General The Company is the Nation's largest specialty retailer of home furnishings and related items with 872 stores (as of April 30, 2000) which are located in 30 states. The Company's Heilig-Meyers stores are primarily located in small towns and rural markets in the southern, mid-western and western Continental United States. The 55 stores of The RoomStore are located in 5 states, including Texas, Virginia, Oregon, Maryland and Washington. The stores included in Operations held for sale as of February 29, 2000 include three stores in the Chicago market and the 33 stores in Puerto Rico operating under the Berrios name, both of which were previously reported within The RoomStore division.

The Company's operating strategies include: (1) offering a broad selection of competitively priced home furnishings, including furniture and accessories, and bedding, and in the Heilig-Meyers stores, consumer electronics, appliances, and other items such as jewelry, small appliances and seasonal goods; (2) locating Heilig-Meyers stores primarily in small towns and rural markets which are at least 25 miles from a metropolitan market; (3) offering credit programs to provide flexible financing to its customers; (4) utilizing centralized inventory and distribution systems in strategic regional locations to support store inventory and merchandise delivery operations and; (5) emphasizing customer service and repair service for consumer electronics and other mechanical items.

Competition The retail home furnishings industry is a highly competitive and fragmented market. The Company, as a whole, competes with large chains, independent stores, discount stores, furniture stores, specialty stores and others, some of which have financial resources greater than those of the Company, and some of which derive revenues from the sale of products other than home furnishings.

Due to volume purchasing, the Company believes it is generally able to offer merchandise at equal or lower prices than its competitors, particularly local independent and regional specialty furniture retailers. In addition, management believes that it offers a broader selection of merchandise than many of its competitors.

The Company believes that locating its Heilig-Meyers stores in small towns and rural markets provides an important competitive advantage. Currently, approximately 80% of all Heilig-Meyers stores are located in towns with populations under 50,000 that are more than 25 miles from a metropolitan market. Competition in these small towns largely comes from locally owned store operations, which generally lack the financial strength to compete effectively with the Company. Consequently, the Company believes that its Heilig-Meyers stores have the largest market share among home furnishings retailers in the majority of their areas.

The RoomStore division competes in mid-to-large metropolitan markets and serves middle income customers.

Based on its experience, the Company believes its competitive environment is comparable in all geographic regions in which it operates. Therefore, the Company does not believe that a regional analysis of its competitive market is meaningful at this time.

D. Store Operations

General The Company's Heilig-Meyers stores generally range in size from 12,000 to 35,000 square feet, with the average being approximately 25,000 square feet. A store's attached or nearby warehouse usually measures from 3,000 to 5,000 square feet. A typical store is designed to give the customer an urban shopping experience in a rural location. The Company's existing store remodeling program, under which stores are remodeled on a rotational basis, provides the Company's older stores with a fresh look and up-to-date displays on a periodic basis. During fiscal 2000, the Company remodeled 18 existing stores and plans to remodel approximately 20 existing stores in fiscal 2001. The remodel plan for fiscal 2001 is designed around a new store format that brings together new product and visual presentation supported by an enhanced advertising program. Decisions regarding the presentations and programs will be made on a market-by-market basis. The existing The RoomStore stores average approximately 30,000 square feet. The Company does not have significant remodeling activities planned for this format during fiscal 2001.

Generally, each store unit is managed by an on-site manager responsible for day-to-day store operations including, if offered in that store, installment credit extension and collection. In certain markets where conditions permit, one manager may have operating responsibility for two stores. See "Credit Operations" regarding planned changes with respect to installment credit extension and collection. For executive management purposes, stores are grouped by operating format. For operational purposes, stores are generally grouped within their format by geographic market.

The Company has an in-house education program to train new employees in its operations and to keep current employees informed of the Company's policies. This training program emphasizes sales productivity, store administration, and where applicable, credit extension and collection. The training program utilizes the publication of detailed store manuals, internally produced training videotapes and Company-conducted classes for employees. The Company also has an in-store manager training program, which provides potential managers with hands-on experience in all aspects of store operations. The Company's ongoing education program is designed to provide a sufficient number of qualified personnel for its stores.

In order to increase the availability and effectiveness of management information, Heilig-Meyers makes use of just-in-time ordering and backhauling. The Company also makes use of satellite systems which provide immediate communication between the Company's corporate headquarters and the Heilig-Meyers stores and distribution centers. The Company believes customer service is enhanced by providing store management more timely access to information related to product availability. The RoomStore division has operating systems in place that provide similar operating capabilities.

Merchandising The Company's Heilig-Meyers merchandising strategy is to offer a broad selection of competitively priced home furnishings, including furniture and accessories, consumer electronics, appliances, bedding and other items such as jewelry and seasonal goods. The RoomStore stores primarily sell mid-price-point furniture and accessories, and bedding. During the three most recent fiscal years, the percentage of store sales derived from the various merchandising categories were as follows (by format):

2000 1999 1998 ---- ---- ---- Heilig-Meyers Furniture: Furniture and accessories 65% 64% 60% Consumer electronics 8 7 9 Bedding 13 13 13 Appliances 7 7 7 Other (e.g. jewelry and seasonal goods) 7 9 11

The RoomStore: Furniture and accessories 90 90 90 Bedding 10 10 10

The Company's stores carry a wide variety of items within each merchandise category to appeal to individual tastes and preferences. The Company believes this broad selection of products helps to increase repeat sales to existing customers. By carrying seasonal merchandise (heaters, air conditioners, lawn mowers, outdoor furniture, etc.) in its Heilig-Meyers stores, the Company has been able to moderate the seasonal fluctuations in its sales that are common to the industry and, in particular, small towns.

While the basic merchandise mix within each operating format remained fairly constant during fiscal 2000, the Company continued to refine its merchandise selections to capitalize on variations in customer preferences. During fiscal 2000, the Company continued to strengthen its vendor relationships. In addition to providing purchasing advantages, these relationships provide warehousing and distribution arrangements that improve inventory management. The Company also began the implementation of new systems in fiscal 2000 designed to improve category management capabilities and supply chain management. These systems will allow the Company to gather and analyze marketing and merchandising information more effectively in order to build better assortments and inventory plans. Furthermore, the systems should provide the capability to integrate this information into its inventory management function and develop supply chain management strategies aimed at lowering inventory levels while enhancing customer service.

Advertising and Promotion Circulars and broadcast advertising are the key components of the Company's marketing program. The Company centrally designs its circulars for its Heilig-Meyers stores, which accounted for approximately 32% of the Company's Heilig-Meyers store advertising expenses in fiscal 2000. In fiscal 2000, the Heilig-Meyers format distributed over 150 million circulars. This included nine circulars sent by direct mail or newspaper insert to over 16 million households in Heilig-Meyers primary trade area and special private sale circulars mailed to approximately 0.5 million of these households each month, as well as during special promotional periods. Direct mailing expenses accounted for approximately 20% of advertising expenses at The RoomStore during fiscal 2000, with circulars being mailed to approximately 750,000 customers per month.

In addition to the Company's utilization of circulars, television and radio commercials are produced for each format and aired in virtually all of the Company's markets. Broadcast advertising accounted for approximately 46% of the Company's Heilig-Meyers store advertising expenses in fiscal 2000. Newspaper advertising is placed largely at the store level. The Company also utilizes Spanish language television and radio in selected markets with significant Hispanic populations. The Company regularly conducts approximately 42 Heilig-Meyers store promotional events each year. In addition to these events, individual stores periodically conduct promotional events locally. The Company generally conducts promotions twice each month in its The RoomStore format.

During fiscal 2000, the Company continued to utilize market segmentation techniques to identify prospective customers by matching their demographics to those of existing customers. Management believes ongoing market research and improved mailing techniques enhance the Company's ability to place circulars in the hands of those potential customers most likely to make a purchase. The Company believes that the availability as well as the terms of credit are key determinants in the purchasing decision at its Heilig-Meyers stores, and therefore, promotes credit availability in those circulars.

Credit Operations The Company believes that offering flexible credit options is an important part of its business strategy. Approximately 70% to 80% of sales in the Heilig-Meyers stores have been made through the Company's installment credit programs. The Company accepts major credit cards in all stores and offers revolving credit featuring private label credit cards.

Historically, the Heilig-Meyers installment credit program has been administered at the store level, allowing terms to generally be tailored to meet the customer's ability to pay. Each Heilig-Meyers store has a credit manager who, under the store manager's supervision, is responsible for extending and collecting that store's accounts in accordance with corporate guidelines. Over fiscal years 1999 and 2000, the Company implemented credit scoring capabilities that provide local store management with an enhanced tool for making better credit decisions. In fiscal 2001, the Company plans to further refine its credit management effectiveness by implementing a centralized billing process for all installment credit customers. Additionally, the Company plans to implement centralized credit extension and collections in approximately 223 stores. In addition to administrative cost savings, this program should enable the Company to more effectively evaluate its credit offerings to ensure their competitiveness in the marketplace, as well as provide the highest level of support to the Company's operating strategy. Based on results achieved in the initial implementation of this program in the 223 stores, strategies will be developed regarding the credit offerings and operations within the remaining store base.

The Company extends credit under installment contracts in its Heilig-Meyers stores for original terms up to 24 months, however, the average term at origination as of February 29, 2000 was 19 months. Finance charges are included in revenues on a monthly basis, as earned, net of costs related to the Company's asset securitization program and totaled $214,098,000 during fiscal 2000, or approximately 9.3% of total revenues. To provide a source of financing to the Company, the substantial majority of installment accounts receivable is transferred to a Master Trust in exchange for certificates representing undivided interests in such receivables. Certificates with a face value of $826,300,000 have been sold to third parties as of February 29, 2000. The Company continues to service these accounts. Because credit operations are integrated with the sales and store administration, management does not believe that an accurate allocation of various costs and expenses of operations can be made between the retail sales and credit operations. Therefore, the Company is unable to estimate accurately the contribution of its financing operations to net income.

The Company also offers revolving credit programs, which are underwritten by third parties, in The RoomStore stores, and to a lesser degree, in the Heilig-Meyers stores. The Company does not service or generally provide recourse on these accounts. Credit applications, sales, and many payments on account are generally processed electronically through the point-of-sale systems. During fiscal 2000, approximately 45% of The RoomStore sales and approximately 3% of Heilig-Meyers sales were made through the revolving credit programs.

Distribution As of April 30, 2000, the Company operates eight Heilig-Meyers distribution centers in the Continental U.S. These centers are located in Orangeburg, South Carolina; Rocky Mount, North Carolina; Russellville, Alabama; Mount Sterling, Kentucky; Thomasville, Georgia; Moberly, Missouri; Hesperia, California; and Athens, Texas. Currently, the Company's Heilig-Meyers distribution network has the capacity to service over 900 stores in the Continental U.S. The Company also operates six RoomStore distribution centers which collectively have approximately 1,000,000 square feet.

The Company utilizes several sophisticated design and management techniques to increase the operational efficiency of its distribution network. These include cantilever racking and computer-controlled random-access inventory storage. Use of direct shipping and backhauling from vendors has also enhanced distribution efficiency. Backhauling involves routing its trucks so that they can transport purchased inventory from suppliers to the distribution centers while returning from normal store deliveries. The Company backhauled approximately 25% of its purchased inventory in the Heilig-Meyers stores during fiscal 2000.

Typically, each of the Company's Heilig-Meyers stores is located within 250 miles of one of the eight distribution centers and each of The RoomStore stores is located within 30 miles of the six The RoomStore distribution and delivery centers. The Company operates a fleet of trucks which generally delivers merchandise to each Heilig-Meyers store at least twice a week. In The RoomStore format which are located in larger cities, the Company also utilizes centralized delivery centers for home delivery. The Company believes the use of the distribution centers enables it to make available a broader selection of merchandise, to reduce inventory requirements at individual stores, to benefit from volume purchasing, to provide prompt delivery to customers and to minimize freight costs.

Customer Service The Company believes that customer service is an important element for success in the retail furniture business and therefore provides a broad range of services to its customers. These include home delivery and setup, as well as liberal policies with respect to exchanges and returns. In addition, the Company offers service agreements on certain merchandise sold in its stores. The Company sells substantially all of its service policies to third parties and recognizes service policy income on these at the time of sale. Revenue from service policies and extended warranty contracts retained by the Company are deferred and recognized over the life of the contract period.

In addition, the Company provides repair services on virtually all consumer electronics and mechanical items sold in its Heilig-Meyers stores. The Company operates Heilig-Meyers service centers in Fayetteville, North Carolina; Moberly, Missouri; Hesperia, California and Athens, Texas. The Fayetteville Service Center occupies approximately 32,000 square feet and has the capacity to process 2,000 repairs a week. The Moberly Service Center occupies 35,000 square feet adjacent to the Moberly, Missouri Distribution Center and has the capacity to process 2,000 repairs a week. The Hesperia Service Center occupies 35,000 square feet and has the capacity to process 2,500 repairs a week. The Athens Service Center occupies 30,000 square feet and has the capacity to process 2,000 repairs a week. The service centers provide service for all consumer electronic items, most mechanical items (except major appliances, which are serviced locally) and watches. The service centers are also authorized to perform repair work under certain manufacturers' warranties. Service center trucks visit Heilig-Meyers stores weekly, allowing one-week turnaround on most repair orders.

E. Corporate Expansion

The Company has grown from 647 stores at February 28, 1995, to 872 stores at April 30, 2000. The following table lists the Company's stores by state and format as of April 30, 2000:

Heilig- The Operations State Meyers RoomStore Held for Sale Total --------------------------------------------------------------------------

Alabama 33 33 Arizona 15 15 California 81 81 Colorado 4 4 Florida 35 35 Georgia 57 57 Idaho 4 4 Illinois 28 3 31 Indiana 21 21 Iowa 19 19 Kentucky 30 30 Louisiana 20 20 Maryland 2 15 17 Mississippi 29 29 Missouri 29 29 Montana 2 2 Nevada 5 5 New Mexico 10 10 North Carolina 110 110 Ohio 33 33 Oklahoma 11 11 Oregon 2 5 7 Pennsylvania 22 22 South Carolina 43 43 Tennessee 53 53 Texas 33 25 58 Virginia 45 9 54 Washington 11 1 12 West Virginia 27 27 --- --- --- ---- 814 55 3 872 === === === ====

Growth in the number of stores comes primarily from three sources: acquisition of chains or independent stores, refurbishing of existing retail space and new construction. During the fiscal year ended February 29, 2000, the Company opened 16 stores and closed 8 stores. The Company also divested 236 Mattress Discounters stores and 96 Rhodes stores. The Company also closed 19 stores in the Chicago and Milwaukee markets and on April 20, 2000, the Company sold the 33 Berrios stores located in Puerto Rico for a net decrease of 376 stores. The 16 new stores were opened in refurbished existing retail space.

The Company plans to continue its slower, selective growth strategy for the Heilig-Meyers division with a greater focus on remodeling existing stores. In selecting new Heilig-Meyers locations, the Company intends to follow its established strategy of generally locating stores within 250 miles of a distribution center and in towns with populations of 5,000 to 50,000 that are over 25 miles from the closest metropolitan market. Growth opportunities of The RoomStore format are being evaluated. The Company plans to expand this format as the appropriate markets are identified.

F. Other Factors Affecting the Business of the Company

Suppliers During the fiscal year ended February 29, 2000, the Company's ten largest suppliers accounted for approximately 35% of consolidated merchandise purchases. In the past, the Company has not experienced difficulty in obtaining satisfactory sources of supply and believes that adequate alternative sources of supply exist for the types of merchandise sold in its stores. Neither the Company nor its officers or directors have an interest, direct or indirect, in any of its suppliers of merchandise other than minor investments in publicly held companies.

Service Marks, Trademarks and Franchise Operations The marks "Heilig-Meyers", "MacSaver", "MacSaver, design of a Scotsman", other marks acquired through various acquisitions and the Company's distinctive logo are federally registered service marks of the Company. The Company has registrations for numerous other trademarks and service marks routinely used in the Company's business.

The mark "The RoomStore" is a federally registered service mark of the Company which was acquired in fiscal year 1997.

These registrations can be kept in force in perpetuity through continued use of the marks and timely applications for renewal.

Seasonality Quarterly fluctuations in the Company's sales are insignificant.

Employees As of April 30, 2000, the Company employed approximately 16,478 persons full- or part-time in the Continental United States, of whom approximately 15,800 worked in the Company's stores, distribution centers and service centers, with the balance in the Company's corporate offices. The Company is not a party to any union contract and considers its relations with its employees to be good.

Foreign Operations and Export Sales The Company has no foreign operations and makes no export sales.

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