ITEM 1. BUSINESS
BACKGROUND
An important event, the Recapitalization (defined below), occurred during Rhodes, Inc.'s ("Rhodes" or the "Company") fiscal year ended February 28, 1994 which affects its comparison with this year's financial statements. The results of operations for the year ended February 28, 1995 are best analyzed by comparison with the pro forma results of operations for the prior year ended February 28, 1994 which have been adjusted to reflect the Recapitalization, in addition to comparison with the historical financial statements presented herein.
RECAPITALIZATION
On June 24, 1993, the Company completed a series of transactions (described below) constituting a recapitalization of the Company (the "Recapitalization"). The Recapitalization enhanced the Company's strategic, financial and operating flexibility by increasing shareholders' equity and reducing indebtedness and interest expense. Each component of the Recapitalization was consummated on June 24, 1993, except for the 17% Debenture Redemption (defined below) which was consummated on July 26, 1993.
COMMON STOCK OFFERING
The Company offered 4,167,000 shares of Common Stock for sale to the public at $12.00 per share in an initial public offering (the "Offering"), of which Green Capital Investors, L.P. ("Green Capital") purchased 250,000 shares. Green Capital is controlled by Holcombe T. Green, Jr., who was Chairman of the Board of the Company until July, 1994. Mr. Green is currently a Director of the Company and Chairman of the Executive Committee of the Board of Directors. The net proceeds from the Offering (after deducting underwriting discounts and expenses paid by the Company) were approximately $45.5 million.
SENIOR SECURED FINANCING
Certain institutional investors purchased $40.0 million principal amount of long-term indebtedness (the "Senior Secured Financing") concurrently with the closing of the Offering. The Senior Secured Financing consists of two tranches, with a $30.0 million aggregate principal amount maturing in 1999 and bearing interest at a rate of 9% per annum and a $10.0 million aggregate principal amount maturing in 2000 and bearing interest at a rate of 10% per annum. The net proceeds to the Company from the Senior Secured Financing were approximately $38.7 million. The Senior Secured Financing is secured by liens on all of the real estate owned by the Company.
THE EXCHANGE
On the terms and subject to the conditions contained in an exchange agreement between the Company and Green Capital (the "Exchange Agreement"), the Company issued 2,859,115 shares of Common Stock to Green Capital in exchange for approximately 78.1% of the Company's 17% Junior Discount Subordinated Redeemable Debentures Due 2000 (the "17% Debentures"), at their accreted value ($34.3 million as of June 24, 1993), owned by Green Capital. Additionally, pursuant to the Exchange Agreement, the Company issued 1,221,666 shares of Common Stock to Green Capital in exchange for all of the shares of the Company's Class A Preferred Stock (1,000 shares with a stated value of $10.0 million and accumulated, unpaid dividends aggregating approximately $4.7 million as of June 24, 1993).
REPAYMENT OF INDEBTEDNESS
12% SECURED TERM LOAN
As part of the Recapitalization, the Company repaid the $36.2 million principal amount of its 12% Secured Term Loan with Jackson National Life Insurance Co. ("Jackson National"). The 12% Secured Term Loan, which was scheduled to mature on April 1, 1997, was prepaid by the Company without penalty.
15% NOTES
As part of the Recapitalization, on June 24, 1993 the Company redeemed the $40.0 million principal amount of the Company's 15% Senior Subordinated Notes due September 20, 1998 (the "15% Notes"). Although the 15% Notes were not redeemable at that date, the consent of the holders thereof to early redemption was obtained. In connection with the redemption of the 15% Notes, the Company incurred $2.6 million of prepayment penalties, $2.3 million of which was payable to Jackson National, the holder of $35.0 million principal amount of the 15% Notes.
17% DEBENTURES
Upon consummation of the other components of the Recapitalization, the Company called for redemption of all the 17% Debentures that were not subject to the Exchange in accordance with the provisions of the indenture under which the 17% Debentures were issued (the "17% Debenture Redemption"). The 17% Debenture Redemption was completed at a redemption price equal to the aggregate accreted value of the 17% Debentures of approximately $9.7 million on July 26, 1993.
MISCELLANEOUS
In order to consummate the Recapitalization, the Company borrowed approximately $4.0 million under a committed, unsecured line of credit maintained with Green Capital. Borrowings under this line of credit had an annual interest rate of 8.0%. All amounts outstanding under this line of credit have been repaid and the line of credit was terminated prior to the end of fiscal 1994.
Effective upon consummation of the Recapitalization, the Company terminated the management arrangement with Green Capital pursuant to which Rhodes paid to Green Capital a $400,000 annual management fee for certain management services.
GENERAL INFORMATION
BACKGROUND
Rhodes is one of the largest specialty furniture retailers in the United States. Founded in 1875, the Company operates 80 stores in metropolitan areas of 11 contiguous Southeastern and Midwestern states and for many years has focused on selling brand name residential furniture to middle-income customers.
The Rhodes retailing philosophy is to provide value to its customers through a combination of quality, price and service. Each of the Company's stores offers a broad line of brand name merchandise, emphasizing good quality and an extensive selection. The Company employs an aggressive pricing policy, under which it guarantees to sell each item at the lowest advertised price in the market. Rhodes emphasizes superior service through in-store credit, prompt delivery of merchandise, professionally trained salespeople and convenient locations.
In September, 1988 Rhodes was acquired (the "Acquisition") by a group of investors led by Holcombe T. Green, Jr., who was Chairman of the Board of Directors of the Company until July, 1994. Mr. Green is currently a Director of the Company and Chairman of the Executive Committee of the Board of Directors. As of April 28, 1995, Mr. Green beneficially owned approximately 31.2% of the outstanding shares of Common Stock.
STORE BASE
In fiscal 1993, the Company initiated a store remodeling and refurbishing program designed to significantly upgrade its existing stores and increase sales per store. This program is designed to provide a more attractive in-store atmosphere by professionally redesigning and redecorating existing display space in order to improve the consumer's shopping experience and enhance the appearance of displayed merchandise. Through the end of fiscal 1995, thirty-six stores had been remodeled or refurbished pursuant to the program. An additional fifteen stores are scheduled to be remodeled or refurbished in fiscal 1996.
Remodeling a store typically involves redesigning the store's display space and reconfiguring its model room settings, replacing its carpet and wallpaper, repainting its interior walls, and replacing or updating its lighting. Remodeling a store may include work on its exterior (such as paint, lighting and signage), but does not typically increase the store's existing display space. The cost for the complete remodeling of a store in fiscal 1996 is anticipated to be approximately $400,000. Refurbishing a store typically involves replacing carpet and wallpaper, repainting and making minor improvements to the store's lighting. The cost to refurbish a store in fiscal 1996 is anticipated to be approximately $125,000. Stores generally remain open during a remodeling or refurbishing and the event is advertised as an opportunity for customers to enjoy increased savings.
The Company also has a program designed to increase its store base by adding stores in existing markets and, when possible, new markets. In pursuing this program, the Company seeks to add new cluster stores that may be served from existing regional distribution centers ("RDCs"). In fiscal 1995, seven new stores were opened, all in existing markets, including a replacement store in Columbia, South Carolina. Single stores were opened in Chattanooga and Knoxville, Tennessee in fiscal 1994. New markets were opened in the metropolitan areas of Nashville, Tennessee in fiscal 1990 and Birmingham, Alabama in fiscal 1991, with the Company currently operating four stores in Nashville and five stores in Birmingham.
In evaluating the feasibility of entering a new market, the Company would typically consider (a) the size of the market, focusing on locations that have a local population base of more than 100,000 people, (b) existing competitive conditions and (c) the feasibility of serving the new stores from an existing RDC. Expansion or opening of new RDC's will be considered as needed to support the expansion. The Company would generally seek to enter a new market by acquiring or opening two or more stores that may operate as a cluster, although the Company believes that single stores may be operated profitably in certain markets.
The table below summarizes as of May 1, 1995 openings, closings and remodelings or refurbishings of stores during the fiscal years indicated and the Company's current plans for fiscal years 1996 and 1997.
(1) Proposed (2) On August 24, 1992, Hurricane Andrew destroyed one of the Company's four Miami stores. (3) Remodelings and refurbishings prior to fiscal 1993 were not part of the Company's current remodeling and refurbishing program and therefore are not comparable. (4) Includes refurbishment of one store that subsequently was destroyed by fire. (5) Includes relocation of one store. (6) The status of the Company's 14 stores that have not been remodeled, or scheduled for remodeling in fiscal 1996, has not been determined. Whether or not individual stores will be remodeled, refurbished or relocated will depend on a number of factors such as the lease terms, availability of expansion space in some cases, or suitable relocation space to lease.
STORE OPERATIONS
TARGET MARKET
For many years, the Company has focused its retailing strategy on selling good quality furniture to a broad base of middle-income customers. The Company intends to maintain this focus both in its existing markets and as it enters new markets. The Company carefully tracks the demographic profile of its customer base, designs its merchandising and promotions to appeal to its targeted market, and evaluates programs by analyzing changes in the profile of the resulting customer base. The Company has identified its target group as between the ages of 25 and 54 with an annual family income of $30,000
to $75,000. An extensive marketing study commissioned by the Company as of October 13, 1994 confirmed that the majority of Rhodes' customers fit the target profile.
STORE FORMAT AND SITE SELECTION
The Company's stores average 31,387 square feet of display space. Furniture typically is displayed in model room settings, complete with accessories. Stores are open 362 days each year and at least five evenings per week.
The Company continuously assesses retail trade areas and specific sites in its existing markets and targeted metropolitan areas to evaluate the feasibility of opening new stores. Within a trade area, the Company carefully analyzes prospective sites for new stores with respect to traffic-count levels along contiguous roadways, visibility of the site and ingress/egress characteristics, proximity to competitors and other retail trade generators, zoning restrictions, availability of suitable leasable space and other factors.
MERCHANDISING AND PURCHASING
The Company's merchandising strategy is to offer a broad selection of affordably priced home furnishings. Each of the Company's stores offers a full line of residential furniture, including upholstered furniture, recliners and occasional tables for dens and living rooms; bedroom suits and bedding; dinettes and more formal dining room suits; and desks, lamps, and other accessories. The table below sets forth the percentage of sales derived from the types of merchandise indicated during each of the last three fiscal years.
The Company's centralized merchandising and buying group selects all lines of merchandise, negotiates purchase prices and terms with suppliers and places orders for each of the Company's stores and RDCs. The Company purchases merchandise from a large number of manufacturers, including well-known brands such as Alan White, Armstrong, Bassett, Berkline, Broyhill, Dunmore, Kincaid, Klaussner, La-Z-Boy, Natuzzi, Peoplounger, River Oaks, Sealy, Samuel Lawrence, Simmons and Universal. As of February 28, 1995, one manufacturer, making products under the brand names La-Z-Boy and Kincaid, accounted for approximately 14.5% of the Company's total purchases. The Company's inventory control system provides its headquarters group with merchandising information, and the group also receives information from regional and store managers regarding local preferences and market conditions.
PROMOTIONS AND ADVERTISING
The Company relies to a considerable extent upon promotions and advertising to produce sales, with much of the Company's marketing featuring the availability of in-store credit and special credit plans. The Company conducts over 40 Company-wide promotional events each year. Sales are generally related to holidays and other promotional events. The Company's headquarters staff develops a monthly calendar of Company-wide promotional events.
The Company advertises extensively throughout the year in newspapers and by use of radio and television in each of its markets. Color circulars also are issued several times a year in special mailings or newspaper inserts. In the year ended February 28, 1995, newspaper and print media advertising accounted for approximately 38.9% of the Company's total advertising expense. Regional managers along with the Company's headquarters staff and advertising agency are responsible for determining the appropriate media mix for the monthly advertising budget in each market. All advertising is prepared by the Company's headquarters staff in conjunction with an outside advertising agency.
MANAGEMENT INFORMATION SYSTEM
The Company has developed and installed an inventory control and point-of-sale information system. This system expedites the processing of customer transactions and credit approval, controls inventory levels and is designed to support future growth. Specifically, the Company accounts for merchandise in each store and RDC, and the movement of items, by inventory stock identification numbers known as SKU numbers. Management and each store manager are furnished with daily sales and gross margins by SKU category and for each salesperson. The Company has completed a successful test of bar coding in one RDC, which it will be adding to all RDC's in fiscal 1996.
The Company believes that the centralization and standardization of its operating systems, and the present successful operation of these systems in all its existing stores, will allow the Company to support the operation of new stores without major capital expenditures or substantial increases in its corporate overhead. Although entering a new market will require the expansion of certain systems, the Company believes that its existing merchandising, promotional, inventory and training systems will allow it to add new stores in existing or new markets in a cost-effective manner.
MANAGEMENT AND TRAINING
The Company's senior management is supported through the Company's seven operating regions, each of which has a regional manager and multiple area managers. The seven regional managers and one divisional vice president have a combined 109 years of experience with Rhodes.
Store management personnel undergo extensive and regular training, which is designed to keep managers and employees informed of all standardized Company operating policies, including procedures for sales, inventory maintenance, credit extension, advertising, store administration and merchandise display. Training programs are conducted both at the Company's stores and at the Company's headquarters in Atlanta. Through the training process, management believes it has identified employees whose experience and training will qualify them to be store managers in all stores expected to be opened in the current fiscal year.
DISTRIBUTION AND DELIVERY
Inventories are maintained in RDCs, from which merchandise is shipped to the appropriate store for delivery to the customer's home. The seven RDCs, which collectively had more than 600,000 square feet at year end, have cantilever racking and computer-controlled inventory storage. An additional 98,000 square feet is being added to the Powder Springs facility, which will be completed in May, 1995.
Typically, each store is within 200 miles of one of the RDCs. Substantially all of the Company's merchandise is distributed to its stores through its RDCs. The Company operates a fleet of trucks which delivers merchandise from an RDC to each store several times each week.
Deliveries to customers are made from the Company's stores by Company-operated trucks or, in certain markets, by independent contractors. In certain of its major metropolitan markets, the Company guarantees next-day delivery for all in-stock purchases and the Company believes that this program, and its prompt delivery for all stores, provides it with a competitive advantage.
CREDIT OPERATIONS
The Company offers its customers the option to purchase furniture using cash, the Rhodes credit card or other major nationally recognized credit cards. Approximately 71.9% of the Company's sales in the year ended February 28, 1995 were made through the Rhodes credit card, which operates as a revolving charge account. All credit applications, sales and many payments on account are processed electronically through the Company's point-of-sale system. The terms for the Rhodes credit card purchases are flexible and on most purchases allow up to 48 months to pay. The Company also provides promotional credit plans to its customers in which no interest is charged on purchases made under the plan or in which monthly payments are deferred.
On June 18, 1992, the Company sold its portfolio of customer installment receivables (the "Receivables Sale") to Beneficial National Bank U.S.A. ("BNB") in the amount of approximately $174.3 million (including an advance of $4.3 million against future revenue to be earned by the Company under a related merchant agreement (the "Merchant Agreement")). Under the Merchant Agreement, the Company also contracted to sell all future receivables for three years following the Receivables Sale and received approximately $4.3 million, net of a $0.5 million contingency deposit, in advance against future revenue to be earned by the Company under the Merchant Agreement. Repayment of the advance was completed in fiscal 1995. The Company derives income under the Merchant Agreement from commissions earned from BNB on certain credit transactions. The Merchant Agreement is subject to early termination by BNB in the event of a bankruptcy filing by or against Rhodes or upon 30 days notice in the event of a material change in any law or regulation or in the operation, assets, condition (financial or otherwise), business or ownership of Rhodes. After the initial three-year term, the Merchant Agreement remains in effect unless terminated by either party on 180 days notice. Upon termination of the Merchant Agreement, Rhodes may, at its option, repurchase the total portfolio of outstanding consumer installment receivables for 106% of the outstanding principal balances, including accrued interest, subject to certain rights of BNB to securitize and sell the portfolio. It is the Company's intention to continue with the Merchant Agreement.
COMPETITION
The retail home furnishings business is highly competitive and fragmented. The Company competes with a large number of independent furniture stores which operate in single markets, other regional and national furniture store chains, and various department stores and mass merchandisers. Based on statistics published by Furniture/Today for calendar 1994, the Company was the third largest conventional furniture retailer in the United States; however, the 10 largest conventional furniture retailers accounted for less than 13.3% of industry sales in 1994. Some of the furniture store chains, department stores and mass merchandisers with which the Company competes have greater financial and other resources than the Company.
The retail furniture industry competes primarily on the basis of quality, price and service. Each of the Company's stores offers a broad line of brand name merchandise, emphasizing good quality and an extensive selection. The Company employs an aggressive pricing policy, under which it guarantees to sell each item at the lowest advertised price in the market. Rhodes emphasizes superior service through in-store credit, prompt delivery of merchandise, professionally trained salespersons, convenient locations and a 30 day unconditional return policy.
SERVICE MARKS
The Company conducts its business under the names "Rhodes," "Crossroads" (in Kentucky and Missouri), "Marks-Fitzgerald" (in Birmingham, Alabama) and "Fowler's Furniture Center" (in Knoxville, Tennessee). The Company holds service marks for each of these names and believes that the names are well-recognized in their markets and of great value to the Company.
EMPLOYEES
As of March 31, 1995 the Company employed 2,690 persons, including 2,337 in sales and store operations, 210 in its RDCs and 143 in its corporate office. The Company has never experienced a work stoppage due to labor difficulties. The Company is not a party to any collective bargaining agreements and considers its relations with employees to be good.
ITEM 2.

ITEM 2. PROPERTIES
PROPERTIES
The Company's stores are free-standing units or are located in shopping centers, and have display space ranging from approximately 17,000 square feet to approximately 78,000 square feet (with an average of approximately 31,000 square feet). As of February 28, 1995, the Company owned 13 of its stores and leased the remaining 67, of which nine were leased pursuant to sale/leaseback arrangements. See Notes 5 and 6 to Consolidated Financial Statements.
Store leases have initial terms which will expire at various dates through 2023, with an average lease term, including renewal options, of approximately 13 years. The Company's leases generally provide for fixed monthly rentals, although some provide for fixed minimum rentals with a percentage rental based on sales.
The Company's principal executive offices are located in a 30,366 square foot leased facility located in Atlanta, Georgia. The facility is leased by the Company pursuant to two leases, one of which extends to July 2005 and the other of which extends to May 2002 and which the Company has an option to extend for an additional 10 year term. Management believes that the Company has adequate expansion opportunities to accommodate its needs for the foreseeable future.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
On April 17, 1995, several individuals, as members of a purported plaintiff class of customers, filed suit in the Circuit Court of Jefferson County, Alabama against the Company and certain other defendants, including Sears, Roebuck & Company, Inc., Service Merchandise Company, Inc., Friedman's Inc., Alabama Power Company, Lowe's Home Centers, Inc., and Rex Radio and Television, Inc., alleging violations of the Code of Alabama and fraud and conspiracy arising from the sale of "extended service contracts" in connection with the credit purchase of consumer goods. In their prayer for relief, the plaintiffs seek damages equal to all principal and finance charges under the credit agreements in question, a judgment voiding the credit agreements, injunctive relief, the reimbursement of all costs associated with the action, other compensatory damages and unspecified punitive damages. The Company believes that its practices with respect to extended service contracts comply with Alabama law and it intends to vigorously defend this action.
Due to the nature of the Company's business, it is from time to time a party to other legal proceedings arising in the ordinary course of its business, none of which, in the judgment of management, would have a material adverse effect on its operations or financial condition if adversely determined.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1995.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each person who is an executive officer of the Company, as indicated below.
Irwin L. Lowenstein joined the Company in 1972 and has served as President, Chief Operating Officer and Director of the Company since 1977. Effective in 1989, Mr. Lowenstein was elected Chief Executive Officer of the Company. In 1994 he was elected Chairman of the Board and Chief Executive Officer.
Joel T. Lanham joined the Company in 1976. For the past five years he has served as Senior Vice President and Executive Vice President, Operations and in 1994 he was elected President and Chief Operating Officer. He is a director of the National Home Furnishings Association.
Joel H. Dugan joined the Company in 1985. Mr. Dugan, a certified public accountant formerly with Price Waterhouse & Co., was elected Vice President, Accounting and Information Services in 1985 and Senior Vice President, Finance and Administration in 1988.
James A. Welch joined the Company in 1986. For the past five years he has served as Regional Manager and Division Manager and in 1994 he was elected Senior Vice President, Operations.
Jack A. Hurst joined the Company in 1957 and has served as Senior Vice President, Training & Human Resources since 1986. Mr. Hurst has informed the Company he will tender his resignation for retirement effective July 31, 1995.
Donald M. Parker joined the Company in 1987 as the Regional Manager for the Atlanta area stores, and served in that capacity until being named Senior Vice President Merchandising in May 1993. Prior to joining the Company, Mr. Parker served as General Manager for Maxwell Furniture, a furniture retailer.
Barbara W. Snow joined the Company in 1981 and has served as Corporate Controller since 1988. Ms. Snow, a certified public accountant, served in the capacity of Accounting Manager prior to being elected to Corporate Controller. In 1994 Ms. Snow was elected to the additional office of Vice President.
All executive officers of the Company are elected by the Board of Directors and serve for a one-year term and until their successors have been elected and qualified.
PART II
ITEM 5.

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:
As of April 28, 1995, there were approximately 253 holders of record of the Company's common stock.
The Company has paid no cash dividends since the Acquisition in 1988 and it has no plans to commence payment of cash dividends on its Common Stock.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following information with respect to the Company's consolidated financial statements for the fiscal years ended February 28, 1995, 1994, 1993, February 29, 1992 and February 28, 1991 has been derived from, and should be read in conjunction with, the Company's audited consolidated financial statements.
The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company appearing elsewhere in this Annual Report.
CERTAIN DEFINITIONS
INVENTORY TURNOVER: Cost of Goods Sold on a FIFO basis for the fiscal year divided by the average of FIFO inventory levels at the beginning of the fiscal year and at the end of each month during the fiscal year.
AVERAGE DISPLAY SQUARE FOOTAGE: Average of the total square feet of display area open at the beginning of the fiscal year and at the end of each month during the fiscal year.
COMPARABLE STORE SALES GROWTH: Growth in furniture and services sold and delivered by stores open for the same months in each comparative period.
SALES PER SQUARE FOOT: Net sales for the fiscal year divided by the average square feet of display area of those stores open at the beginning of the fiscal year and at the end of each month during the fiscal year.
SALES PER NON-SALES EMPLOYEE: Net sales for the fiscal year divided by the average number of non-selling forty hour units at the end of each month during the fiscal year. A forty-hour unit is the equivalent of one employee working forty hours each work. Sales employees, who work on commission only, are excluded.
SALES PER STORE: Net sales for the fiscal year divided by the average number of stores open at the end of each month during the fiscal year.
(1) In fiscal 1992, the Company sold, without recourse, a portion of its written-off accounts to an affiliate. The effect of these transactions was to reduce the provision for credit losses by $1,001,000 and increase selling, general and administrative expenses by $494,000.
(2) In the year ended February 28, 1994, the Company recorded an extraordinary charge, net of taxes, against net income of $2,727,000, or $(0.38) per share, which resulted from the early retirement of debt principally in connection with the Recapitalization.
(3) Comparable store sales growth for fiscal 1994, excluding the results of three Florida stores that were favorably impacted in fiscal 1993 by increased sales following Hurricane Andrew, was 12.2% compared with fiscal 1993.
(4) Comparable store sales growth for fiscal 1993, excluding the three Florida stores that were favorably impacted in fiscal 1993 by increased sales following Hurricane Andrew, was 6.2% for fiscal 1993 compared with fiscal 1992.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following table sets forth the unaudited pro forma results of operations as if the Recapitalization had been completed as of the beginning of fiscal 1994 and 1993. Additionally, fiscal 1993 was adjusted to reflect the Receivables Sale. There are no pro forma adjustments to the financial statements for year ended February 28, 1995. Management believes that these pro forma results present the most meaningful comparison of historical operating performance as a basis for understanding future operations.
The pro forma information for fiscal 1993 and 1994 does not purport to represent what the Company's results of operations would actually have been if such transactions had occurred on such dates or project the Company's results of operations for future periods. The pro forma adjustments are based upon currently available information and upon certain assumptions that management of the Company believes are reasonable under the circumstances.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
RESULTS OF OPERATIONS
The following table sets forth certain financial data expressed as a percentage of net sales for the fiscal years ended February 28, 1995, 1994 and 1993.
FISCAL YEARS 1995 AND 1994 COMPARED - PRO FORMA BASIS
Net sales increased 11.1% to $361,238,000 from $325,255,000 for fiscal 1995 compared with the prior fiscal year. Comparable store sales growth was 7.1% for fiscal 1995. Comparable store sales represent furniture and services sold and delivered by stores open for the same months in each comparative period. Operating income for fiscal 1995 of $25,632,000 (7.1% of net sales) increased 15.3% compared with $22,233,000 (6.8% of net sales) for the prior fiscal year. Net income for fiscal 1995 increased 26.5% to $11,519,000, or $1.18 per share, compared with $9,105,000, or $.92 per share for the prior year.
During fiscal 1995 Rhodes opened three new stores in Atlanta, Georgia, one in Birmingham, Alabama, one in St. Louis, Missouri and one in Eustis, Florida, which was acquired in an exchange for the Company's three Miami stores. One store was also opened in Columbia, South Carolina to replace a store that was closed at the same time. The Company also lost one store to a fire in Jacksonville, Florida, bringing the total stores in operation at February 28, 1995 to 80, compared to 78 stores in operation at February 28, 1994. After fiscal year end, one new store was opened in the Jacksonville, Florida market and one of the two Jackson, Mississippi stores was closed and the real estate owned by the Company was sold. The Company plans to replace the Jackson, Mississippi store as soon as practical. The Company has leases signed on six additional stores and is in final lease negotiations for five more new stores, all of which are expected to open in the next fiscal year. Three of these six stores with completed leases will be located in Atlanta, Georgia, two in Charlotte, North Carolina, and one in Memphis, Tennessee (a new market). The Company plans to close several stores in fiscal 1996, most of which are stores in Atlanta which will be too close to new, larger stores. Sixteen stores were remodeled or refurbished in fiscal 1995 and the Company plans to remodel or refurbish approximately
fifteen stores in fiscal 1996. The status of fourteen stores that have not been remodeled or scheduled for remodeling in fiscal 1996 has not yet been determined. Whether or not individual stores will be remodeled, refurbished or relocated will depend on a number of factors such as the lease terms, availability of expansion space in some cases, or suitable relocation space to lease.
Gross profit as a percentage of net sales for the year increased to 48.5% from 48.2%, compared with last year. The gross profit improvement is attributable to improved gross profit on furniture sales and improved sales penetration of extended warranties which have a higher gross profit.
Finance charge and insurance commission income derives from commissions earned from BNB on new credit sales under the Merchant Agreement and from commissions on credit insurance on credit customer balances. Income increased due to additional insurance commissions earned on customers' accounts, partially offset by lower commissions earned from BNB.
Selling expense for fiscal 1995 increased slightly as a percentage of net sales to 16.0% compared with 15.9% last year due to an increase in advertising expenses, which were offset, in part, by lower net costs on credit promotions charges. Selling expense varies as a percentage of sales due to a number of factors including the level of advertising, credit promotions and the opening of new stores.
General and administrative expenses for the year increased to $93,391,000 (25.9% of net sales) from $84,285,000 (25.9% of net sales) last year. The increased expense for the year is due to having seven new stores this year, less the three Miami stores sold in the second quarter plus increases in employee expenses. The net increases were the same percentage of sales due to increased sales volume.
Other expense for fiscal 1995 includes an accrual of $375,000 in anticipation of the losses expected to be incurred upon closing two stores in fiscal 1996.
Interest expense on the Company's indebtedness is generally fixed and is expected to decline slightly in future periods as such debt is reduced from internal cash flow.
FISCAL YEARS 1995 AND 1994 COMPARED - HISTORICAL BASIS
On a historical basis, the results of fiscal 1995 are not comparable with the prior year due to the Recapitalization which took place on June 24, 1993. As a result of the Recapitalization, interest expense has been substantially reduced. The following information describes results of operations on a historical basis to the extent that the historical information differs significantly from the pro forma information set forth under "Fiscal Years 1995 and 1994 Compared - Pro Forma Basis".
Interest expense for the year ended February 28, 1995 decreased to $6,109,000 compared with $11,545,000 for last year as a result of the Recapitalization and the related reduction in the Company's indebtedness.
FISCAL YEARS 1994 AND 1993 COMPARED--PRO FORMA BASIS
Net sales increased 13.5% to $325,255,000 from $286,527,000 for fiscal 1994 compared with the prior fiscal year. Comparable store sales growth was 10.0% for fiscal 1994. Comparable store sales growth, excluding the three stores that were favorably impacted in fiscal 1993 by increased sales following Hurricane Andrew, was 12.2% for fiscal 1994. Pro forma operating income for fiscal 1994 of $22,233,000 (6.8% of net sales) increased 68.6% compared with $13,186,000 (4.6% of net sales ) for fiscal 1993 on a net sales increase of $38,728,000. Pro forma net income before extraordinary item for fiscal 1994 increased 214% to $9,105,000, or $.92 per share, compared with $2,897,000, or $.30 per share, for the prior fiscal year.
During fiscal 1994, Rhodes opened one new store in Chattanooga, Tennessee, acquired one new store in Knoxville, Tennessee and opened a new store in Clarksville, Indiana (a suburb of Louisville, Kentucky), to bring the total stores in operation to 78 compared with 76 stores in operation at February 28, 1993. The Company closed one store in Sarasota, Florida in January 1994, which closing had no adverse impact on the Company.
Gross profit as a percentage of net sales for fiscal 1994 increased to 48.2% from 47.5%, compared with fiscal 1993. Gross margin improvement is partially attributable to improved sales penetration of extended warranties, which have a higher gross profit. Also, the credit promotions discussed below permitted less discounting of selling prices, contributing to the higher gross profit percentage. Inventory turnover on a FIFO basis was 3.8x for each of the fiscal years 1994 and 1993. Inventories were approximately $10.9 million higher at February 28, 1994 than February 28, 1993 due to three more stores in operation and management's anticipation of an improved economic climate.
Finance charge and insurance commission income derives from commissions earned from BNB under the Merchant Agreement and from commissions on credit insurance on credit customer balances. The amounts earned were down due to lower net yields on credit insurance commissions.
Selling expense for fiscal 1994 declined substantially as a percentage of net sales to 15.9%, compared with 16.7% for fiscal 1993. The expense of interest-free and deferred payment credit promotions was more than off-set by reduced net advertising expenditures and reduced sales commissions compared with the prior year. Sales commissions have decreased as a percentage of net sales as a result of revisions made to the commission structure at the beginning of fiscal 1994.
Pro forma general and administrative expenses for fiscal 1994 increased to $84,285,000 (25.9% of net sales) from $77,218,000 (26.9% of net sales) for fiscal 1993. The increased expense is due to adding three new stores plus increases in employee expenses. The improvement in the percentage of net sales is due to the increased sales volume.
Interest expense on the Company's indebtedness is generally fixed and is expected to decline slightly in future periods as such debt is reduced from internal cash flow.
FISCAL YEARS 1994 AND 1993 COMPARED--HISTORICAL BASIS
On a historical basis, results for fiscal 1994 are not comparable with the prior fiscal year due to the Receivables Sale, which took place on June 18, 1992 and the completion of the Recapitalization, which took place on June 24, 1993. As a result of the Receivables Sale, the Company no longer earns finance charge income, and general and administrative expenses, credit losses and interest expense related to the credit operation have been eliminated. Also, as a result of the Recapitalization, interest expense has been substantially reduced. The following information describes results of operations on a historical basis to the extent that the historical information differs from the pro forma information set forth under "Fiscal Years 1994 and 1993 Compared--Pro Forma Basis."
Finance charges and insurance commissions income was $4,892,000 for fiscal 1994, compared with $13,853,000 for fiscal 1993. As a result of the Receivables Sale, the related finance charge income is no longer earned by the Company.
General and administrative expenses for the year ended February 28, 1994 increased to $84,404,000 (26.0% of net sales) from $81,432,000 (28.4% of net sales) for fiscal 1993 due to the cost of adding three new stores plus increases in employee expenses, partially offset by the elimination of the Company's credit operations following the Receivables Sale. The improvement in general and administrative expenses as a percentage of net sales is due principally to the increased sales volume.
The provision for credit losses of $4,803,000 reported for fiscal 1993 decreased to $213,000 for fiscal 1994 due to the Receivables Sale, which eliminated the Company's risk of credit losses on the customer credit accounts sold to BNB under the Merchant Agreement. As a result, the only credit loss expenses to the Company are write-offs associated with bankcard and check transactions.
Interest expense for fiscal 1994 decreased to $11,545,000, compared with $24,306,000 for fiscal 1993 as a result of the Recapitalization and Receivables Sale and related reduction in the Company's indebtedness.
In fiscal 1994 the Company expensed certain charges incurred principally in connection with the Recapitalization. These extraordinary items represent non-recurring prepayment penalties of $2,624,000 for early retirement of debt and the write-off of $903,000 in related deferred loan costs, less income tax benefit of $800,000.
SEASONALITY
The Company typically experiences its strongest sales in its third quarter. Gross profit margin is generally lower in the Company's second and fourth quarters, during which the Company conducts its clearance sales.
EFFECTS OF INFLATION ON OPERATIONS
Although the rate of inflation has remained low and has had little impact on the Company during the last three fiscal years ended February 28, 1995, the Company's operating results could be adversely affected by high rates of inflation. The area which could be most affected is the Company's cost to replenish inventory. An increase in the cost of inventory would be mitigated, however, to the extent the Company was able to pass along such costs to its customers through price increases. The Company's interest rate risk is limited to the variable rate of interest paid under the Revolving Credit Agreement.
LIQUIDITY AND CAPITAL RESOURCES
Currently, the Company's principal sources of liquidity are cash flow from operations and additional borrowing capacity under its Revolving Credit Agreement. The Company had net cash provided by operating activities of approximately $25.9 million, $19.4 million and $6.2 million (adjusted for the short-term debt paydown related to the Receivables Sale), in fiscal years 1995, 1994 and 1993, respectively. The Company's principal uses of cash are capital expenditures, working capital needs and debt service obligations.
On June 24, 1993, the Company completed the Recapitalization to enhance the Company's strategic, financial and operating flexibility by increasing shareholders' equity and reducing indebtedness and interest expense. Management believes that the new capital structure provides sufficient cash flow to fund its planned expansion, remodeling, and refurbishing programs and debt service requirements. On June 18, 1992, the Company completed the Receivables Sale. The Company also contracted to sell all future receivables until June 1995, unless extended, under the Merchant Agreement (the term of which is extended automatically unless terminated by one of the parties), whereby BNB provides credit to customers under the Rhodes credit card name for future credit sales. This arrangement removed the need for Rhodes to fund that portion of the accounts receivable not financed by the commercial paper facility.
At the end of fiscal years 1995, 1994, and 1993, LIFO inventories were $54.4 million, $48.2 million, and $37.3 million, respectively. FIFO inventory turns in these years have decreased to 3.6x for fiscal 1995 from 3.8x in fiscal years 1994 and 1993. Inventories have been increased due to addition of new, larger stores and due to management's anticipation of a continued favorable economic climate. Also, accessory inventories were increased during fiscal 1995 from $6.8 million to $11.2 million to enhance the appearance of the furniture in the stores, which management believes has stimulated both furniture and accessory sales. The Company has historically had low or negative working capital, primarily as a result of its tight inventory controls, low cash balances and the inclusion in current liabilities of deferred revenues, such as merchandise sold but not delivered and deferred warranty revenue.
The Company made additions to property and equipment of approximately $14.1 million, $6.9 million and $3.4 million for fiscal years 1995, 1994 and 1993, respectively. These expenditures have been both for the opening of new stores and capital replacements in existing stores, including the remodeling completed for sixteen stores in fiscal 1995, sixteen stores in fiscal 1994 and four stores in fiscal 1993. Prior to the Recapitalization, the Company's capital expenditures were restricted by covenants contained in the various loan agreements and by the significant financial constraints imposed
by its high debt and interest expense levels. Upon completion of the Recapitalization, the Company substantially increased its capital expenditures in fiscal 1994 (although capital expenditure funding continues to be subject to restrictions in the Senior Notes and Revolving Credit Agreement), and plans to spend approximately $17.0 million in fiscal 1996 and $14.0 million in 1997. Capital expenditures in excess of $15.0 million in any one year will require aproval under the Company's Revolving Credit Agreement. These increases reflect the cost of remodeling or refurbishing fifteen stores in 1996 and the addition of twenty-two new stores over the two year period. The Company does not plan to purchase any real estate in acquiring and opening new stores. The Company anticipates that these increased capital expenditures will be funded primarily from cash flow from operations. If the Company's cash flow from operations were insufficient to fund such capital expenditures, the Company would consider additional means to finance its remodeling and refurbishing and expansion programs or delaying or limiting such programs.
In connection with its previously announced intent to repurchase up to $5.0 million of its common stock from time to time, the Company had expended $3.7 million to repurchase 311,400 shares of its common stock as of February 28, 1995. The repurchase program was completed on March 20, 1995 with an aggregate of 436,000 shares of common stock repurchased at an aggregate cost of $5.0 million.
The Company's consolidated funded indebtedness at February 28, 1995 including obligations under capital leases, was $55.0 million, down from $60.8 million at February 28, 1994 and $145.7 million at February 28, 1993 due to the Recapitalization and the Receivables Sale and the payments previously described. Set forth below are the scheduled principal payments required under the Company's existing debt agreements.
Fiscal 1996 $0 Fiscal 1997 $7.5 million Fiscal 1998 $7.5 million
The maximum availability of funds under the Revolving Credit Agreement is the lesser of $30.0 million or 50% of eligible inventory. The Revolving Credit Agreement is secured by substantially all of the inventory of the Company. As of May 10, 1995, borrowings under the Revolving Credit Agreement were approximately $9.0 million and approximately $16.0 million remained available for borrowing. Loans outstanding under the Revolving Credit Agreement generally will bear interest at one of two interest rate options selected by the Company: (i) Prime Rate + .5% per annum or (ii) a quoted LIBOR + 2.375% per annum for specified interest periods. The "Prime Rate" is the rate of interest announced publicly by the lender, from time to time, as its prime rate. The Company is required to pay a commitment fee of 0.375% per annum of the average daily unused portion of the lender's commitment under the Revolving Credit Agreement. The Revolving Credit Agreement was scheduled to terminate in February 1996, but was renewed until February 27, 1997.
The Senior Notes consist of two tranches: (i) Tranche A Notes in the aggregate principal amount of $30 million which mature in June 1999 (subject to mandatory annual redemption payments of $7.5 million per year commencing in June 1996) and bear interest at a rate of 9% per annum, payable semiannually; and (ii) Tranche B Notes in the aggregate principal amount of $10 million, which mature in June 2000 and bear interest at a rate of 10% per annum, payable semiannually. The Senior Notes are secured by all real property owned by the Company.
The terms of the Revolving Credit Agreement and the Senior Notes impose restrictions that affect, among other things, the Company's ability to (i) incur certain additional indebtedness, (ii) create liens on assets, (iii) sell assets, (iv) engage in mergers or consolidations, (v) make investments, (vi) pay dividends and make distributions and (vii) engage in certain transactions with affiliates and subsidiaries. The Revolving Credit Agreement and the Senior Notes also require the Company to comply with certain specified financial ratios and tests.
The Company expects to continue to finance inventories, future expansion, debt service requirements and other cash needs with cash flow from operations supplemented by other potential sources of capital, principally the sources described above. Although there can be no assurance as to the availability of other sources of funding, management believes that internally generated funds and amounts available under the Company's existing credit facility will be sufficient to fund the Company's present and proposed operations and capital expenditure program.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of the Company are set forth herein beginning on page.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See Item X hereof and incorporated herein by reference to the annual proxy statement relating to the 1995 annual meeting of shareholders of the Company.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the annual proxy statement relating to the 1995 annual meeting of shareholders of the Company.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the annual proxy statement relating to the 1995 annual meeting of shareholders of the Company.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Incorporated by reference to the annual proxy statement relating to the 1995 annual meeting of shareholders of the Company.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements (beginning on page -) are filed under Item 8 of this Annual Report:
Report of Independent Public Accountants
Consolidated balance sheets as of February 28, 1995 and February 28, 1994
Consolidated statements of operations for the years ended February 28, 1995, February 28, 1994 and February 28, 1993
Consolidated statements of shareholders' equity for the years ended February 28, 1995, February 28, 1994 and February 28,
Consolidated statements of cash flows for the years ended February 28, 1995, February 28, 1994 and February 28, 1993
Notes to consolidated financial statements for the years ended February 28, 1995, February 28, 1994 and February 28, 1993
2. The following financial statement schedules (beginning on page -) are filed as part of this Annual Report:
Report of Independent Public Accountants
Schedule II - Valuation and qualifying accounts for the three years ended February 28, 1995
3. Exhibits.
The Exhibits listed in (c) below are filed as part of this Annual Report.
(b) Reports on Form 8-K
None
(c) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 -- Restated and Amended Articles of Incorporation of the Registrant dated as of April 8, 1993 (incorporated by reference to Exhibit 3.1 to Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962)).
3.2 -- Amended Bylaws of the Registrant dated as of April 7, 1993 (incorporated by reference to Exhibit 3.2 to Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962)).
4.1 -- Loan and Security Agreement (the "Loan and Security Agreement") dated as of February 24, 1994 between the the Registration and Wachovia Bank of Georgia, N.A. and Master Note between the Registrant payable to Wachovia Bank of Georgia, N.A. as of February 24, 1994 (incorporated by reference to Exhibit 4.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended February 28, 1994).
4.2 -- Letter of Extension, dated November 9, 1994, of Loan and Security Agreement and First Amendment to the Loan and Security Agreement, dated January 4, 1995.
4.3 -- Form of Note Purchase Agreement between the Company, Sun Life Insurance Company of America, The Equitable Private Income and Equity Partnership II, L.P., The Life Insurance Company of Virginia and Protective Life Insurance Company (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962)).
10.1 -- Rhodes, Inc. Employees' Savings Plan (incorporated by reference to Exhibit 10.6 to Registrant's Annual Report on Form 10-K for the year ended February 28, 1986).
10.2 -- Form of Exchange Agreement by and between Rhodes, Inc. and Green Capital Investors, L.P. (incorporated by reference to Exhibit 10.9 to Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962)).
10.3 -- Rhodes, Inc. 1991 Stock Option Plan (incorporated by reference to Exhibit 10.35 to Registrant's Annual Report on Form 10-K for the year ended February 28, 1991).
10.4 -- Master Note by RHD Holdings Corp. (predecessor to the Registrant) payable to Green Capital Investors, L.P., dated as of December 15, 1989 (incorporated by reference to Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the year ended February 28, 1991).
10.5 -- First Amendment to Master Note by RHD Holdings Corp. (incorporated by reference to Exhibit 10.14 to Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962)).
EXHIBIT NUMBER DESCRIPTION - ------ -----------
10.6 -- Policy issued by Life Insurance Company of North America, dated March 1, 1989 covering the Rhodes, Inc. Employee Disability Plan (incorporated by reference to Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the year ended February 28, 1991).
10.7 -- Form of Compensation (changes and controls) Agreement between Irwin L. Lowenstein and Rhodes, Inc.
10.8 -- Merchant Agreement by and between Beneficial National Bank USA and Rhodes, Inc., dated as of May 15, 1992 (incorporated by reference to Exhibit 10.42 to Registrant's Annual Report on Form 10-K for the year ended February 29, 1992).
10.9 -- Form of Option Agreement between the Registrant and James V. Napier (incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962))
10.10 -- Form of Option Agreement between the Registrant and Don L. Chapman (incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962))
11 -- Rhodes, Inc. Computation of Net Income Per Share
21 -- List of subsidiaries of the Registrant (incorporated by reference to Exhibit 22 to Registrant's Registration Statement on Form S-1, as amended (File No. 33-60962))
23(a) -- Consent of Independent Public Accountants
27 -- Financial Data Schedule (for SEC use only)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RHODES, INC.
By: /s/ JOEL H. DUGAN ------------------ Joel H. Dugan Senior Vice President, Finance and Administration Date: May 25, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
PRINCIPAL EXECUTIVE OFFICER:
/s/ IRWIN L. LOWENSTEIN - ---------------------------- Irwin L. Lowenstein Chairman of the Board and Chief Executive Officer Date: May 25, 1995
PRINCIPAL OPERATING OFFICER:
/s/ JOEL T. LANHAM - ---------------------------- Joel T. Lanham President and Chief Operating Officer Date: May 25, 1995
PRINCIPAL FINANCIAL OFFICER:
/s/ JOEL H. DUGAN - ---------------------------- Joel H. Dugan Senior Vice President, Finance and Administration Date: May 25, 1995
PRINCIPAL ACCOUNTING OFFICER:
/s/ BARBARA SNOW - ---------------------------- Barbara Snow Vice President and Corporate Controller Date: May 25, 1995
DIRECTORS:
/s/ IRWIN L. LOWENSTEIN - ---------------------------- Irwin L. Lowenstein Date: May 25, 1995
/s/ HOLCOMBE T. GREEN, JR. - ---------------------------- Holcombe T. Green, Jr. Date: May 25, 1995
/s/ JAMES R. KUSE - ---------------------------- James R. Kuse Date: May 25, 1995
/s/ JAMES V. NAPIER - ---------------------------- James V. Napier Date: May 25, 1995
/s/ DON L. CHAPMAN - ---------------------------- Don L. Chapman Date: May 25, 1995
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF RHODES, INC.
We have audited the accompanying consolidated balance sheets of Rhodes, Inc. (a Georgia corporation) and subsidiaries as of February 28, 1995 and 1994 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended February 28, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rhodes, Inc. and subsidiaries as of February 28, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia April 21, 1995
RHODES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated balance sheets.
RHODES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated statements.
RHODES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
RHODES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated statements.
RHODES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1995, 1994 AND 1993
1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
INTRODUCTION
On September 20, 1988, Rhodes Acquisition Corp., a wholly owned subsidiary of RHD Holdings Corp. ("RHD Holdings" or "RHD"), was merged with and into Rhodes, Inc. ("Rhodes" or the "Company"), in which merger (the "Acquisition") Rhodes was the surviving corporation. As a result of the Acquisition, Rhodes became a wholly owned subsidiary of RHD Holdings. For financial statement purposes, the Acquisition was accounted for by the purchase method of accounting effective September 21, 1988. Upon approval by the board of directors of the Company and RHD Holdings on June 11, 1991, the Company and RHD Holdings entered into an Agreement and Plan of Merger, which provided for the merger of RHD Holdings with and into the Company. Rhodes was the surviving corporation in the 1991 Merger.
INITIAL PUBLIC OFFERING
In April 1993, the Company's board of directors approved a plan of recapitalization (the "Recapitalization") whereby it would offer a certain number of shares of Common Stock for sale to the public (the "Offering") and Green Capital Investors, L.P. ("Green Capital") would exchange its Class A Preferred Stock (including accumulated, unpaid dividends) and Junior Discount Subordinated Redeemable Debentures Due 2000 for Common Stock of the Company (the "Exchange"), at an exchange price equal to the stock price in an initial public offering. The Company effected a 1.8-for-1 stock split of the Company's Common Stock prior to the Offering. As a part of the Recapitalization, the Company also refinanced and repaid certain of its outstanding debt.
As a result of the Recapitalization, the Company recorded the accumulated, unpaid Class A Preferred Stock dividends of $4,181,000 as of February 28, 1993 in the accompanying financial statements. Because of the Company's accumulated deficit, the dividends were recorded as a reduction of Paid-in Capital. Also, all share and per share amounts in the accompanying financial statements were restated to reflect the 1.8-for-1 stock split.
In conjunction with the above, the Company also increased the number of authorized shares of Common Stock to 20,000,000.
BASIS OF PRESENTATION
The consolidated financial statements of Rhodes include the accounts of the Company and all subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications of prior years' amounts have been made to conform with the current year's presentation.
BUSINESS SEGMENT
The Company has one business segment consisting of the retail sale of home furnishings.
INSTALLMENT RECEIVABLES AND REVENUE RECOGNITION
All merchandise sales are recorded upon delivery of furniture. As a result of the Receivables Sale (see Note 10), accounts receivable consists primarily of miscellaneous receivables from customers and amounts awaiting funding.
Finance commissions following the sale of installment receivables are recognized for the sale of certain installment contracts to Beneficial National Bank USA ("BNB") (see Note 10). Finance charge income previously earned by the Company on installment receivables is no longer earned following the Receivables Sale.
The Company offers credit insurance coverage through third parties in connection with its furniture sales and earns monthly commissions.
INVENTORIES
Inventories are stated at the lower of cost (last in, first out method - -- LIFO) or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments are stated at their fair value in the accompanying financial statements at February 28, 1994; at February 28, 1995 the Company's financial instruments are stated at their fair value with the exception of long-term debt (see Note 3).
PROPERTY AND EQUIPMENT
Depreciation is provided using the straight-line method for financial reporting and accelerated methods for income tax purposes. The ranges of annual depreciation percentages, which reflect estimated useful lives, are as follows: buildings--2% to 4% and equipment and other assets--10% to 25%. Capitalized real estate leases are amortized on a straight-line basis over the terms of the leases which range from 18 to 25 years. Leasehold improvements are amortized over the life of the asset or the lease term, whichever is shorter. Repair and maintenance costs are expensed as incurred.
Property and equipment are summarized as follows:
Capitalized real estate leases are summarized as follows:
INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over identifiable assets acquired at the time of the Acquisition and is being amortized on a straight-line basis over 40 years. Amortization expense for goodwill totaled $1,798,000 for fiscal 1995, 1994, and 1993. Accumulated amortization for goodwill totaled $11,590,000 and $9,792,000 as of February 28, 1995 and 1994, respectively. Subsequent to the Acquisition, the Company continually evaluates whether events and circumstances have occurred which would indicate the remaining estimated useful life of goodwill may warrant revision. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable.
Favorable leases represent the difference between market rates and contract rates of store leases as of the time of the Acquisition and are being amortized over the remaining terms of the leases. Amortization expense for favorable leases totaled $953,000, $1,091,000 and $1,149,000 for fiscal 1995, 1994, and 1993, respectively. Accumulated amortization for favorable leases totaled $7,646,000 and $6,752,000 as of February 28, 1995 and 1994, respectively.
Other intangibles include deferred loan costs incurred in connection with the Acquisition and subsequent refinancing, which are being amortized over the terms of the applicable debt. Amortization expense for these items (exclusive of the fiscal 1994 write-off of loan costs related to the Recapitalization (see Note 11)) for fiscal 1995, 1994, and 1993, totaled approximately $323,000, $190,000 and $306,000, respectively. Accumulated amortization for deferred loan costs totaled $690,000 and $367,000 as of February 28, 1995 and 1994, respectively.
WARRANTY CONTRACTS
The Company markets extended warranty contracts to its customers on certain merchandise at the time of the initial sale. Extended warranty contract revenue is deferred and recognized over the contract period on a straight-line or other reasonable basis. The Company is recognizing such income based on its historical data on service and repair claims. Historical data on service and repair claims is updated periodically and the income recognition on warranties is adjusted accordingly. As a result, net warranty sales of $1,878,000, $1,587,000, and $1,272,000 less net direct expenses of $413,000, $349,000, and $280,000, respectively, were deferred to future periods in fiscal 1995, 1994, and 1993, respectively.
EARNINGS PER SHARE
The historical net income (loss) per common share is calculated by dividing net income (loss) applicable to Common Stock by the weighted average shares of Common Stock outstanding. All stock options were antidilutive for earnings per share calculations for fiscal 1995, fiscal 1994 and fiscal 1993.
Unaudited pro forma earnings per share in the consolidated statement of operations are presented on a pro forma basis assuming the Recapitalization and the Receivables Sale had taken place at the beginning of the periods for February 28, 1994 and 1993.
2. FEDERAL AND STATE INCOME TAXES
The Company follows Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the determination of deferred income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the currently enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be settled or realized.
The components of the net deferred tax liability are as follows:
The net deferred tax liabilities are classified on the Company's balance sheets as follows:
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:
The Company has established a valuation allowance of $2.9 million as of February 28, 1995 and 1994 because of the uncertainty regarding the realizability of certain deferred tax assets.
The consolidated provision (benefit) for income taxes before extraordinary item consists of the following:
The tax provision (benefit) differed from the amounts resulting from multiplying the income (loss) before income taxes and extraordinary item by the statutory federal income tax rates. The reasons for these differences were as follows:
As of February 28, 1995, the Company had net operating losses available to be carried forward or carried back of approximately $6,200,000, which expire beginning in the year 2006.
3. LONG-TERM DEBT
The aggregate annual payments required for the above notes during each of the next five fiscal years are as follows:
FAIR VALUE OF DEBT
In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial Investments," the fair value of short-term debt is estimated to be its carrying value. The fair value of long-term debt is estimated based on approximate market interest rates for similar issues. The estimated fair value of long-term debt at February 28, 1995 was approximately $41,300,000 and at February 28, 1994 the estimated fair value of long-term debt was equal to the carrying amount included in the accompanying balance sheet.
TERMS
The Senior Secured Notes consist of two tranches: (i) Tranche A Notes in the aggregate principal amount of $30 million which mature in June 1999 (subject to mandatory annual redemption payments of $7.5 million per year commencing in June 1996) and bear interest at a rate of 9% per annum, payable semiannually; and (ii) Tranche B Notes in the aggregate principal amount of $10 million, which mature in June 2000 and bear interest at a rate of 10% per annum, payable semiannually. The Senior Secured Notes are secured by all real property owned by the Company.
On November 20, 1991, the Company signed an agreement of renewal and extension of the 10% mortgage note. The new repayment terms called for 24 consecutive quarterly installments in the amount of $125,000 payable beginning September 1, 1992 and a final payment of $145,000 due September 1, 1998. The note was secured by property having an original cost of $3,700,000. The 10% mortgage note was prepaid in full on July 22, 1994.
The terms of the revolving loan (see Note 8) and the Senior Secured Notes impose restrictions that affect, among other things, the Company's ability to (i) incur certain additional indebtedness, (ii) create liens on assets, (iii) sell assets, (iv) engage in mergers or consolidations, (v) make investments, (vi) pay dividends and make distributions, and (vii) engage in certain transactions with affiliates and subsidiaries. The revolving loan and the Senior Secured Notes also require the Company to comply with certain specified financial ratios and tests. The Company was in compliance with the restrictive covenants at February 28, 1995.
4. INVENTORIES
The Company uses the LIFO method for valuing inventories in order to more closely match current costs with related revenue. Under this method, current costs are charged to cost of sales through application of Department Store Price Indices published by the Bureau of Labor Statistics. If LIFO inventories were valued at current costs, the inventory amounts would have been $2,383,000 and $1,282,000 higher than those reported as of February 28, 1995 and 1994, respectively.
As discussed in Note 8, the Company has a revolving loan with a bank, which is secured by a priority lien on the Company's inventories.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain store locations under operating lease agreements with various expiration dates through 2023. Rentals under all store leases were approximately $11,901,000, $10,464,000, and $9,651,000 for fiscal 1995, 1994, and 1993, respectively. As of February 28, 1995, the minimum obligations under lease commitments with original terms beyond one year are as follows:
Certain of the leases above are renewable at the Company's option, and some contain clauses requiring payment of contingent rentals based upon sales in excess of specified amounts. Contingent rental amounts based on sales are immaterial.
CONTINGENCIES
On April 17, 1995, several individuals, as members of a purported plaintiff class of customers, filed suit in the Circuit Court of Jefferson County, Alabama against the Company and certain other defendants alleging improper practices relating to extended warranty contracts. In their prayer for relief, the plaintiffs seek damages equal to all principal and finance charges under the credit agreements in question, a judgment voiding the credit agreements, injunctive relief, the reimbursement of all costs associated with the action, other compensatory damages and unspecified punitive damages. The Company believes that its practices with respect to extended service contracts comply with Alabama law and it intends to vigorously defend this action.
The Company is subject to claims and lawsuits arising in the normal course of business. It is the opinion of management that any such claims will not have a material adverse effect on the financial position or results of operations of the Company.
The Company has a compensation (change in control) agreement with its Chairman and Chief Executive Officer. Under such agreement, severance payments and benefits would become payable under certain events, such as change of control (as defined) of the Company. The maximum contingent liability of the Company at February 28, 1995 is approximately $3 million.
6. CAPITAL LEASES
Certain of the property and equipment used in the Company's business is leased under capital leases. In prior years, the Company completed sale and leaseback agreements on nine stores previously owned and operated by the Company with terms ranging from 18 to 25 years and options to renew for additional periods. Equipment leases are for terms of up to seven years.
The following is a schedule by fiscal year of the future minimum lease payments on these leases together with the present value of net minimum lease payments as of February 28, 1995:
7. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all employees. The Company's policy is to fund amounts necessary to satisfy the requirements of the Employee Retirement Income Security Act of 1974.
The pension cost for the defined benefit plan for fiscal 1995, 1994, and 1993 includes the following components:
The funded status of the defined benefit plan as of February 28, 1995 and February 28, 1994 is as follows:
The projected benefit obligation was calculated using an 8.75% and 8.0% assumed discount rate as of February 28, 1995 and 1994, respectively, and an assumed long-term compensation increase rate of 4.9% in fiscal 1995 and fiscal 1994. Pension expense was determined using an 8% and 9% assumed long-term rate of return on plan assets for the years ended February 28, 1995 and 1994, respectively. At February 28, 1995, plan assets consisted primarily of equity securities (54%), fixed income securities (29%) and money market instruments (17%).
The Company has an employees' savings plan. Under the provisions of this plan, the Company will match 50% of employee contributions which are limited to a maximum of 6% of pay. The Company's savings plan expense was $400,000, $345,000 and $365,000 in fiscal 1995, 1994 and 1993, respectively.
Prior to the consummation of the Acquisition, the board of directors and stockholders of RHD Holdings adopted a non-qualified restricted stock option plan (the "Stock Option Plan") which provided for the granting of options to officers and key employees of RHD Holdings and its subsidiaries to acquire an aggregate of up to 300,000 shares of RHD Holdings' common stock at an exercise price of not less than $0.01 per share. Upon consummation of the 1991 Merger, all options outstanding under the Stock Option Plan (options to purchase 284,800 shares of RHD common stock (the "Plan Options")), along with options to purchase an aggregate of 23,095 shares of RHD common stock granted outside the Stock Option Plan (the "Substitution Options"; the Substitution Options and the Plan Options are referred to collectively as the "Options") at an exercise price of $0.08 per share, were assumed by the Company and converted into options to purchase an adjusted amount of 53,702 shares of Common Stock at an exercise price of $0.04 per share. No additional options may be granted under the Stock Option Plan. An expense in the amount of $150,000, net of canceled options, is recorded for the accretion of the value of these Plan Options in each year over the five-year period during which they become exercisable. All options under the Stock Option Plan were exercised during fiscal 1994.
1991 STOCK OPTION PLAN
On June 11, 1991, the Company's board of directors adopted the Rhodes, Inc. Stock Option Plan (the "1991 Stock Option Plan"), pursuant to which options to purchase Common Stock ("1991 Options") may be granted to eligible employees. The purpose of the 1991 Stock Option Plan is to provide an incentive for such employees to work to increase the value of the Company's capital stock and to provide such employees with a stake in the future of the Company which corresponds to the stake of each of the Company's stockholders.
As of February 28, 1995, a maximum of 700,000 shares of Common Stock may be issued under the 1991 Stock Option Plan. The Plan allows for the grant of either qualified incentive stock options ("ISO", as defined by the Internal Revenue Code) or non-qualified options ("Non-ISO"). At February 28, 1995, options to acquire 694,000 shares of common stock were outstanding under the 1991 Stock Option Plan.
The option price of each 1991 Option is set by a committee of the Board of Directors subject to certain limitations. The option price for an ISO may not be less than the fair market value (or for a stockholder holding stock possessing more than 10% of the total combined voting power of all classes of stock of the company (a "Ten Percent Stockholder"), 110% of the fair market value) of Common Stock on the date the ISO is granted. The option price for a Non-ISO may be more than, less than or equal to the fair market value of such stock on the date the Non-ISO is granted but may not be less than an amount which the Committee determines to be adequate consideration. The options carry a 5 year vesting period.
Also, options to purchase an additional 15,000 shares of Common Stock have been granted to certain directors of the Company.
The following table details the Company's stock option activity for the past three fiscal years:
8. SHORT-TERM DEBT
NOTES AND LOANS PAYABLE
At February 28, 1993, the Company had a revolving credit facility with Security Pacific Business Credit, Inc. ("SPBC"), which was secured by a priority lien on the Company's inventory. Effective December 7, 1992, the Company and SPBC agreed to the extension of the revolving loan agreement until November 30, 1994 with automatic annual renewals thereafter unless 60 days' written notice of non-renewal was given by either party.
On February 24, 1994, the Company cancelled its revolving credit facility with SPBC and entered into a revolving credit agreement ("Revolving Credit Agreement") with Wachovia Bank of Georgia, N.A. (the "Senior Lender"). The maximum availability of funds under the Revolving Credit Agreement is the lesser of $30 million or 50% of eligible inventory. The Revolving Credit Agreement is secured by substantially all of the inventory of the Company. Loans outstanding under the Revolving Credit Agreement generally will bear interest at one or two interest rate options selected by the Company: (i) Prime Rate + .5% per annum or (ii) a quoted LIBOR + 2.375% per annum for specified interest periods. The Company is required to pay a commitment fee of 0.375% per annum of the average daily unused portion of the Senior Lender's commitment under the Revolving Credit Agreement. The Revolving Credit Agreement was scheduled to terminate in February 1996, but has been extended to February 24, 1997. At February 28, 1995 the Company had no loans outstanding under the Revolving Credit Agreement. The amount available under the Revolving Credit Agreement at February 28, 1995 is $21,783,000.
The revolving loan has, among other restrictions, covenants whereby the Company must meet certain goals with respect to cash interest coverage, fixed charge coverage, and profit after taxes plus amortization of intangibles. These goals, expressed in terms of defined minimum ratios and amounts, become more restrictive over the term of the loan agreement. The agreement also provides, among other things, limitations on the Company's ability to incur debt (including lease obligations); to make capital expenditures; to enter into transactions involving mergers, consolidations, acquisitions or sales; or to declare, pay or make any dividend or other distribution of property with respect to its capital stock.
Included in interest expense for fiscal 1995, 1994, and 1993 is interest of $294,000, $506,000, and $2,796,000, respectively, related to short-term debt.
9. RELATED-PARTY TRANSACTIONS
In June 1993, the Company consummated the Recapitalization, pursuant to which the Company issued 2,859,115 shares of Common Stock to Green Capital, an affiliate of Holcombe T. Green, Jr., in exchange for outstanding indebtedness of the Company to Green Capital having an accreted value of $34.3 million. The Company also issued 1,221,666 shares of Common Stock to Green Capital in exchange for preferred stock of the Company with a stated value of $10.0 million and accrued and unpaid dividends aggregating $4.7 million. In addition, Green Capital purchased 250,000 shares in the public offering which was part of the Recapitalization.
Green Capital previously maintained an unsecured line of credit for the Company of up to $10.0 million for working capital purposes, and has advanced funds to the Company from time to time to meet short-term cash needs. Interest is payable monthly at a floating interest rate equal to the prime rate plus 2%. The line of credit was terminated upon execution by the Company of the Revolving Credit Agreement on February 24, 1994. The maximum amount outstanding in the period beginning March 1, 1991 and ending February 24, 1994 was $7.8 million and total interest paid to Green Capital during such period was $478,000.
In December, 1993, January, February, and December, 1994 and January, 1995, the Company had outstanding advances to Green Capital in varying amounts, with the largest principal amount outstanding at any time being $3.0 million. Interest accrued on outstanding principal at a rate of 8% or 10% per annum, and total interest paid by Green Capital to the Company for these advances was approximately $22,000. No advances were outstanding as of February 28, 1995 or 1994.
On June 28, 1990, the Company entered into a $40.0 million secured term loan with Jackson National Life Insurance Company ("Jackson National"), secured by all real estate and certain other personal property of the Company, excluding inventories. Interest accrued on the outstanding principal at a rate of 12% per annum. At the time of the loan, Jackson National owned more than 5% of the common stock of the Company and $35.0 million of the $40.0 million outstanding 15% Senior Subordinated Notes due September 20, 1998 of the Company (the "15% Notes"). In connection with the Recapitalization, the 12% Secured Term Loan and 15% Notes were repaid and Jackson National and the other holders of the 15% Notes consented to the prepayment of the 15% Notes in consideration of $2.6 million of prepayment penalties, $2.3 million of which was paid to Jackson National (see Note 11).
Pursuant to an agreement dated November 15, 1991 between the Company and Bankers Fidelity, an affiliate of Atlantic American Corporation, Bankers Fidelity exchanged 17% Junior Discount Subordinated Debentures due 2000 (the "17% Debentures") owned by it having an aggregate stated face amount of $10.2 million for an aggregate of 485,398 newly issued shares of Common Stock (an exchange rate of 47.7613 shares of Common Stock for each $1,000 stated face amount of 17% Debentures). On November 18, 1991, Green Capital acquired all such shares of Common Stock from Bankers Fidelity for a purchase price of $3.0 million, thereby increasing the beneficial ownership by Holcombe T. Green, Jr. and Green Capital of the outstanding Common Stock of the Company at that time to 80.2% and 56.6%, respectively. During June and July 1992, Green Capital purchased from Atlantic American Corporation and affiliates 17% Debentures having an aggregate face value of $20.1 million for an aggregate purchase price of $6.0 million.
For the period from July 1990 through the date of the Recapitalization, the Company had paid RHD Investors a monthly fee of $33,333 for management services, including financial and strategic planning. Prior to July 1990, the monthly management fee was $20,833. Although Holcombe T. Green, Jr., who through affiliates controls RHD Investors, personally devoted substantial efforts on the Company's behalf in his capacity as Chairman of the Board of the Company, Mr. Green received no directors' fees or other compensation from the Company. Payment of the monthly management fee terminated effective upon consummation of the Recapitalization. Upon Mr. Lowenstein becoming Chairman of the Board of Directors in July, 1994, Mr. Green began to receive the same remuneration as the other outside directors.
On March 24, 1994 affiliates of Mr. Holcombe T. Green, Jr., Chairman of the Board and beneficial owner of 52.8% of the outstanding common stock of the Company, sold 2,240,494 shares in a secondary offering at $18.50 per share. Jackson National Life sold 248,880 shares in the same offering. Consummation of the sale reduced Mr. Green's beneficial ownership to 29.8%. No shares were sold by the Company in this offering. Upon consummation of the secondary offering, the Company became listed on the New York Stock Exchange.
10. SALE OF INSTALLMENT RECEIVABLES PORTFOLIO
On May 15, 1992, Rhodes and its wholly owned subsidiary, Rhodes Financial Services Corp. ("Rhodes Financial"), entered into a definitive agreement to sell to Beneficial National Bank USA all outstanding customer installment receivables in the approximate amount of $174,000,000 (the "Receivables Sale"). The Receivables Sale was completed on June 18, 1992 (the "Closing Date"). The Company also contracted to sell all future receivables for the next three years in an on-going merchant agreement ("Merchant Agreement") whereby BNB will provide Rhodes with its private label credit facility for future credit sales. This arrangement removed the need for Rhodes to fund that portion of the accounts receivable not financed by the commercial paper facility and eliminated the risks from credit losses and interest rate fluctuations on its accounts receivable portfolio. The Merchant Agreement is subject to early termination by BNB in the event of a bankruptcy filing by or against Rhodes or upon 30 days notice in the event of a material change in any law or regulation or in the operation, assets, condition (financial or otherwise), business or ownership of Rhodes. After the initial three-year term, the Merchant Agreement remains in effect unless terminated by either party on 180 days notice. BNB has no recourse against the Company for the accounts receivable acquired under the Receivables Sale or under the Merchant Agreement.
Rhodes received $170,006,000 or approximately 97.77% of the balance of the outstanding accounts receivable in cash on the Closing Date and, in addition, received approximately $4,262,000, net of a $500,000 contingency deposit, in advances against future revenue to Rhodes to be earned under the on-going Merchant Agreement. Under the Merchant Agreement, Rhodes continues to receive the credit insurance commission income and a commission on certain classes of credit sales sold to BNB.
The net proceeds of the Receivables Sale are set forth below:
The net proceeds were used to pay down the Company's existing lines of credit and to repay the outstanding balance of an industrial revenue bond.
The effect of the Receivables Sale on fiscal 1993 loss before income taxes is set forth below:
Under its on-going Merchant Agreement with BNB, Rhodes continues to offer the Rhodes Credit Card on substantially the same terms to customers.
The following provides the historical results of the Company's credit operations for the fiscal year 1993 before the Receivables Sale:
11. EXTRAORDINARY ITEM
During fiscal 1994, the Company expensed certain charges incurred principally in connection with the Recapitalization (see Note 1). These extraordinary items represent nonrecurring prepayment penalties of $2,624,000 for early retirement of debt and write-off of $903,000 in related deferred loan costs, less an income tax benefit of $800,000.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth a summary of the quarterly unaudited results of operations for the years ended February 28, 1995 and 1994:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND THE SHAREHOLDERS OF RHODES, INC.
We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Rhodes, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated April 21, 1995. Our audits were made for the purpose of forming opinions on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(2) in this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Security and Exchange Commission's Rules and Regulations and is not a required part of the basic financial statements. This information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial, statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia April 21, 1995
RHODES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED FEBRUARY 28, 1995 (IN THOUSANDS)
(A) Charges to the allowance for purposes for which the allowance was created.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
RHODES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN:
We have audited the accompanying statement of net assets available for purchase of stock of Rhodes, Inc. 1994 Employee Stock Purchase Plan as of February 28, 1995 and the related statement of changes in net assets available for purchase of stock for the period from September 1, 1994 (date of inception) to February 28, 1995. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for purchase of stock of Rhodes, Inc. 1994 Employee Stock Purchase Plan at February 28, 1995 and the changes in net assets available for purchase of stock for the period from September 1, 1994 (date of inception) to February 28, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia April 21, 1995
RHODES, INC. 1994 EMPLOYEE STOCK PURCHASE PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PURCHASE OF STOCK
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PURCHASE OF STOCK
The accompanying notes are an integral part of these financial statements.
RHODES, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1995
NOTE 1 - PLAN DESCRIPTION
The Rhodes, Inc. 1994 Employee Stock Purchase Plan (the "Plan") was created to encourage employees (each a "Participant") of Rhodes, Inc. (the "Company") to invest in the Company's common stock. All employees of Rhodes, Inc. who have at least one year of service, who customarily work more than 20 hours a week and who are customarily employed for more than five (5) months in any calendar year are eligible to participate.
The Plan, which was approved by the Board of Directors of the Company on May 11, 1994 and will continue for an indefinite period, is administered by the Company. All expenses of administering the Plan are paid by the Company.
Two hundred fifty thousand (250,000) shares of the Company's common stock have been reserved for issuance under the Plan. As of February 28, 1995, no shares had been issued under the Plan.
Eligible employees may commence participation in the Plan on the first investment date (March 1 and September 1) after they have become eligible to participate. Participant contributions to the Plan can only be made by authorized payroll deductions. Deductions must be in whole dollar amounts of not less than $150 nor more than $12,500 for the entire purchase period. The Company accumulates payroll deductions in the name of each Participant during each purchase period. All funds collected by the Plan are held by the Company in individual accounts established in the name of each Participant until expiration of the applicable investment period. The Plan does not pay interest on funds held in any Participant's investment account.
On the first day of each purchase period, each Participant is granted an option to purchase the number of shares of stock determined by the plan administrator by dividing the total payroll deductions which the Participant has elected to make for such purchase period by the option price for a share of Company common stock as of such date, rounding down to the nearest whole number. Each such option is exercisable by the Participant in accordance with the terms of the Plan on the last day of the purchase period.
Shares purchased under the Plan are distributed to the Participants as soon as practical after the end of the investment period.
STOCK PURCHASE PRICE
The purchase price for each share of stock is the lesser of 85% of the fair market value of the stock on the first or last day of the purchase period.
The fair market value of the stock on each investment date is the closing price of the stock as quoted in the Wall Street Journal.
TERMINATION OF PARTICIPATION
A Participant may elect to withdraw from participation in the Plan with respect to any purchase period by so notifying the plan administrator prior to the end of the purchase period. After receipt of notice, the payroll deductions credited to the Participant's account with respect to the purchase period will be paid to him or her promptly (without interest) and no further payroll deductions will be made on behalf of the Participant during the purchase period.
LIMITATION ON STOCK PURCHASES
No Participant may purchase stock under the Plan if such Participant, immediately after an option is granted to purchase stock, would own stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or its subsidiaries.
No Participant will be granted options under the Plan to purchase stock with a fair market value in excess of $25,000 in any calendar year.
NOTE 2 - FEDERAL INCOME TAXES
Management believes the Plan meets the requirements of Section 423 of the Internal Revenue Code and is not subject to any provisions of the Employee Retirement Income Security Act of 1974.
NOTE 3 - SUBSEQUENT EVENT
On March 1, 1995, 21,265 shares of the Company's common stock were purchased under the Plan for $178,477. The net assets available for purchase of stock at February 28, 1995 represent the $178,477 purchase price of the stock, refunds due of $1,230 and contributions made for the next purchase period. These shares were subsequently distributed to the participants. The price per share of $8.39 is equal to 85% of the September 1, 1994 fair market value of the Company's common stock. Subsequent to the purchase, 228,735 shares remained available for purchase under the Plan.