SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section l5(d) of the
Securities Exchange Act of 1934
For the Quarter Ended July 29, 1995
Commission file number 33-27126
PEEBLES INC.
Virginia 54-0332635
(State of Incorporation) (I.R.S. Employer Identification No.)
One Peebles Street
South Hill, Virginia 23970-5001 (804) 447-5200
(Address of principal executive offices) (Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: NONE
Indicate by check (x) whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes_x_. No_.
As of July 29, 1995, 1,000 shares of common stock of Peebles Inc. were
outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
PEEBLES INC.
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
JULY 29, 1995 JANUARY 28, 1995 JULY 30, 1994
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 52 $ 408 $ 78
Accounts receivable, net 24,729 28,812 24,615
Merchandise inventories 44,273 44,703 42,896
Prepaid expenses 358 306 566
Refundable income taxes 1,350 778 --
Other 88 62 482
TOTAL CURRENT ASSETS 70,850 75,069 68,637
PROPERTY AND EQUIPMENT, NET 28,987 28,951 26,322
BUILDINGS UNDER CAPITAL LEASES, NET 1,135 1,230 1,307
OTHER ASSETS
Excess of cost over net assets
acquired, net 51,162 37,111 37,957
Deferred financing costs 3,813 277 364
Other 6,143 6,316 6,574
61,118 43,704 44,895
$162,090 $148,954 $141,161
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,460 $ 8,722 $ 7,006
Accrued compensation and
other expenses 5,468 5,587 3,806
Deferred income taxes 1,781 4,472 4,957
Current maturities of long-term debt 7,050 5,850 7,536
Other 202 566 426
TOTAL CURRENT LIABILITIES 22,961 25,197 23,731
LONG-TERM DEBT 72,375 34,240 34,102
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,764 1,865 1,997
DEFERRED INCOME TAXES 5,224 5,416 4,481
COMMON STOCK WARRANTS -- 2 164
STOCKHOLDERS' EQUITY
Common stock--par value $.10 per share,
authorized 5,000,000 shares, issued
and outstanding 1,000, 2,942,690 and
2,933,562 shares, respectively 1 294 293
Additional capital 59,307 64,390 64,174
Retained earnings 458 17,550 12,219
59,766 82,234 76,686
$162,090 $148,954 $141,l61
</TABLE>
See notes to condensed financial statements
<PAGE>
CONDENSED STATEMENT OF OPERATIONS
PEEBLES INC.
(dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Two-Month One-Month Three-Month Two-Month Four-Month Six-Month
Period Period Period Period Period Period
Ended Ended Ended Ended Ended Ended
July 29, 1995 May 27, 1995 July 30, 1994 July 29, 1995 May 27, 1995 July 30, 1994
(Post-Acquisition) (Pre-Acquisition) (Post-Acquisition) (Pre-Acquisition)
<S> <C> <C> <C> <C> <C> <C>
NET SALES $26,318 $12,645 $36,782 $ 26,318 $49,163 $71,549
COSTS AND EXPENSES
Cost of sales 15,158 8,350 21,461 15,158 29,935 42,552
Selling, general and
administrative expenses 7,667 3,800 10,250 7,667 14,639 19,906
Stock option settlement -- 3,089 -- -- 3,089 --
Depreciation and
amortization 1,178 596 1,767 1,178 2,349 3,505
24,003 15,835 33,478 24,003 50,012 65,963
OPERATING INCOME (LOSS) 2,315 (3,190) 3,304 2,315 (849) 5,586
OTHER INCOME 79 -- 161 79 77 337
INTEREST EXPENSE 1,630 357 1,110 1,630 1,414 2,108
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) 764 (3,547) 2,355 764 (2,186) 3,815
INCOME TAXES (BENEFIT)
Federal, state and
deferred 306 (1,399) 1,024 306 (874) 1,659
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 458 (2,148) 1,331 458 (1,312) 2,156
EXTRAORDINARY ITEM-DEBT
REFINANCE -- (216) -- -- (216) --
NET INCOME (LOSS) $ 458 $(2,364) $ 1,331 $ 458 $(1,528) $ 2,156
EARNINGS (LOSS) PER
SHARE $ 458 $ (.80) $ .45 $ 458 $ (.52) $ .73
Average common stock
and common stock
equivalents outstanding 1,000 2,942,785 2,940,048 1,000 2,942,785 2,940,048
</TABLE>
See notes to condensed financial statements
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
PEEBLES INC.
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six-Month Period Ended
July 29, 1995 July 30, 1994
(Post-Acquisition) (Pre-Acquisition)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ (1,070) $ 2,156
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation 2,162 1,869
Amortization 1,570 1,860
Extraordinary loss 216 --
LIFO Reserve adjustment 833 --
Changes in operating assets and
liabilities net of effects
from acquisition adjustments:
Accounts receivable 4,083 3,771
Merchandise inventories (3,505) (1,244)
Accounts payable (262) (300)
Other assets and liabilities (2,505) (2,028)
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,522 6,084
INVESTING ACTIVITIES
Acquisition of Peebles Inc. (90,642) --
Purchase of property and equipment (3,022) (3,543)
Other -- (60)
NET CASH USED IN INVESTING ACTIVITIES (93,664) (3,603)
FINANCING ACTIVITIES
Proceeds from revolving facilities 155,777 77,768
Reduction in revolving facilities
and long-term debt (151,965) (80,270)
Proceeds from acquisition debt 76,390 --
Retirement of pre-acquisition debt (40,917) --
Acquisition and financing fees (6,807) --
Proceeds from equity 59,308 --
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 91,786 (2,502)
DECREASE IN CASH AND CASH EQUIVALENTS (356) (21)
Cash and cash equivalents
beginning of period 408 99
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 52 $ 78
</TABLE>
See notes to condensed financial statements
<PAGE>
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PEEBLES INC.
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
PAR ADDITIONAL RETAINED
SHARES VALUE CAPITAL EARNINGS
<S> <C> <C> <C> <C>
BALANCE JANUARY 29, 1994 2,933,562 $ 293 $64,174 $ 10,063
Net income -- -- -- 2,156
BALANCE JULY 30, 1994 2,933,562 293 64,174 12,219
Common stock issued in
redemption of Common
Stock Warrants 6,391 1 151 10
Common stock issued upon
exercise of common
stock options under the
1993 Stock Option Plan 2,737 -- 65 --
Net income -- -- -- 5,321
BALANCE JANUARY 28, 1995 2,942,690 294 64,390 17,550
Net (loss) -- -- -- (1,528)
BALANCE MAY 27, 1995, PRIOR
TO 1995 ACQUISITION 2,942,690 294 64,390 16,022
1995 Acquisition
adjustments (2,941,690) (293) (5,083) (16,022)
BALANCE MAY 27, 1995,
FOLLOWING 1995 ACQUISITION 1,000 1 59,307 --
Net Income -- -- -- 458
BALANCE JULY 29, 1995 1,000 $ 1 $59,307 $ 458
</TABLE>
See notes to condensed financial statements
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
PEEBLES INC.
July 29, 1995
(dollars in thousands, except per share amounts)
NOTE A -- ACQUISITION OF PEEBLES INC.
1995 ACQUISITION (THE "1995 ACQUISITION"): On June 9, 1995, PHC Retail Holding
Company ("PHC Retail") acquired the entire equity interest of Peebles Inc.
("Peebles" or the "Company") for approximately $136 million, which included
acquisition related expenses of approximately $5.6 million and the refinancing
of existing debt. PHC Retail is an affiliate of Kelso & Company ("Kelso"), an
investment firm located in New York, New York. PHC Retail has no significant
assets other than the shares of Peebles common stock, $.10 par value (the
"Common Stock") and had no operations prior to the 1995 Acquisition.
The 1995 Acquisition has been accounted for using the purchase method of
accounting with an effective date of May 27, 1995, and accordingly, a new
accounting basis was begun. The 1995 Acquisition cost has been allocated to the
assets and liabilities of Peebles as follows:
Cash purchase price $135,949
Pre-acquisition debt refinanced (40,917)
---------
Adjusted purchase price 95,032
Tangible net assets at historical cost (65,243)
Incremental acquisition debt 35,473
---------
Purchase price to be allocated 65,262
Purchase price allocations:
Merchandise inventories $7,436
Buildings 1,133
Land 1,411
Beneficial leaseholds 3,232
Pension asset 533
13,745
---------
Excess of cost over net assets acquired $ 51,517
The excess of cost over net assets acquired is being amortized on a
straight-line basis over 25 years beginning May 27, 1995. Beneficial leaseholds
are amortized on a straight-line basis over the composite useful lives of the
related leases. Buildings are amortized on a straight-line basis over the their
estimated useful lives.
As a result of the 1995 Acquisition, the Company recorded an extraordinary loss,
net of tax, of $216 related to the write-off of financing costs capitalized in
periods prior to the 1995 Acquisition.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal and
recurring accruals) considered necessary for a fair presentation have been
included. As a result of the 1995 Acquisition, the financial statements and
related footnote amounts for periods prior to the acquisition are not comparable
to the current period. In addition, the operating results for the current fiscal
periods are not necessarily indicative of the results that may be expected for
the fiscal year ended February 3, 1996, due to the seasonal nature of the
business of Peebles. For further information, refer to the financial statements
and footnotes thereto included in Peebles' annual report on Form 10-K for the
fiscal year ended January 28, 1995.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
Peebles Inc.
July 29, 1995
PRO FORMA FINANCIAL INFORMATION: The following unaudited pro forma financial
information reflects the results of operations of the Company as if the 1995
Acquisition occurred at the beginning of the 1994 fiscal year. These pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of what would have occurred had the acquisition been made at the
beginning of fiscal 1994 or the results which may occur in the future.
<TABLE>
<CAPTION>
Three-Month Period Six-Month Period Fiscal Year Ended
Ended July 29, 1995 Ended July 29, 1995 January 28, 1995
<S> <C> <C> <C>
NET SALES $ 38,963 $ 75,481 $ 167,662
COSTS AND EXPENSES
Cost of sales 23,113 44,606 98,248
Selling, general and
administrative expenses 11,467 22,306 45,205
Depreciation and amortization 1,823 3,627 6,924
36,404 70,539 150,377
OPERATING INCOME 2,559 4,942 17,285
OTHER INCOME 79 156 131
INTEREST EXPENSE 2,137 4,306 7,261
INCOME BEFORE INCOME TAXES 501 792 10,155
INCOME TAXES 205 317 4,413
NET INCOME $ 296 $ 475 $ 5,742
</TABLE>
NOTE B -- MERCHANDISE INVENTORIES
Merchandise inventories are accounted for by the retail inventory method applied
on a last in, first out ("LIFO") basis. Merchandise inventories consisted of the
following:
<TABLE>
July 29, 1995 May 27, 1995 January 28, 1995 July 30, 1994
<S> <C> <C> <C> <C>
Merchandise inventories at lower (Pre-Acquisition)
of cost (FIFO) or market $ 36,837 $ 35,549 $ 33,332 $ 31,947
Fair Value Adjustment 7,436 14,209 14,209 14,209
LIFO reserve -- (3,873) (2,838) (3,260)
Merchandise inventories at
LIFO cost $ 44,273 $ 45,855 $ 44,703 $ 42,896
</TABLE>
The $1,035 increase in the LIFO reserve from January 28, 1995 to May 27, 1995 is
included in cost of goods sold for the four-month period then ended. The 1995
Acquisition established a new LIFO base year as of May 27, 1995. At July 29,
1995, current costs represented the lower of cost or market. The Fair Value
Adjustment represents the difference between historical cost and fair value at
the respective period presented.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
Peebles Inc.
July 29, 1995
NOTE C -- ACCOUNTS RECEIVABLE
Accounts receivable are shown net of $930, $930 and $950 representing the
allowance for uncollectible accounts at July 29, 1995, January 29, 1994 and July
30, 1994, respectively. As a service to its customers, the Company offers credit
through the use of its own charge card, certain major credit cards and a layaway
plan. The Peebles' customer typically resides in the local community immediately
surrounding the store location. Peebles stores serve these local customers in
Virginia, Maryland, North Carolina, South Carolina, Tennessee, Kentucky,
Delaware, New Jersey, Pennsylvania and New York. The Company does not require
collateral from its customers.
NOTE D -- LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 29, 1995 January 28, 1995 July 30, 1994
<S> <C> <C> <C>
1995 Senior Revolving Facility $ 29,750 $ - $ -
Senior Term Note A 19,750 - -
Senior Term Note B 29,925 - -
Revolving Facility - 28,550 28,998
Term Facility - 11,340 12,340
Other - 200 200
79,425 40,090 41,538
Less current maturities 7,050 5,850 7,536
$ 72,375 $ 34,240 $ 34,102
</TABLE>
On June 9, 1995, the Company entered into a $120 million credit facility (the
"1995 Credit Agreement") to i) refinance the existing debt under the
pre-acquisition Credit Agreement, ii) provide the additional funding necessary
to complete the 1995 Acquisition, and iii) provide working capital and funds for
capital expenditures. The 1995 Credit Facility provides a Senior Revolving
Facility (the "1995 Revolving Facility") and a Senior Term Facility. The Senior
Term Facility includes two notes, Senior Term Note A and Senior Term Note B,
with original principal balances of $20 million and $30 million, respectively.
Senior Term Note A and Senior Term Note B each require quarterly payments,
coinciding with the Company's fiscal quarters, of principal (increasing annually
from $250 and $75 per quarter, respectively) and interest in arrears through
maturity. Senior Term Note A and Senior Term Note B mature on June 9, 2000 and
2002, respectively, and currently bear interest at prime plus 1-1/2% and prime
plus 2%, respectively.
The amount available under the 1995 Revolving Facility is determined by a
defined asset based formula with maximum borrowings limited to $65 million less
outstanding amounts under letters of credit. The Company pays a fee of 1/2 of
1% per annum on any unused portion of the 1995 Revolving Facility. The 1995
Revolving Facility has no specific paydown provisions. Based on the anticipated
operations of the Company in the succeeding twelve-month period, $23,000,
$24,800 and $24,562 were considered long-term obligations at July 29, 1995,
January 28, 1995 and July 30, 1994, respectively. The 1995 Revolving Facility
currently bears interest at prime plus 1-1/2%.
Under the provisions of the Credit Agreement, LIBOR-based interest rates will be
available on both the 1995 Revolving Facility and the Senior Term Facility in
October 1995 in addition to the prime-based rates stated above as follows: i)
Senior Term Note A: LIBOR plus 2.75%; ii) Senior Term Note B: LIBOR plus 3.25%;
iii) 1995 Revolving Facility: LIBOR plus 2.75%.
Aggregate principal payments on long-term debt for the next five fiscal years
under Senior Term Note A and Senior Term Note B are: 1996 - $1,825; 1997 -
$2,750, 1998 - $6,375, 1999 - $10,125, and 2000 - $11,750.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (continued)
Peebles Inc.
July 29, 1995
NOTE E -- SETTLEMENT OF THE 1993 STOCK OPTION PLAN
The 1993 Stock Option Plan was established in April 1993 to replace the Equity
Incentive Plan, both of which were intended to provide a long-term incentive to
certain key management personnel. At May 27, 1995, 432,699 options to purchase
one share of Common Stock at an exercise price of $23.75 were issued and
outstanding. Under certain change in control provisions in the 1993 Stock Option
Plan, all outstanding options vested as a result of the 1995 Acquisition. The
1995 Acquisition mandated that all options would be settled for cash only,
either for i) the difference between the $30 per share price paid by PHC Retail
for the Common Stock and the $23.75 exercise price, or ii) as specified by
certain change of control agreements. The 1993 Stock Option Plan was determined
to be compensatory under the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and as result of the cash settlement, $3,089 has
been included as an operating expense in the one-month period and four-month
periods ended May 27, 1995. Prior to the 1995 Acquisition, no compensation
expense related to the 1993 Stock Option Plan had been incurred as the best
estimates of the Company's non-publicly traded stock showed the per share fair
value to approximate the option exercise price.
As of July 29, 1995, no employee incentive option plan has been established and
there are no options to purchase Common Stock issued or outstanding.
NOTE F -- INCOME TAXES
The 1995 Acquisition did not significantly change the effective tax rate.
Differences between the effective rate of income taxes and the statutory rate
arise principally from the state income taxes and non-deductible amortization
related to certain purchase accounting adjustments.
As a result of the 1995 Acquisition, certain significant components of
deferred tax liabilities and assets were adjusted to reflect the new basis
of accounting begun on May 27, 1995. The deferred tax liabilities of
inventory valuation and depreciation and amortization were reduced approximately
$2.0 million and $1.3 million, respectively, from the balances at
January 28, 1995.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollars in thousands, except per share amounts)
The following management's discussion and analysis provides information with
respect to the results of operations for the three-month period ("Fiscal
Quarter") and six-month period ended July 29, 1995 in comparison with the
three-month period and six-month period ended July 30, 1994. The l995
Acquisition has been accounted for using the purchase method of accounting.
Accordingly, a new basis of accounting was begun on May 27, 1995. As a result,
financial statements for periods prior to the 1995 Acquisition are not
comparable to periods subsequent thereto. The three-month period ended July 29,
1995 includes amounts both prior and subsequent to the 1995 Acquisition, and as
a result, certain operating components of this Fiscal Quarter discussed below
have been significantly affected by the acquisition transactions, purchase
accounting adjustments or a combination thereof. The actual store operations of
Peebles Inc., however, were unaffected by the 1995 Acquisition. The change in
ownership of Peebles is not expected to result in any deviation from
management's pre-acquisition strategic plans involving store operations, except
that greater flexibility is afforded through the New Credit Agreement and the
added financial support of Kelso as an equity owner within that agreement, as
described in more detail below.
Net sales for the three-month period ended July 29, 1995 totaled $38,963, a 5.9%
increase over the $36,782 for the three-month period ended July 30, 1994. Net
sales at comparable stores were $36,189, up .3% in the current Fiscal Quarter in
comparison to the prior year Fiscal Quarter. For the six-month period ended July
29, 1995, net sales were $75,481, up 5.5% from the $71,549 recorded in the
six-month period ended July 30, 1994. The net sales at comparable stores were
$70,259, down .5% in comparing the six-month periods. With the comparable
stores maintaining approximately the same sales pace as the prior year, the
increase shown in net sales for both the Fiscal Quarter and six-month period
ended July 29, 1995 is attributable to the five new stores opened in the twelve
month period succeeding July 30, 1994. Net sales at comparable stores, although
recovering from the 1.3% decrease in the first Fiscal Quarter ended April 29,
1995 as a result of fewer fall and winter clearance markdowns, were affected by
weaker sales in the Company's Metro Washington D.C. region, which includes
Northern Virginia and Southern Maryland.
Cost of sales as a percentage of net sales for the three-month periods ended
July 29, 1995 and July 30, 1994 were 60.3% and 58.3%, respectively. A portion of
this increase is attributable to the adjustment of the LIFO reserves in the
respective three-month periods. The 1995 Acquisition required a new basis of
accounting and established the LIFO base year at May 27, 1995. The seasonal
fluctuations in the Department Store Price Indexes calculated by the Bureau of
Labor Statistics ("BLS Index") as used in the LIFO calculation, coupled with the
normal seasonal increase in merchandise inventories, created a larger increase
in the LIFO reserve, and therefore cost of goods sold, at May 27, 1995 than in
the previous year. Without the impact of LIFO, cost of goods sold as a
percentage of net sales for the three-month periods ended July 29, 1995 and July
30, 1994 were 58.6% and 58.0%, respectively. The additional increase in cost of
sales as a percentage of net sales in comparing the 1995 and 1994 Fiscal
Quarters relates to an increase in the normal summer clearance markdowns on
spring merchandise as inventory levels had been increased in anticipation of
stronger sales than were actually realized in the 1995 Fiscal Quarter. For the
six-month periods ended July 29, 1995 and July 30, 1994, cost of sales as a
percentage of net sales were 59.7% and 59.5%, respectively. Removing all LIFO
effects from cost of sales for the six-month periods ended July 29, 1995 and
July 30, 1994, respectively, the percentage of net sales was 58.6% and 59.1%
respectively. As described above, the decrease in comparing the six-month
periods results from better inventory management in the first Fiscal Quarter of
1995 relative to the same period in 1994. Management believes inventory levels
at July 29, 1995 and planned inventory for the fall season are proportionate to
planned sales.
Selling, general and administrative expenses ("SG&A"), including depreciation
and amortization, for the three-month periods ended July 29, 1995 and July 30,
1994 were 34.0% and 32.7%, respectively, as a percentage of net sales. For the
six-month periods ended July 29, 1995 and July 30, 1994, SG&A including
depreciation and amortization were 34.4% and 32.7%, respectively. This increase
is primarily attributed to the additional expenses related to the opening of
five new stores and the re-location of three stores in the twelve month-period
subsequent to July 30, 1994. During the Fiscal Quarter ended July 29, 1995,
approximately $3.1 million was paid to settle the 1993 Stock Option Plan as a
pre-requisite to closing the 1995 Acquisition. This non-recurring expense,
considered additional compensation expense, is included in the one-month period
ended May 27, 1995.
Interest expense for the Fiscal Quarters ended July 29, 1995 and July 30, 1994
was $1,987 and $1,110, respectively, and $3,444 and $2,108, respectively for the
six-month periods then ended. These increases result primarily from the
incremental increase in debt associated with the New Credit Agreement when
compared to the pre-acquisition capitalization. In addition, the prime lending
rate, the basis of interest expense in both the pre-1995 Acquisition Credit
Agreement and the New Credit Agreement, was 6% during the majority of the three
and six month periods ended July 30, 1994 and 9% during the comparable periods
ended July 29, 1995.
<PAGE>
Primarily as a result of the settlement of the 1993 Stock Option Plan and the
additional LIFO charge to cost of goods sold, both of which resulted from the
closing of the 1995 Acquisition, the Company showed losses before income tax
benefit and extraordinary item of $2,733 and $1,422 for the three-month and
six-month periods ended July 29, 1995, respectively. The pro-forma information
included in Note A to the condensed financial statements reflects income before
taxes of $501 and $792 for the three and six month periods ended July 29, 1995.
These pro forma amounts include the increased interest expense related to the
additional debt as if the 1995 Acquisition had occurred at the beginning of
fiscal 1994. The pro forma information excludes the non-recurring impact of the
1993 Stock Option Settlement, and considers the LIFO base year to be January 29,
1994, where seasonal fluctuations in both the BLS Index and merchandise
inventory levels are mitigated. In the three and six month periods ended July
30, 1994, the Company showed income before taxes of $2,355 and $3,815,
respectively.
The income tax benefit for the three-month period and six-month period ended
July 29, 1995 was $1,093 and $568, respectively. For the comparable periods
ended July 30, 1994, income tax expense was $1,024 and $1,659, respectively. The
effective income tax and benefit rates for the respective periods differ from
the statutory rate primarily due to nondeductible amortization relating to
certain acquisition related assets.
The Company recorded an extraordinary loss, net of tax, of $216 in the one-month
period ended May 27, 1995 related to the write-off of unamortized financing
costs related to the pre-1995 Acquisition Credit Agreement.
As a result of the changes discussed above, net losses for the three and six
month periods ended July 29, 1995 totaled $1,906 and $1,070, respectively. In
the prior year comparable periods ended July 30, 1994, the Company showed net
income of $1,331 and $2,156, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The funds necessary to enable PHC Retail to pay the merger consideration due in
the 1995 Acquisition, the related acquisition and financing fees, and the cash
settlement of the 1993 Stock Option Plan as a pre-requisite thereto, were
obtained from combination of equity investment in PHC Retail and funds available
under the New Credit Agreement. Additional funds were drawn under the New Credit
Agreement to refinance $40,917 of debt outstanding under the pre-acquisition
Credit Agreement. The provisions of the 1995 Acquisition required that all
outstanding options under the 1993 Stock Option Plan be settled in cash at the
closing date for either the difference in the $30 per share acquisition price
and the $23.75 exercise price per option or as specified by certain change in
control agreements. With 432,699 options outstanding, the total cash outlay was
$3,089, funded through a draw on the New Credit Agreement. In addition, 78,615
shares of PHC Retail common stock were issued to certain members of Peebles'
management at a price of $30 per share, the proceeds from which were used to pay
down the 1995 Revolving Facility under the New Credit Agreement. Immediately
subsequent to the 1995 Acquisition the net increase in debt carried by the
Company had increased $35,473, for a total debt balance of $76,390 at May 27,
1995.
The New Credit Agreement provides three separate financing facilities under a
Senior Term Facility and a Senior Revolving Facility. The Senior Term Facility
includes Senior Term Note A for $20 million and Senior Term Note B for $30
million, the funds from which were used to facilitate the 1995 Acquisition as
described above. The final maturity dates of Senior Term Note A and Senior Term
Note B are June 9, 2000 and June 9, 2002, respectively. The mandatory quarterly
principal payments are graduated to allow greater operating flexibility in the
initial three fiscal years. In the six-month period ended February 3, 1996, the
principal payments will total $650. In the succeeding fiscal years, these
principal payments will increase as disclosed in Note D to the condensed
financial statements. Initially, the Senior Term Facility bore interest at a
rate based on the prime lending rate. At July 29, 1995, Senior Term Note A and
Senior Term Note B bore interest at prime plus 1-1/2% and prime plus 2%,
respectively. In October 1995, the Company will have the option of changing
either Senior Term Note, or both, to a more favorable interest rate based on
LIBOR. As such, subsequent to this planned conversion, the applicable interest
rates for Senior Term Note A and Senior Term Note B will be LIBOR plus 2.75% and
LIBOR plus 3.25%, respectively. Interest is paid quarterly in arrears. The
continued growth of the Company is primarily dependent upon its ability to open
or acquire new stores on a profitable basis and to continue to increase sales in
existing stores. The funds necessary to facilitate this business growth will be
provided by both the internal operations of the Company and draws under the
Senior Revolving Facility, described below. The funds required to service the
Senior Term Facility will also be either internally generated or will be drawn
under the 1995 Revolving Facility, but this service is not expected to exhaust
those resources so as to detrimentally limit planned business growth. Likewise,
the new store growth is controlled through certain restrictive debt covenants of
the New Credit Agreement, including an annual capital expenditures maximum tied
to the performance of the Company, such that these growth and maintenance
expenditures will not prohibit the debt service.
<PAGE>
The amount available under the 1995 Revolving Facility is determined by a
defined asset based formula, with maximum borrowings limited to $65 million less
any amounts outstanding under letters of credit. The 1995 Revolving Facility has
no specific paydown provisions and the Company pays a fee of 1/2 of 1% per annum
on any unused portion of the 1995 Revolving Facility. At July 29, 1995, the 1995
Revolving Facility bore interest at prime plus 1-1/2%. In October 1995, the 1995
Revolving Facility is expected to be converted to bear interest at a rate of
LIBOR plus 2.75%.
The New Credit Agreement contains certain restrictive debt covenants related to
the Company's performance. Specifically, operations must satisfy defined
criteria for i) Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"); ii) Fixed Charge Coverage Ratio; iii) Leveraged Ratio; iv) Interest
Coverage Ratio; and v) Capital Expenditures. At July 29, 1995, the Company is in
compliance with all restrictive debt covenants, including these performance
based covenants. The New Credit Agreement also includes an equity call
provision, under which, if for any reason the operations of the Company fail to
satisfy these covenants, Kelso will contribute additional equity up to $10
million, based on certain pre-defined formulae.
During the six-month period ended July 29, 1995, the Company had opened one new
store location in Stafford, Virginia. Immediately subsequent to the close of the
Fiscal Quarter on July 29, 1995, new store locations were opened in Marion,
North Carolina, Appomattox, Virginia and Humboldt, Tennessee. The Company has
signed noncancellable operating leases for new stores in the third and fourth
fiscal quarters of 1995 in Wytheville, Virginia, Auburn, New York and Woodstock,
Virginia. These fiscal 1995 new store locations represent approximately 157,000
square feet of a planned 180,000 square feet for fiscal 1995. A noncancellable
lease has been signed for a 25,200 square foot location in Sylacauga, Alabama,
originally scheduled for a fiscal 1995 opening, but now due to open in the
spring of fiscal 1996. The Company plans to open approximately 200,000 new store
square feet in fiscal 1996. Although only the Sylacauga location has a signed
noncancellable operating lease related to the fiscal 1996 new store growth, the
Company is currently evaluating a significant number of potential locations in
its current ten-state area and in contiguous states, such that this fiscal 1996
planned square footage remains appropriate. The planned new store growth and the
continued maintenance of existing operations described above have been
considered in the New Credit Agreement such that adequate capital expenditures
and financial resources are available to facilitate the planned new store square
footage of approximately 180,000 to 250,000 per year.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 1995, a special meeting of the stockholders was held to consider and
vote upon the Agreement and Plan of Merger, dated as of April 3, 1995, among PHC
Retail, Inc. Peebles Acquisition Corp. and Peebles Inc., as amended on June 2,
1995 (the "Plan of Merger"). There were 2,838,648 shares of Common Stock
representing 96.46% of the Common Stock entitled to vote represented either in
person or by proxy. The Plan of Merger was approved by a vote of 2,375,985
shares (93.69%) FOR and 81,663 (2.78%) AGAINST.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27. Financial Data Schedule.
b. Reports on Form 8-K
Reports were filed on June 6, 1995 reporting Item 5, Other Events, and June
14, 1995, reporting a Change in Control.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEEBLES INC.
Date: September 12, 1995 By /s/ Michael F. Moorman
Michael F. Moorman
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ E. Randolph Lail
E. Randolph Lail
Chief Financial Officer, Senior Vice
President-Finance, Treasurer and
Secretary (Principal Financial Officer)
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<INCOME-PRETAX> 764 (3,547) (2,186)
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