNB")
provides Rhodes with its private label credit facility for credit sales. This
arrangement eliminates the risks associated with credit losses and interest
fluctuations on its accounts receivables portfolio. Accounts receivable
consists primarily of miscellaneous receivables from customers and amounts
awaiting funding from BNB.
Finance commissions are recognized for the sale of certain installment
contracts to BNB.
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 29, 1996 and February 28,
1995 with the exception of long-term debt (see Note 3).
F-7
<PAGE> 40
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.
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Land $ 8,036 $ 8,416
Buildings 31,807 30,045
Leasehold improvements, equipment and other 75,115 50,688
-------- --------
114,958 89,149
Less accumulated depreciation and amortization (39,007) (34,007)
-------- --------
$ 75,951 $ 55,142
======== ========
</TABLE>
Capitalized real estate leases are summarized as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Land $ 2,267 $ 2,267
Buildings 9,677 9,677
-------- --------
11,944 11,944
Less accumulated amortization (5,640) (4,882)
-------- --------
$ 6,304 $ 7,062
======== ========
</TABLE>
F-8
<PAGE> 41
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over identifiable
assets acquired and is being amortized on a straight-line basis over 40 years.
Amortization expense for goodwill totaled $1,824,000 for fiscal 1996, and
$1,798,000 for February 28, 1995, and 1994 Accumulated amortization for
goodwill totaled $13,413,000 and $11,590,000 as of February 29, 1996 and
February 28, 1995, respectively. 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 $773,000, $953,000 and $1,091,000 for fiscal 1996,
1995, and 1994, respectively. Accumulated amortization for favorable leases
totaled $8,384,000 and $7,646,000 as of February 29, 1996 and February 28,
1995, 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 10)) for fiscal 1996, 1995, and 1994, totaled
approximately $336,000, $323,000 and $190,000, respectively. Accumulated
amortization for other intangibles totaled $908,000 and $690,000 as of
February 29, 1996 and February 28, 1995, respectively.
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 $1,154,000, $1,878,000 and $1,587,000, less net direct expenses of
$253,000, $413,000 and $349,000, respectively, were deferred to future periods
in fiscal 1996, 1995, and 1994, respectively.
EARNINGS PER SHARE
The historical net income per common share is calculated by dividing
net income applicable to Common Stock by the weighted average shares of Common
Stock outstanding. Most stock options were antidilutive for earnings per share
calculations for fiscal 1996, fiscal 1995 and fiscal 1994.
F-9
<PAGE> 42
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 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Total deferred tax liabilities $ 16,780 $ 16,403
Total deferred tax assets (15,005) (13,124)
Valuation allowance 2,930 2,930
-------- --------
Net deferred tax liabilities $ 4,705 $ 6,209
======== ========
</TABLE>
The net deferred tax liabilities are classified on the Company's
balance sheet as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
Net current deferred tax assets $(2,157) $ (861)
Net non-current deferred income taxes 6,862 7,070
------- ------
Net deferred tax liabilities $ 4,705 $6,209
======= ======
</TABLE>
The sources of the difference between the financial accounting and tax
basis of the Company's assets and liabilities which give rise to the deferred
tax liabilities and deferred tax assets and the tax effects of each are as
follows:
F-10
<PAGE> 43
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Stepped-up basis in fixed assets $ 5,864 $ 6,263
Favorable leases 1,155 1,492
Acquisition costs 696 1,340
Depreciation 3,974 3,108
Inventories 4,148 3,491
Other 943 709
------- -------
$16,780 $16,403
======= =======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
Capitalized leases $ 2,779 $ 2,763
Gain-Sale/leaseback 932 1,056
Gain on property disposals 1,325 1,395
Deferred rent 852 692
Accrued expenses 2,731 1,792
Deferred revenues 2,481 2,049
Uniform inventory cost capitalization 1,296 848
Net operating loss carryforwards - 2,404
Other 2,609 125
------- -------
$15,005 $13,124
======= =======
</TABLE>
The Company has established a valuation allowance of $2.9 million as
of February 29, 1996 and February 28, 1995 because of the uncertainty regarding
the realizability of certain deferred tax assets.
F-11
<PAGE> 44
The consolidated provision for income taxes before extraordinary item
consists of the following:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
---- ---- ----
ENDED ENDED ENDED
----- ----- -----
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
------------ ------------ ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ 5,407 $ 7,269 $ 1,335
Deferred (1,245) 735 3,173
------- ------- -------
$ 4,162 $ 8,004 $ 4,508
======= ======= =======
</TABLE>
The tax provision differed from the amounts resulting from multiplying
the income before income taxes and extraordinary item by the statutory federal
income tax rates. The reasons for these differences were as follows:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
---- ---- ----
ENDED ENDED ENDED
----- ----- -----
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
------------ ------------ ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal income tax provision at statutory rates $3,553 $6,833 $3,694
State income tax provision, net of federal income tax
benefit 406 780 422
Amortization of intangible assets not deductible for tax
purposes 717 701 717
Tax reserve adjustment (645) - -
Increase of net deferred tax liabilities from fiscal 1994
tax rate change - - 31
Other 131 (310) (356)
------ ------ ------
$4,162 $8,004 $4,508
====== ====== ======
</TABLE>
F-12
<PAGE> 45
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
(In Thousands)
<S> <C> <C>
SENIOR SECURED NOTES:
Tranche A, 9%, due June 15, 1999 $29,778 $30,000
Tranche B, 10%, due June 15, 2000 10,000 10,000
Unsecured Notes payable at prime rate plus 3.0% with quarterly
installments of $100,000 beginning March 31, 1996 2,000 -
Revolving Note with maximum availability of $45 million or 50% of eligible
inventory expiring January 12, 1999 21,764 -
Secured Term Loan payable in quarterly installments beginning March 1,
1996, with the final installment due January, 1999. 18,750 -
------- -------
82,292 40,000
Less current portion 11,650 -
------- -------
$70,642 $40,000
======= =======
</TABLE>
The aggregate annual payments required for the above notes during each
of the next five years are as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1997 $11,650
1998 $14,900
1999 $37,664
2000 $ 7,678
2001 $10,400
</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 29, 1996 was approximately $83,607,000 and at
February 28, 1995 was approximately $41,300,000.
F-13
<PAGE> 46
TERMS
The Senior Secured Notes consist of two tranches: (I) Tranche A Notes
in the aggregate principal amount of $29.8 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 January 12, 1996, the Company renewed its Revolving Credit
Agreement with Wachovia National Bank of Georgia for the lessor of $45.0
million or 50% of eligible inventory. The loan agreement also included a three
year term loan of $20.0 million dollars with quarterly principal payments
beginning March 1, 1996.
The terms of the revolving loan and three year term 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 29, 1996,
except for the limitation on capital expenditures which was waived.
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
$2,932,000 and $2,383,000 higher than those reported as of February 29, 1996
and February 28, 1995, 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.
F-14
<PAGE> 47
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain store locations under operating lease
agreements with various expiration dates through 2021. Rentals under all store
leases were approximately $16,980,000, $11,901,000, and $10,464,000 for fiscal
1996, 1995, and 1994, respectively. As of February 29, 1996, the minimum
obligations under lease commitments with original terms beyond one year are as
follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
1997 $24,975
1998 24,535
1999 23,334
2000 21,661
2001 20,303
After 2001 178,094
</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. 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-15
<PAGE> 48
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 Company also has compensation (change
of control) agreements with the President and Chief Operating Officer and the
Chief Financial Officer whereby severance would become payable under certain
events, such as a change of control (as defined) of the Company. The maximum
contingent liability under these agreements of the Company at February 29, 1996
is approximately $2.9 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 29, 1996:
<TABLE>
<S> <C>
1997 $ 2,699,000
1998 2,691,000
1999 2,602,000
2000 2,620,000
2001 2,754,000
After 2001 9,683,000
-----------
Total minimum lease payments 23,049,000
-----------
Less amount representing interest at rates of 11.89% to 12.83% (9,076,000)
Present value of total minimum obligation 13,973,000
Less current portion (1,045,000)
-----------
Long-term obligations under capital leases $12,928,000
===========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has an employee discount stock purchase plan for all
eligible employees of Rhodes, Inc. and designated subsidiaries. Participants
may use up to $12,500 each six month purchase period to purchase through
payroll deductions the Company's common stock for 85% of the lower of the
closing stock price on the first or last day of each stock purchase period. At
February 29, 1996, there were 209,875 shares of stock reserved for issuance
under this plan.
F-16
<PAGE> 49
On March 1, 1995, the Company established a non-qualified Supplemental
Pension Plan (the "Plan"), which is an unfunded defined benefit plan. The Plan
provides benefits to certain officers who earn compensation in excess of the
compensation limits imposed by the Internal Revenue Tax Code ("Code"). Under
the Plan, participants are paid an amount equal to the difference between (I)
the monthly benefit that would be paid without regard to Code limitations (ii)
and the monthly retirement benefit payable under the pension Plan. The
projected benefit obligation of the unfunded plan totaled $834,000 at February
29, 1996. Net periodic pension expense for fiscal 1996 was $199,000.
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 1996, 1995,
and 1994 includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
---------- ---------- ----------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
------------ ------------ ------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 484,000 $ 502,000 $ 660,000
Interest cost on projected benefit obligation 1,014,000 857,000 916,000
Actual return on assets (1,634,000) 467,000 (786,000)
Net amortization and deferral 564,000 (1,596,000) (390,000)
----------- ----------- ---------
Net pension expense for period $ 428,000 $ 230,000 $ 400,000
=========== =========== =========
</TABLE>
The funded status of the defined benefit plan as of February 29, 1996
and February 28, 1995 is as follows:
F-17
<PAGE> 50
<TABLE>
<S> <C>
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF:
Vested benefits $ 12,508,000 $ 9,428,000
Nonvested benefits 331,000 297,000
------------ ------------
Accumulated benefit obligation 12,839,000 9,725,000
Effect of projected future compensation levels 1,007,000 675,000
------------ ------------
Projected benefit obligation 13,846,000 10,400,000
Plan assets at fair value (12,063,000) (10,451,000)
------------ ------------
Plan assets (less than) in excess of projected benefit obligation (1,783,000) 51,000
Unrecognized prior service cost 60,000 70,000
Unrecognized net (gain) loss 845,000 (961,000)
Unrecognized net asset from initial application of SFAS No. 87 (1,453,000) (1,650,000)
------------ ------------
Pension liability recognized In the balance sheet $ (2,331,000) $ (2,490,000)
============ ============
</TABLE>
The projected benefit obligation was calculated using an 7.75% and
8.75% assumed discount rate as of February 29, 1996 and February 28, 1995,
respectively, and an assumed long-term compensation increase rate of 4.9% in
fiscal 1996 and fiscal 1995. Pension expense was determined using an 8.5% and
8.0% assumed long-term rate of return on plan assets for the years ended
February 29, 1996 and February 28, 1995, respectively. At February 29, 1996,
plan assets consisted primarily of equity securities 68%, fixed income
securities 27% and money market instruments 5%.
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
$445,000, $400,000 and $345,000 in fiscal 1996, 1995 and 1994, 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
F-18
<PAGE> 51
$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.
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 29, 1996, 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 29, 1996,
options to acquire 681,500 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.
F-19
<PAGE> 52
The following table details the Company's stock option activity for
the past three fiscal years:
<TABLE>
<CAPTION>
<S> <C> <C>
OPTIONS OUTSTANDING AT: OPTIONS OPTION PRICE
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 Granted 35,000 $ 9.00
Options Exercised - -
Options Cancelled or Terminated (47,500) $ 12.00
------- -------------
OPTIONS OUTSTANDING AT:
February 29, 1996 696,500 $ 9.00-$18.25
======= =============
OPTIONS EXERCISABLE AT:
February 29, 1996 352,000 $ 9.00-$18.25
======= =============
</TABLE>
F-20
<PAGE> 53
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 with Wachovia
Bank of Georgia, N.A. ("Wachovia"). On January 12, 1996, the Company entered
into a revised loan and security agreement with Wachovia and the Fleet Capital
Corporation which provides a term loan of $20 million and a revolving credit
facility (the "Revolving Credit Facility") of the lesser of $45 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 of two interest
rate options selected by the Company: (i) Prime Rate or (ii) a quoted LIBOR
plus 1.75% per annum for specified interest periods. On any day that the loans
outstanding including the term loan exceeds 50% of eligible inventory,
additional interest of 1.00% per annum will apply. The Company is required to
pay a commitment fee of 0.50% per annum of the average daily unused portion of
the Senior Lender's commitment under the Revolving Credit Agreement. The
Revolving Credit Agreement is scheduled to terminate in January 12, 1999. At
February 29, 1996, the Company had $21,764,000 outstanding under the Revolving
Credit Facility and the amount available under the Revolving Credit Agreement
at February 29, 1996 was $15,518,000. The balance outstanding at February 29,
1996 on the term loan was $18,750,000.
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.
Because the Company had no short term debt at the year ended February
29, 1996, none of the interest expense of $6,898,000 for fiscal 1996 set forth
is short term interest.
F-21
<PAGE> 54
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.
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 29, 1996 or
February 28, 1995.
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 10).
F-22
<PAGE> 55
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.
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. 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.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited
results of operations for the years ended February 29, 1996 and February 28,
1995:
<TABLE>
<CAPTION>
=============================================================================================================
FISCAL 1996 FISCAL 1995
(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 $89,439 $95,379 $111,725 $133,650 $82,865 $88,809 $95,785 $93,779
- -------------------------------------------------------------------------------------------------------------
Gross Profit $43,095 $45,562 $ 54,159 $ 61,424 $41,267 $43,140 $45,801 $45,035
- -------------------------------------------------------------------------------------------------------------
Net income $ 1,807 $ 2,669 $ 1,155 $ 359 $ 1,756 $ 2,616 $ 4,591 $ 2,556
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA:
- -------------------------------------------------------------------------------------------------------------
Net income $ 0.19 $ 0.29 $ 0.12 $ 0.04 $ 0.18 $ 0.27 $ 0.47 $ 0.26
=============================================================================================================
</TABLE>
F-23
<PAGE> 56
12. NON-RECURRING CHARGE
In the quarter ended November 30, 1995 the Company recorded a
non-recurring charge to reflect the cost of changing the names of 33 stores to
"Rhodes", and the cost of closing four stores in the fourth quarter of fiscal
1996. The aggregate amount of the charge was $2,400,000, less income tax
benefit of $984,000, for a net charge of $1,416,000, or approximately $.15 per
share.
13. ACQUISITIONS
On November 1, 1995, the Company completed its acquisition of The
Weberg Furniture Company for approximately $30,734,000. The acquisition was
accounted for as a purchase transaction and, accordingly, the results of
operations of Weberg have been included in the accompanying financial
statements since November 1, 1995. The purchase price was allocated to the
assets and liabilities based upon their estimated fair value as of the date of
acquisition. The excess of the consideration paid over the estimated fair
value of net assets acquired of $3,399,000 has been recorded as goodwill and
is being amortized on a straight line basis over 40 years. The fair value of
assets acquired and liabilities assumed was $29,866,000 and $2,531,000,
respectively.
On December 15, 1995, the Company completed its acquisition of The
Glick Furniture Company for approximately $10,742,000. The acquisition was
accounted for as a purchase transaction and, accordingly, the results of
operations of Glick's have been included in the accompanying financial
statements since December 15, 1995. The purchase price was allocated to the
assets and liabilities based upon their estimated fair value as of the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $588,000 has been recorded as goodwill and is being
amortized on a straight line basis over 40 years. The fair value of assets
acquired and liabilities assumed was $11,121,000 and $967,000, respectively.
The following table summarizes on a pro forma basis the consolidated
results of operations as though Weberg and Glick's had been acquired on March 1
of each year presented (unaudited):
<TABLE>
<CAPTION>
Dollars in thousands, except per
share data
YEAR ENDED YEAR ENDED
---------- ----------
FEBRUARY 29, FEBRUARY 28,
------------ ------------
1996 1995
---- ----
<S> <C> <C>
Net Sales $533,292 $514,355
Net Income $ 4,611 $ 12,346
Earnings Per Share $ 0.50 $ 1.26
</TABLE>
This pro forma information is not necessarily indicative of the
results of operations that would have been attained had the acquisition been
consummated on March 1 of each year presented or that may be attained in the
future.
F-24
<PAGE> 57
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 29, 1996 and February 28, 1995 and the related statements of changes
in net assets available for purchase of stock for the year ended February 29,
1996 and 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 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 net assets available for purchase of
stock of Rhodes, Inc. 1994 Employee Stock Purchase Plan as February 29, 1996
and February 28, 1995 and the changes in net assets available for purchase of
stock for the year ended February 29, 1996 and 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 25, 1996
F-25
<PAGE> 58
RHODES, INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS
AVAILABLE FOR PURCHASE OF STOCK
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS END
---------- --------------
FEBRUARY 28, FEBRUARY 28,
------------ ------------
1995 1995
---- ----
<S> <C> <C>
Cash $ 155,777 $ 184,677
=============== ===============
Net assets available for purchase of stock $ 155,777 $ 184,677
=============== ===============
STATEMENT OF CHANGES IN NET ASSETS
AVAILABLE FOR PURCHASE OF STOCK
Additions to net assets:
Employee contributions $ 339,321 $ 184,677
--------------- ---------------
Deductions from net assets:
Stock purchases 350,755 -
Refunds 17,466 -
--------------- ---------------
368,221 -
--------------- ---------------
Change in net assets for the period (28,900) 184,677
Net assets, beginning of period 184,677 -
--------------- ---------------
Net assets, end of period $ 155,777 $ 184,677
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 59
RHODES, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996 AND 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 29, 1996,
40,120 shares had been issued under the Plan and 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.
F-27
<PAGE> 60
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.
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, 1996, 16,211 shares of stock were purchased under the Plan
for $129,169. The net assets available for purchase of stock at February 29,
1996 represent the $129,169 purchase price of the stock, refunds due of $21,638
and contributions made for the next purchase period. These shares were
subsequently distributed to the participants. The price per share of $7.97 is
equal to 85% of the February 29, 1996 fair market value of Rhodes, Inc. Stock.
Subsequent to the purchase, 193,669 shares remain available for purchase under
the Plan.
F-28
<PAGE> 1
EXHIBIT 10.9
FIRST AMENDMENT TO LOAN AND
SECURITY AGREEMENT DATED AS OF
MAY 26, 1996 BY AND AMONG THE
REGISTRANT, WACHOVIA BANK OF GEORGIA, N.A.
AND FLEET CAPITAL CORPORATION
<PAGE> 2
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is
made and entered into this 28th day of May, 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 Agent
for the Lenders.
RECITALS:
Agent, Lenders and Borrower are parties to a certain Loan and Security
Agreement dated January 12, 1996 (the "Loan Agreement") pursuant to which
Lender has made certain revolving credit and term loans to Borrower.
The parties desire to 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. AMENDMENT TO LOAN AGREEMENT. The Loan Agreement is hereby amended by
deleting Sections 10.3.1, 10.3.2 and 10.3.4. in
their entireties and by substituting the following new Sections 10.3.1 and
10.3.2 in lieu thereof (with each such amendment to have prospective
application only):
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:
-1-
<PAGE> 3
Period Amount
------ ------
March 1, 1996, through $1,000,000
May 31, 1996
March 1, 1996, through $10,000,000
August 31, 1996
March 1, 1996, through $29,000,000
November 30, 1996
March 1, 1996, through $39,000,000
February 28, 1997
March 1, 1997, through $47,000,000, calculated
February 28, 1998 quarterly based upon the
immediately preceding four
(4) fiscal quarters of
Borrower
March 1, 1998, and $48,000,000, calculated
thereafter quarterly based upon the
immediately preceding four
(4) fiscal quarters of
Borrower
10.3.2 Consolidated Fixed Charge Coverage Ratio. Borrower shall at
all times maintain a Consolidated Fixed Charge Coverage Ratio of at least
the ratios shown below for the period corresponding thereto, calculated
quarterly based upon the immediately preceding four fiscal quarters:
Period Ratio
------ -----
Closing date through 1.50 to 1.0
February 29, 1996
March 1, 1996, through 1.15 to 1.0
August 31, 1996
September 1, 1996, through 1.35 to 1.0
November 30, 1996
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 2.0 to 1.0
thereafter
<PAGE> 4
10.3.4 Consolidated Leverage Ratio. Borrower shall at all times
maintain a consolidated leverage ratio that does not exceed the ratios
shown below for the periods corresponding thereto:
Period Ratio
------ -----
Closing date through 2.75 to 1.0
February 29, 1996
March 1, 1996, through 2.95 to 1.0
May 31, 1996
June 1, 1996, 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
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 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 and as of May 28, 1996, totalled $39,642,000 and the unpaid principal
amount of the Term Loan on and as of May 28, 1996, totalled $18,750,000.
5. AMENDMENT FEE. Borrower agrees to pay Agent, for the ratable benefit
of the Lenders, an amendment fee in the amount of $50,000 in immediately
available funds, which fee is due and owing on the date hereof and shall be
paid upon the execution of this Amendment.
-3-
<PAGE> 5
6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender, to induce Lender to enter into this Amendment, that 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.
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 and
any taxes or expenses associated with or incurred in connection with any
instrument or agreement referred to herein or contemplated hereby.
8. EFFECTIVENESS; GOVERNING LAW. This Amendment shall be effective upon
acceptance by Lender in Atlanta, Georgia, whereupon the same shall be governed
by and construed in accordance with the internal laws of the State of Georgia.
9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns.
10. 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, any of the Other Agreements, any of the Security Documents
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.
11. 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.
12. FURTHER ASSURANCES. Borrower agrees to take such further actions as
Lender shall reasonably request from time to time in
-4-
<PAGE> 6
connection herewith to evidence the amendments set forth herein to the Loan
Agreement.
13. 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.
14. RELEASE OF CLAIMS. TO INDUCE LENDER TO ENTER INTO THIS AMENDMENT,
BORROWER HEREBY RELEASES, ACQUITS AND FOREVER DISCHARGES LENDER, AND ALL
OFFICERS, DIRECTORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS OF LENDER, FROM
ANY AND ALL LIABILITIES, CLAIMS, DEMANDS, ACTIONS OR CAUSES OR 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 LENDER ARISING UNDER OR IN CONNECTION WITH ANY OF THE LOAN
DOCUMENTS OR OTHERWISE.
15. WAIVER OF JURY TRIAL. 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.
Barbara W. Snow By: Joel H. Dugan
- -------------------------- ----------------------------
Title: V.P. Controller JOEL H. DUGAN, Senior Vice
[CORPORATE SEAL] President, Finance and
Administration
Address:
4370 Peachtree Road, N.E.
Atlanta, Georgia 30319
Attention: Joel H. Dugan,
Senior Vice President
Telecopier No.: (404) 264-4701
[Signatures continued on following page]
-5-
<PAGE> 7
LENDERS:
WACHOVIA BANK OF GEORGIA, N.A.
By: ____________________________
Title: _____________________
Address:
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1757
Attention: Kevin B. Harrison
Telecopier No.: (404) 332-6920
FLEET CAPITAL CORPORATION
By: ____________________________
Title: _____________________
WACHOVIA BANK OF GEORGIA, N.A.,
as Agent
By: ____________________________
Title: _____________________
Address:
191 Peachtree Street, N.E.
Atlanta, Georgia 30303-1757
Attention: Kevin B. Harrison
Telecopier No.: (404) 33-6920
-6-
<PAGE> 8
RHODES, INC.
ASSISTANT SECRETARY'S CERTIFICATE
OF
BOARD OF DIRECTORS RESOLUTIONS
I, Barbara W. Snow, DO HEREBY CERTIFY, that I am the Assistant Secretary
of RHODES, INC. (the "Corporation"), a corporation duly organized and existing
under and by virtue of the laws of the State of Georgia and am keeper of the
records and seal thereof; that the following is a true, correct and compared
copy of the resolutions duly adopted by the unanimous consent of all members of
the Board of Directors of said Corporation effective as of May 28, 1996; and
that said resolutions are still in full force and effect:
RESOLVED, that the Chairman of the Board, President, any Vice President,
or any other officer or board member of this Corporation (or the designee of
any of them), each be, and each hereby is, authorized and empowered (either
alone or in conjunction with any one or more of the other officers of the
Corporation) to take, from time to time, all or any part of the following
actions on or in behalf of the Corporation: (i) to make, execute and deliver
to WACHOVIA BANK OF GEORGIA, N.A. ("Agent"), in its capacity as agent for the
entities that are from time to time lenders thereunder (collectively,
"Lenders") (1) a First Amendment to Loan and Security Agreement (the
"Amendment") providing for the amendment of certain terms of that certain Loan
and Security Agreement dated January 12, 1996 among the Corporation, Lenders
and Agent, as amended (the "Loan Agreement"), and (2) all other agreements,
documents and instruments contemplated by or referred to in the Amendment or
executed by the Corporation in connection therewith; said Amendment to be
substantially in the form presented by Lender with such additional, modified or
revised terms as may be acceptable to any officer or director of the
Corporation, as conclusively evidenced by his or her execution thereof; and
(ii) to carry out, modify, amend or terminate any arrangements or agreements at
any time existing between the Corporation and Lender.
RESOLVED, that any arrangements, agreements, security agreements, or other
instruments or documents referred to or executed pursuant to the Amendment by
Joel H. Dugan, any other officer or director of the Corporation, or by an
employee of the Corporation acting pursuant to delegation of authority, may be
attested by such person and may contain such terms and provisions as such
person shall, in his or her sole discretion, determine.
RESOLVED, that the Loan Agreement and each amendment to the Loan Agreement
heretofore executed by any officer or director of the Corporation and any
actions taken under the Loan Agreement as thereby amended are hereby ratified
and approved.
I DO FURTHER CERTIFY that Joel H. Dugan is the Senior Vice President,
Finance and Administration of the Corporation and Barbara Snow is the Assistant
Secretary of the Corporation and each is duly elected, qualified and acting as
such, respectively.
<PAGE> 9
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of
the Corporation at Atlanta, Georgia, this 28th day of May, 1996.
Barbara W. Snow
------------------------------
BARBARA W. SNOW, Assistant
Secretary
[CORPORATE SEAL]
I, Joel H. Dugan, Vice President, Finance and Administration of said
Corporation, do hereby certify that the foregoing is a correct copy of the
resolutions passed by the Board of Directors of the Corporation and that
Barbara W. Snow is Assistant Secretary of the Corporation and is duly
authorized to attest to the passage of said resolutions.
Joel H. Dugan
------------------------------
JOEL H. DUGAN, Senior Vice
President, Finance and
Administration
-2-
<PAGE> 1
EXHIBIT 10.10
COMPENSATION AGREEMENT ENTERED
INTO BETWEEN THE REGISTERED
AND JOEL T. LANHAM
<PAGE> 2
COMPENSATION AGREEMENT
THIS AGREEMENT ("Agreement"), effective as of MAY 14, 1996, by
and between JOEL T. LANHAM, an individual resident of the State of Georgia
("Executive"), and RHODES, INC., a corporation organized under the laws of the
State of Georgia ("Company").
W I T N E S S E T H:
WHEREAS, Executive is a key officer of the Company and, if
there is a Change in Control of the Company, the Company desires that
Executive remain with the Company at least through such Change in Control; and
WHEREAS, the Company recognizes that the Company needs to
provide an incentive for Executive to remain with the Company at least through
a Change in Control.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, Executive and the Company, intending
to be legally bound, hereby agree as follows:
Section 1 Compensation.
1.1 Termination by the Company Without Good Cause.
1.1.1 The Company after a Change in Control shall have the
right to terminate Executive's employment without Good Cause before he reaches
age 65 only if the Company provides Notice of such termination to Executive.
During the Notice Period for such Notice, the Company (a) at its option, may
relieve Executive of all or part of his duties and responsibilities as
PRESIDENT AND CHIEF OPERATING OFFICER, without Executive's prior written
consent, but may not (1) assign Executive any additional or new duties or
responsibilities or (2) change Executive's job title from PRESIDENT AND CHIEF
OPERATING OFFICER, without such consent, (b) may not reduce Executive's annual
salary or reduce his compensation package when viewed as a whole as such salary
and such package are in effect on the date Notice is given and (c) shall
continue to make Executive's office and secretary available to Executive on a
full-time basis.
1.1.2 If the Company (subject to Section 1.1.1) terminates
Executive's employment without Good Cause before the first anniversary of a
Change in Control, the Company shall pay to Executive, in a lump sum payment
immediately after the effective date of such termination, an amount equal to
the sum of (a) a pro rata portion of One Year's Compensation for the portion of
the one year period that started on the date of the Change in Control and that
remains as of the effective date of Executive's termination of employment plus
(b) an additional One Year's Compensation.
-1-
<PAGE> 3
1.1.3 If the Company (subject to Section 1.1.1) terminates
Executive's employment without Good Cause on or after the first anniversary of
a Change in Control but before he reaches age 65, the Company shall pay to
Executive, in a lump sum payment immediately after the effective date of such
termination, an amount equal to One Year's Compensation.
1.2 Termination by Executive for Good Reason.
1.2.1 If Executive elects at any time to terminate his
employment for Good Reason during the six (6) month period that starts on the
date there is a Change in Control, the Company shall pay to Executive, in a
lump sum payment immediately after such termination, an amount equal to the sum
of (a) a pro rata portion of One Year's Compensation for the portion of the one
year period that started on the date of the Change in Control and that remains
as of the date of Executive's termination of employment plus (b) an additional
One Year's Compensation.
1.2.2 If Executive elects at any time to terminate his
employment for Good Reason subsequent to the six (6) month period that starts
on the date there is a Change in Control, the Company shall pay to Executive,
in a lump sum payment immediately after such termination, an amount equal to
one and one-half (1 1/2) times One Year's Compensation.
1.3 Termination as a Result of Death or Disability. If
Executive's employment is terminated after there is a Change in Control as a
result of his death or Disability, the Company shall pay to Executive or, in
the event of his death, to his estate, in a lump sum payment immediately after
such termination, an amount equal to One Year's Compensation.
Section 2 Payment of Health Insurance Premiums.
If Executive's employment is terminated at any time after
there is a Change in Control either (a) by the Company without Good Cause, (b)
by Executive for Good Reason or (c) as a result of the death or Disability of
Executive, the Company shall pay Executive's premiums under the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA") for the one year period
that starts on Executive's termination of employment, if Executive elects (as a
result of his termination of employment) continuation coverage under COBRA, or,
at Executive's option, the Company shall pay Executive's premiums for
comparable private health insurance coverage (upon receipt by the Company of
timely notices of request for payment of such premiums) for the one year period
that starts on Executive's termination of employment; provided, however, that
notwithstanding the foregoing, the Company shall have no obligation to pay
Executive's premiums under COBRA if the Company ceases to maintain any group
health plan and the Company shall have no obligation to pay Executive's
premiums under COBRA or for comparable private health insurance coverage after
the Executive is covered under a group health plan provided by a subsequent
employer of the Executive.
-2-
<PAGE> 4
Section 3 Definitions.
3.1 Change in Control. The term "Change in Control" for
purposes of this Agreement shall mean a change in control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 (the "34 Act") as in effect on the effective date of this Agreement,
provided that such a change in control shall be deemed to have occurred at such
time as the consummation of any transaction or series of transactions the
effect of which is such that (a) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the 34 Act), is or becomes the beneficial owner
(as defined in Rule 13d-3 under the 34 Act) directly or indirectly, of
securities representing 30% or more of the combined voting power for election
of directors of the then outstanding securities of the Company or any successor
of the Company; (b) during any period of two consecutive years or less,
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease, for any reason, to constitute at least a
majority of the Board of Directors, unless the election or nomination for
election of each new director was approved by a vote of at least three-fifths
of the directors then still in office who were directors at the beginning of
the period; (c) the shareholders of the Company approve any dissolution or
liquidation of the Company or any sale or the disposition of 50% or more of the
assets or business of the Company or (d) the shareholders of the Company
approve any merger or consolidation to which the Company is a party or a share
exchange in which the Company shall exchange its shares for shares of another
corporation as a result of which the persons who were shareholders of the
Company immediately prior to the effective date of the merger, consolidation or
share exchange shall have beneficial ownership of less than 50% of the combined
voting power for election of directors of the surviving corporation following
the effective date of such merger, consolidation or share exchange.
3.2 Disabled. Executive shall be treated as "Disabled"
for purposes of this Agreement if he, as a result of illness or sickness, no
longer is able to perform (even with reasonable accommodation) the essential
functions of his job.
3.3 Good Cause. The term "Good Cause" for purposes of
this Agreement shall mean (a) Executive is convicted of, pleads guilty to, or
confesses to any felony or any act of fraud, misappropriation or embezzlement,
which has an immediate and material adverse effect on Company, as determined by
the Company's Board of Directors in good faith, (b) Executive engages in a
fraudulent act to the material damage or prejudice of the Company or any
affiliate of the Company or in conduct or activities materially damaging to the
property, business or reputation of the Company or any affiliate of the
Company, all as determined by the Company's Board of Directors in good faith,
(c) any material act or omission by Executive involving malfeasance or gross
negligence in the performance of his duties and responsibilities to the
material detriment of the Company, as determined by the Company's Board of
Directors in good faith, which has not been corrected by Executive within 30
days after written notice from the Company's Board of Directors of any such act
or omission or (d) a failure by Executive to comply in any material respect
with any written policies or directives of the Company's Board of Directors as
determined by such Board of Directors in good faith, which has
-3-
<PAGE> 5
not been corrected by Executive within 30 days after written notice from the
Company's Board of Directors of such failure.
3.4 Good Reason. The term "Good Reason" for purposes of
this Agreement shall mean Executive's resignation as an Executive of the
Company at any time after (a) the effective date of his removal as the
Company's PRESIDENT AND CHIEF OPERATING OFFICER for reasons other than Good
Cause, (b) any reduction of Executive's duties or responsibilities or status as
an officer of the Company without his prior written consent (except as provided
under Section 1.1.1(a)), (c) the reduction of Executive's annual salary or any
adverse changes to his compensation package when viewed as a whole as such
salary and such package are in effect at the date of the Change in Control, (d)
the relocation of Executive from the Company's headquarters or (e) the
relocation of the Company's headquarters without reimbursement of all of
Executive's reasonable relocation expenses incurred in connection with
relocating his family and residence to accommodate to such headquarters
relocation.
3.5 One Year's Compensation. The term "One Year's
Compensation" for purposes of this Agreement shall mean an amount equal to the
sum of the greater of Executive's annual salary as of the date of the Change in
Control or as of the date of Executive's termination of employment plus the
greater of Executive's most recent annual bonus paid or Executive's next
scheduled annual bonus (if Executive has earned but not been paid at the time
of such termination his next scheduled annual bonus).
3.6 Notice. The term "Notice" for purposes of this
Agreement shall mean a written notice of the Company's decision to terminate
Executive's employment, which shall be delivered to Executive at least six (6)
months before the effective date set by the Company for his termination or
Employment.
3.7 Notice Period. The term "Notice Period" for purposes
of this Agreement shall mean the period starting on the date Notice is given to
Executive and ending on the date of his termination of employment.
Section 4 Miscellaneous.
4.1 Binding Effect. This Agreement shall inure to the
benefit of and shall be binding upon Executive and his executor, administrator,
heirs, personal representative and assigns, and the Company and its successors
and assigns.
4.2 Governing Law. This Agreement shall be deemed to be
made in, and in all respects shall be interpreted, construed and governed by
and in accordance with, the laws of the State of Georgia.
-4-
<PAGE> 6
4.3 Headings. The section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
4.4 Entire Agreement. This Agreement is intended by
Executive and the Company to be the final expression of their agreement with
respect to the subject matter of this Agreement and is the complete and
exclusive statement of the terms of such Agreement, notwithstanding any
representations, statements or agreements to the contrary made before the
execution of this Agreement. This Agreement may be modified only by a written
instrument signed by Executive and the Company.
4.5 Construction. No provision of this Agreement shall
be construed against or interpreted to the disadvantage of Executive or the
Company by any court or the government or judicial authority by reason of
Executive or the Company having or being deemed to have structured or drafted
such provision of this Agreement.
4.6 Survival of Agreements. All covenants and agreements
made in this Agreement shall survive the execution and delivery of this
Agreement and the termination of Executive's employment.
IN WITNESS WHEREOF, the Company and Executive have executed
this Agreement as of the 14TH day of MAY, 1996.
RHODES, INC.
By: /s/ Holcomb T. Green, Jr.
------------------------------
Name: HOLCOMBE T. GREEN, JR.
Title: CHAIRMAN OF THE
EXECUTIVE COMMITTEE
EXECUTIVE:
/s/ Joel T. Lanham
----------------------------------
JOEL T. LANHAM
PRESIDENT and CHIEF
OPERATING OFFICER
-5-
<PAGE> 1
EXHIBIT 10.11
COMPENSATION AGREEMENT ENTERED
INTO BETWEEN THE REGISTRANT
AND JOEL H. DUGAN
<PAGE> 2
COMPENSATION AGREEMENT
THIS AGREEMENT ("Agreement"), effective as of MAY 14, 1996, by and
between JOEL H. DUGAN, an individual resident of the State of Georgia
("Executive"), and RHODES, INC., a corporation organized under the laws of the
State of Georgia ("Company").
W I T N E S S E T H:
WHEREAS, Executive is a key officer of the Company and, if there is a
Change in Control of the Company, the Company desires that Executive remain
with the Company at least through such Change in Control; and
WHEREAS, the Company recognizes that the Company needs to provide an
incentive for Executive to remain with the Company at least through a Change in
Control.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and agreements contained herein, Executive and the Company, intending
to be legally bound, hereby agree as follows:
Section 1 Compensation.
1.1 Termination by the Company Without Good Cause.
1.1.1 The Company after a Change in Control shall have the
right to terminate Executive's employment without Good Cause before he reaches
age 65 only if the Company provides Notice of such termination to Executive.
During the Notice Period for such Notice, the Company (a) at its option, may
relieve Executive of all or part of his duties and responsibilities as SENIOR
VICE PRESIDENT, FINANCE AND ADMINISTRATION, without Executive's prior written
consent, but may not (1) assign Executive any additional or new duties or
responsibilities or (2) change Executive's job title from SENIOR VICE
PRESIDENT, FINANCE AND ADMINISTRATION, without such consent, (b) may not reduce
Executive's annual salary or reduce his compensation package when viewed as a
whole as such salary and such package are in effect on the date Notice is given
and (c) shall continue to make Executive's office and secretary available to
Executive on a full-time basis.
1.1.2 If the Company (subject to Section 1.1.1) terminates
Executive's employment without Good Cause before the first anniversary of a
Change in Control, the Company shall pay to Executive, in a lump sum payment
immediately after the effective date of such termination, an amount equal to
the sum of (a) a pro rata portion of One Year's Compensation for the portion of
the one year period that started on the date of the Change in Control and that
remains as of the effective date of Executive's termination of employment plus
(b) an additional One Year's Compensation.
<PAGE> 3
1.1.3 If the Company (subject to Section 1.1.1) terminates
Executive's employment without Good Cause on or after the first anniversary of
a Change in Control but before he reaches age 65, the Company shall pay to
Executive, in a lump sum payment immediately after the effective date of such
termination, an amount equal to One Year's Compensation.
1.2 Termination by Executive for Good Reason.
1.2.1 If Executive elects at any time to terminate his
employment for Good Reason during the six (6) month period that starts on the
date there is a Change in Control, the Company shall pay to Executive, in a
lump sum payment immediately after such termination, an amount equal to the sum
of (a) a pro rata portion of One Year's Compensation for the portion of the one
year period that started on the date of the Change in Control and that remains
as of the date of Executive's termination of employment plus (b) an additional
One Year's Compensation.
1.2.2 If Executive elects at any time to terminate his
employment for Good Reason subsequent to the six (6) month period that starts
on the date there is a Change in Control, the Company shall pay to Executive,
in a lump sum payment immediately after such termination, an amount equal to
one and one-half (1 1/2) times One Year's Compensation.
1.3 Termination as a Result of Death or Disability. If
Executive's employment is terminated after there is a Change in Control as a
result of his death or Disability, the Company shall pay to Executive or, in
the event of his death, to his estate, in a lump sum payment immediately after
such termination, an amount equal to One Year's Compensation.
Section 2 Payment of Health Insurance Premiums.
If Executive's employment is terminated at any time after
there is a Change in Control either (a) by the Company without Good Cause, (b)
by Executive for Good Reason or (c) as a result of the death or Disability of
Executive, the Company shall pay Executive's premiums under the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA") for the one year period
that starts on Executive's termination of employment, if Executive elects (as a
result of his termination of employment) continuation coverage under COBRA, or,
at Executive's option, the Company shall pay Executive's premiums for
comparable private health insurance coverage (upon receipt by the Company of
timely notices of request for payment of such premiums) for the one year period
that starts on Executive's termination of employment; provided, however, that
notwithstanding the foregoing, the Company shall have no obligation to pay
Executive's premiums under COBRA if the Company ceases to maintain any group
health plan and the Company shall have no obligation to pay Executive's
premiums under COBRA or for comparable private health insurance coverage after
the Executive is covered under a group health plan provided by a subsequent
employer of the Executive.
-2-
<PAGE> 4
Section 3 Definitions.
3.1 Change in Control. The term "Change in Control" for
purposes of this Agreement shall mean a change in control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 (the "34 Act") as in effect on the effective date of this Agreement,
provided that such a change in control shall be deemed to have occurred at such
time as the consummation of any transaction or series of transactions the
effect of which is such that (a) any "person" (as that term is used in
Sections 13(d) and 14(d)(2) of the 34 Act), is or becomes the beneficial owner
(as defined in Rule 13d-3 under the 34 Act) directly or indirectly, of
securities representing 30% or more of the combined voting power for election
of directors of the then outstanding securities of the Company or any successor
of the Company; (b) during any period of two consecutive years or less,
individuals who at the beginning of such period constitute the Board of
Directors of the Company cease, for any reason, to constitute at least a
majority of the Board of Directors, unless the election or nomination for
election of each new director was approved by a vote of at least three-fifths
of the directors then still in office who were directors at the beginning of
the period; (c) the shareholders of the Company approve any dissolution or
liquidation of the Company or any sale or the disposition of 50% or more of the
assets or business of the Company or (d) the shareholders of the Company
approve any merger or consolidation to which the Company is a party or a share
exchange in which the Company shall exchange its shares for shares of another
corporation as a result of which the persons who were shareholders of the
Company immediately prior to the effective date of the merger, consolidation or
share exchange shall have beneficial ownership of less than 50% of the combined
voting power for election of directors of the surviving corporation following
the effective date of such merger, consolidation or share exchange.
3.2 Disabled. Executive shall be treated as "Disabled"
for purposes of this Agreement if he, as a result of illness or sickness, no
longer is able to perform (even with reasonable accommodation) the essential
functions of his job.
3.3 Good Cause. The term "Good Cause" for purposes of
this Agreement shall mean (a) Executive is convicted of, pleads guilty to, or
confesses to any felony or any act of fraud, misappropriation or embezzlement,
which has an immediate and material adverse effect on Company, as determined by
the Company's Board of Directors in good faith, (b) Executive engages in a
fraudulent act to the material damage or prejudice of the Company or any
affiliate of the Company or in conduct or activities materially damaging to the
property, business or reputation of the Company or any affiliate of the
Company, all as determined by the Company's Board of Directors in good faith,
(c) any material act or omission by Executive involving malfeasance or gross
negligence in the performance of his duties and responsibilities to the
material detriment of the Company, as determined by the Company's Board of
Directors in good faith, which has not been corrected by Executive within 30
days after written notice from the Company's Board of Directors of any such act
or omission or (d) a failure by Executive to comply in any material respect
with any
-3-
<PAGE> 5
written policies or directives of the Company's Board of Directors as
determined by such Board of Directors in good faith, which has not been
corrected by Executive within 30 days after written notice from the Company's
Board of Directors of such failure.
3.4 Good Reason. The term "Good Reason" for purposes of
this Agreement shall mean Executive's resignation as an Executive of the
Company at any time after (a) the effective date of his removal as the
Company's SENIOR VICE PRESIDENT, FINANCE AND ADMINISTRATION for reasons other
than Good Cause, (b) any reduction of Executive's duties or responsibilities or
status as an officer of the Company without his prior written consent (except
as provided under Section 1.1.1(a)), (c) the reduction of Executive's annual
salary or any adverse changes to his compensation package when viewed as a
whole as such salary and such package are in effect at the date of the Change
in Control, (d) the relocation of Executive from the Company's headquarters or
(e) the relocation of the Company's headquarters without reimbursement of all
of Executive's reasonable relocation expenses incurred in connection with
relocating his family and residence to accommodate to such headquarters
relocation.
3.5 One Year's Compensation. The term "One Year's
Compensation" for purposes of this Agreement shall mean an amount equal to the
sum of the greater of Executive's annual salary as of the date of the Change in
Control or as of the date of Executive's termination of employment plus the
greater of Executive's most recent annual bonus paid or Executive's next
scheduled annual bonus (if Executive has earned but not been paid at the time
of such termination his next scheduled annual bonus).
3.6 Notice. The term "Notice" for purposes of this
Agreement shall mean a written notice of the Company's decision to terminate
Executive's employment, which shall be delivered to Executive at least six (6)
months before the effective date set by the Company for his termination or
Employment.
3.7 Notice Period. The term "Notice Period" for purposes
of this Agreement shall mean the period starting on the date Notice is given to
Executive and ending on the date of his termination of employment.
Section 4 Miscellaneous.
4.1 Binding Effect. This Agreement shall inure to the
benefit of and shall be binding upon Executive and his executor, administrator,
heirs, personal representative and assigns, and the Company and its successors
and assigns.
4.2 Governing Law. This Agreement shall be deemed to be
made in, and in all respects shall be interpreted, construed and governed by
and in accordance with, the laws of the State of Georgia.
-4-
<PAGE> 6
4.3 Headings. The section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
4.4 Entire Agreement. This Agreement is intended by
Executive and the Company to be the final expression of their agreement with
respect to the subject matter of this Agreement and is the complete and
exclusive statement of the terms of such Agreement, notwithstanding any
representations, statements or agreements to the contrary made before the
execution of this Agreement. This Agreement may be modified only by a written
instrument signed by Executive and the Company.
4.5 Construction. No provision of this Agreement shall
be construed against or interpreted to the disadvantage of Executive or the
Company by any court or the government or judicial authority by reason of
Executive or the Company having or being deemed to have structured or drafted
such provision of this Agreement.
4.6 Survival of Agreements. All covenants and agreements
made in this Agreement shall survive the execution and delivery of this
Agreement and the termination of Executive's employment.
IN WITNESS WHEREOF, the Company and Executive have executed
this Agreement as of the 14TH day of MAY, 1996.
RHODES, INC.
By:
------------------------
Name: HOLCOMBE T. GREEN, JR.
Title: CHAIRMAN OF THE
EXECUTIVE COMMITTEE
EXECUTIVE:
-------------------------------
JOEL H. DUGAN
-5-
<PAGE> 7
SENIOR VICE PRESIDENT, FINANCE
AND ADMINISTRATION
-6-
<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 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT OF RHODES, INC. FOR THE YEAR ENDED FEBRUARY 29, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 312
<SECURITIES> 0
<RECEIVABLES> 5,212
<ALLOWANCES> 0
<INVENTORY> 87,965
<CURRENT-ASSETS> 105,718
<PP&E> 114,958
<DEPRECIATION> 39,007
<TOTAL-ASSETS> 261,759
<CURRENT-LIABILITIES> 98,917
<BONDS> 70,642
0
0
<COMMON> 0
<OTHER-SE> 70,020
<TOTAL-LIABILITY-AND-EQUITY> 261,759
<SALES> 430,193
<TOTAL-REVENUES> 430,193
<CGS> 225,953
<TOTAL-COSTS> 225,953
<OTHER-EXPENSES> 192,845
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> 6,898
<INCOME-PRETAX> 10,152
<INCOME-TAX> 4,162
<INCOME-CONTINUING> 5,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,990
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.64
</TABLE>
