SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-Q
Quarterly Report Pursuant to Section 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended October 28, 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 October 28, 1995, 1,000 shares of common stock of Peebles
Inc. were outstanding.
<PAGE>
<TABLE>
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEET
PEEBLES INC.
(dollars in thousands, except per share amounts)
October 28,1995 January 28, 1995 October 29, 1994
(Post- (Pre-Acquisition)
Acquisition)
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 36 $ 408 $ 73
Accounts receivable, net 25,650 28,812 26,144
Merchandise inventories 51,282 44,703 51,885
Prepaid expenses 553 306 461
Refundable income taxes 671 778 --
Other 106 62 336
---------- --------- ---------
TOTAL CURRENT ASSETS 78,298 75, 069 78,899
PROPERTY AND EQUIPMENT, net 30,443 28,951 27,343
BUILDINGS UNDER CAPITAL LEASES, net 1,088 1,230 1,260
OTHER ASSETS
Excess of cost over net assets 49,152 37,111 37,536
acquired, net
Deferred financing costs 3,869 277 255
Other 6,258 6,316 6,455
---------- --------- ---------
59,279 43,704 44,246
---------- --------- ---------
$ 169,108 $ 148,954 $ 151,748
========== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,028 $ 8,722 $ 12,691
Accrued compensation and other 2,481 5,587 4,162
expenses
Interest payable 2,194 306 318
Deferred income taxes 1,781 4,472 4,957
Current maturities of long-term debt 14,108 5,850 11,554
Other 202 260 41
---------- --------- ---------
TOTAL CURRENT LIABILITIES 31,794 25,197 33,723
LONG-TERM DEBT 70,050 34,240 33,502
LONG-TERM CAPITAL LEASE OBLIGATIONS 1,713 1,865 1,962
DEFERRED INCOME TAXES 5,224 5,416 4,481
COMMON STOCK WARRANTS -- 2 23
STOCKHOLDERS' EQUITY
Common stock--par value $.10 per
share, authorized 5,000,000
shares, issued and outstanding
1,000, 2,942,690 and
2,939,142 shares, respectively 1 294 294
Additional capital 59,307 64,390 64,306
Retained earnings 1,019 17,550 13,457
---------- --------- ---------
60,327 82,234 78,057
---------- --------- ---------
$ 169,108 $ 148,954 $ 151,748
========== ========= =========
See notes to condensed financial statements
</TABLE>
<TABLE>
CONDENSED STATEMENT OF OPERATIONS
PEEBLES INC.
(dollars in thousands, except per share amounts)
(Unaudited)
Three-Month Three- Five-Month Four-Month Nine-Month
Month
Period Period Period Period Period
Ended Ended Ended Ended Ended
October 28, October October 28, May 27, October
29, 29,
1995 1994 1995 1995 1994
(Post- (Pre- (Post- (Pre-
Acquisition) Acquisition) Acquisition) Acquisition)
<S> <C> <C> <C> <C> <C>
NET SALES $ 42,562 $ 41,025 $ 68,880 $ 49,163 $112,574
COSTS AND EXPENSES
Cost of sales 25,093 24,843 40,251 29,935 67,395
Selling, general and
administrative expenses 12,530 11,157 20,197 14,639 31,058
Stock option settlement -- -- -- 3,089 --
Depreciation and 1,643 1,768 2,821 2,349 5,278
amortization
--------- --------- --------- --------- --------
39,266 37,768 63,269 50,012 103,731
OPERATING INCOME (LOSS) 3,296 3,257 5,611 (849) 8,843
OTHER INCOME 92 58 171 77 395
INTEREST EXPENSE 2,454 1,139 4,084 1,414 3,247
--------- --------- --------- --------- --------
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) 934 2,176 1,698 (2,186) 5,991
INCOME TAXES (BENEFIT)
Federal, state and 374 946 679 (874) 2,605
deferred
--------- --------- --------- --------- --------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM 560 1,230 1,019 (1,312) 3,386
EXTRAORDINARY ITEM-DEBT
REFINANCE -- -- -- (216) --
--------- --------- --------- --------- --------
NET INCOME (LOSS) $ 560 $ 1,230 $ 1,019 $ (1,528) $ 3,386
========= ========= ========= ========= ========
EARNINGS (LOSS) PER $ 560 $ .42 $ 1,019 $ (.52) $ 1.15
========= ========= ========= ========= ========
Average common stock and
common stock equivalents
outstanding 1,000 2,940,048 1,000 2,942,785 2,940,048
========= ========= ========= ========= ========
=
See notes to condensed financial statements
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
PEEBLES INC.
(dollars in thousands)
(Unaudited)
<TABLE>
Nine Month Period Ended
October 28, October 29, 1994
1995
(Post- (Pre-
Acquisition) Acquisition)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (loss) $ (509) $ 3,386
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Depreciation 3,296 2,826
Amortization 2,299 2,778
Extraordinary loss 216 --
LIFO Reserve adjustment 530 --
Changes in operating assets and liabilities net
of
effects from acquisition adjustments:
Accounts receivable 3,162 2,242
Merchandise inventories (10,514) (10,233)
Accounts payable 2,306 5,385
Other assets and liabilities (1,402) (1,488)
----------- -----------
NET CASH PROVIDED BY (USED IN)OPERATING (616) 4,896
ACTIVITIES
INVESTING ACTIVITIES
Acquisition of Peebles Inc. (90,642) --
Purchase of property and equipment (5,613) (5,663)
Other 36 (276)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (96,219) (5,939)
FINANCING ACTIVITIES
Proceeds from revolving facilities 211,127 122,039
Reduction in revolving facilities and long-term (202,638) (121,022)
debt
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 96,463 1,017
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (372) (26)
Cash and cash equivalents beginning of period 408 99
----------- -----------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 36 $ 73
=========== ===========
See notes to condensed financial statements
</TABLE>
<TABLE>
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
PEEBLES INC.
(dollars in thousands, except per share amounts)
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
Common stock issued in redemption of
Common Stock Warrants 5,580 1 132 8
Net income - - - 3,386
-------- ----- -------- --------
BALANCE OCTOBER 29, 1994 2,939,142 294 64,306 13,457
Common stock issued in redemption of
Common Stock Warrants 811 -- 19 2
Common stock issued upon exercise of common
stock options under the 1993 Stock Option
Plan 2,737 -- 65 --
Net income -- -- -- 4,019
-------- ----- -------- ----------
BALANCE JANUARY 28, 1995 2,942,690 294 64,390 17,550
Net (loss) -- -- -- (1,528)
-------- ----- -------- ----------
BALANCE MAY 27, 1995, PRIOR TO 1995 2,942,690 294 64,390 16,022
ACQUISITION
1995 Acquisition adjustments (2,941,690) (293) (5,083) (16,022)
BALANCE MAY 27, 1995, FOLLOWING 1995 1,000 1 59,307 --
ACQUISITION
Net income -- -- -- 1,019
-------- ----- -------- ----------
- -
BALANCE OCTOBER 28, 1995 1,000 $ 1 $ 59,307 $ 1,019
======== ===== ======== ==========
See notes to condensed financial statements
</TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
PEEBLES INC.
October 28, 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 $135,558
Pre-acquisition debt refinanced (40,917)
-------
Adjusted purchase price 94,641
Tangible net assets at historical cost (66,370)
Incremental acquisition debt 35,474
-------
Purchase price to be allocated 63,745
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 $ 50,000
=======
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.
October 28, 1995
NOTE A_ACQUISITION OF PEEBLES INC. - Continued
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.
Nine-Month Fiscal Year
Period Ended Ended
October 28, October 29, January 28,
1995 1994 1995
Net Sales $ 118,043 $ 112,574 $ 167,662
Costs and Expenses
Cost of sales 69,771 67,070 98,248
Selling, general and
administrative
expenses 34,836 31,058 45,205
Depreciation and amortization 5,140 5,424 6,924
--------- ---------- ----------
109,747 103,552 150,377
--------- ---------- ----------
Operating Income 8,296 9,022 17,285
Other Income 248 395 131
Interest Expense 7,316 6,025 7,309
--------- ---------- ----------
Income Before Income Taxes 1,228 3,392 10,107
Income Taxes 491 1,475 4,392
--------- ---------- ----------
Net Income $ 737 $ 1,917 $ 5,715
========= ========== ==========
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:
October 28 May 27, January 28, October 29
1995 1995 1995 1994
Merchandise (Pre-Acquisition)
inventories at lower
of cost (FIFO) or market $ 43,846 $ 35,549 $ 33,332 $ 41,021
Fair Value Adjustment 7,436 14,209 14,209 14,209
LIFO reserve -- (3,873) (2,838) (3,345)
-------- -------- -------- --------
Merchandise inventories
at LIFO cost $ 51,282 $ 45,855 $ 44,703 $ 51,885
======== ======== ======== ========
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 October 28, 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.
October 28, 1995
NOTE C_ACCOUNTS RECEIVABLE
Accounts receivable are shown net of $930, $930 and $950
representing the allowance for uncollectible accounts at October
28, 1995, January 28, 1995 and October 29, 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:
October January October
28, 1995 28, 1995 29, 1994
1995 Senior Revolving
Facility $33,173 $ -- $ --
Senior Term Note A 19,500 -- --
Senior Term Note B 27,850 -- --
Swingline Facility 3,635 -- --
Revolving Facility -- 28,550 33,016
Term Facility -- 11,340 11,840
Other -- 200 200
-------- -------- -------
84,158 40,090 45,056
Less current maturities 14,108 5,850 11,554
-------- -------- -------
$ 70,050 $ 34,240 $33,502
======== ======== =======
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"), a Senior Term
Facility, and a "Swingline Facility". Loans under the Swingline
facility are drawn and repaid daily based on the operating
activity of the Company. Aggregate amounts outstanding under the
Swingline Facility cannot exceed $5 million, nor fall below zero.
Excess borrowings or funding outside these amounts revert to the
1995 Revolving Facility. The Swingline Facility currently bears
interest at prime plus 1-1/2%, and has no conversion provision to
a LIBOR-based interest rate.
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 bore interest through October 28, 1995 at prime plus 1-1/2%
and prime plus 2%, respectively. On September 8, 1995 the
Company reduced the Senior Term Note B principal balance by $2
million, satisfying certain pre-defined conditions of the Credit
Agreement.
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 October 28, 1995, January 28, 1995 and
October 29, 1994, respectively. The 1995 Revolving Facility bore
interest at prime plus 1-1/2%. through October 28, 1995.
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
PEEBLES INC.
October 28, 1995
NOTE D_LONG-TERM DEBT - Continued
The 1995 Credit Agreement provided for optional conversion to
LIBOR-based interest rates upon the occurrence of certain pre-
defined events 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%. On November 10, 1995, the Senior Term Note B
was converted to a LIBOR-based rate. On November 21, 1995 Senior
Term Note A and the 1995 Revolving Facility were converted to a
LIBOR-based rate. Under the terms of the Credit Agreement, the
LIBOR-based interest periods may be, at the option of the
Company, one, two, three, six or twelve months. Any activity
involving a facility converted to LIBOR-based interest must take
place at the end of the applicable interest period. The portion
of the 1995 Revolving Facility converted, therefore, represents
the maximum amount expected to remain outstanding during the
entire LIBOR interest period selected by the Company.
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.
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.
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 nine-month period ended
October 28, 1995 in comparison with the three-month period and
nine-month period ended October 29, 1994. The 1995 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
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 October 28, 1995
totaled $42,562, a 3.7% increase over net sales of $41,025 for
the three-month period ended October 29, 1994. This $1,537
increase in total net sales was attributable to eight new stores
opened in the twelve-month period subsequent to October 29, 1994.
These stores generated net sales of $3,651 during the three-month
period ended October 28, 1995, up $2,795 from the net sales of
non-comparable stores in the prior year Fiscal Quarter. Net
sales at comparable stores were down $1,258, or 3.1%, comparing
the Fiscal Quarter ended October 28, 1995 to the three-month
period ended October 29, 1994. This decrease is primarily
attributable to the first two weeks in October 1995, where
comparable store net sales were down $1,028 (81.7% of the Fiscal
Quarter decrease) in comparison to the first two weeks of October
1994. The significant decrease during this two-week period is
primarily attributable to unseasonably warm weather in the
current year relative to the prior year, where comparable stores
in the first two weeks of October 1994 had showed a 5.4% increase
in net sales over the same period in 1993. For the nine-month
period ended October 28, 1995, net sales totaled $118,054, up
4.9% from the comparable prior year period. Net sales at
comparable stores were $109,170, down 1.5% from the nine-month
period ended October 29, 1994. A general weakening in consumer
spending on soft apparel, as well as continually increasing
competition has detrimentally affected the Company's comparable
store sales, especially in the 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 October 28, 1995 and October 29, 1994 were 59.0%
and 60.6%, respectively. For the nine-month periods ended
October 28, 1995 and October 29, 1994, cost of sales as
percentage of net sales were 59.5% and 59.9%, respectively. The
improvement in the third Fiscal Quarter relative to the same
period in the prior year results primarily from the Company's
efforts to clear summer merchandise quicker than in the previous
year, as noted in the second Fiscal Quarter, and align Fall
merchandise inventory levels with anticipated sales. In
addition, approximately half of the improvement, .9% of net sales
for the Fiscal Quarter, relates to accounting for LIFO inventory.
As noted in the second Fiscal Quarter, 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 significant increase in the LIFO reserve for the four-
month period ended May 27, 1995. The establishment of the LIFO
base year at May 27, 1995 will create a cost of sales benefit at
the fiscal year end, February 3, 1996. As such, this benefit is
spread to the months succeeding May 27, 1995, and some $300 was
deducted from cost of sales for the Fiscal Quarter ended October
28, 1995. This compares to an increase in cost of sales of $85
in the comparable prior year Fiscal Quarter. Cost of sales as a
percentage of net sales for the nine-month periods are comparable
as the LIFO inventory effect on cost of sales is nearly
equivalent and merchandise inventory levels were in line with the
plan for each year.
Selling, general and administrative expenses ("SG&A"), including
depreciation and amortization, for the three-month periods ended
October 28, 1995 and October 29, 1994 were 33.3% and 31.5%,
respectively, as a percentage of net sales. For the nine-month
periods ended October 28, 1995 and October 29, 1994, SG&A
including depreciation and amortization were 33.9% and 32.3%,
respectively. This increase is primarily attributed to the
additional expenses related to the opening of eight new stores
and the re-location of one store in the twelve month-period
subsequent to October 29, 1994. During the second Fiscal
Quarter, 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 four-month period ended
May 27, 1995.
Interest expense for the Fiscal Quarters ended October 28, 1995
and October 29, 1994 was $2,454 and $1,139, respectively, and
$5,498 and $3,247, respectively for the nine-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 nine month periods
ended October 29, 1994 and 9% during the comparable periods ended
October 28, 1995.
For the Fiscal Quarters ended October 28, 1995 and October 29,
1994, income before income taxes was $934 and $2,176,
respectively. The decrease is attributed to the increase in
interest expense. As a result of the settlement of the 1993
Stock Option Plan and the increase in interest expense, both
associated with the 1995 Acquisition, the Company showed a loss
before income tax benefit and extraordinary item of $293 for the
nine-month period ended October 28, 1995, compared to income of
$3,386 in the comparable prior year period. The pro-forma
information included in Note A to the condensed financial
statements reflects income before taxes of $1,228 and $3,392 for
the nine-month periods ended October 28, 1995 and October 29,
1994, respectively. These pro forma amounts include the
increased interest expense (with the difference in the prime
rates of 9% and 6% in 1995 and 1994), 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.
The income tax expense for the three-month periods October 28,
1995 and October 29, 1994 was $374 and $946, respectively. For
the nine month periods then ended, the Company had an income tax
benefit of $195 and income tax expense of $2,605, 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 four-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 income for the
three-month periods ended October 28, 1995 and October 29, 1994
totaled $560 and $1,230, respectively. In the nine-month periods
then ended, the Company showed a net loss of $509 and net income
of $3,386, 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 a 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 $35,474, 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 Fiscal Quarter ended October 28,
1995, the Company made scheduled principal payments of $250 and
$75 on Senior Term Note A and Senior Term Note B, respectively.
In the succeeding fiscal years, these principal payments will
increase as disclosed in Note D to the condensed financial
statements. In addition, on September 8, 1995, the Company
reduced the principal balance of Senior Term Note B by $2
million, satisfying certain pre-defined conditions of the Credit
Agreement. From inception through the end of the Fiscal Quarter
ended October 28, 1995, the Senior Term Facility bore interest at
a rate based on the prime lending rate, prime plus 1-1/2% and
prime plus 2% for Senior Term Note A and Senior Term Note B,
respectively. In November 1995, the Company converted the Senior
Term Notes to a more favorable interest rate based on LIBOR. As
such, henceforth 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.
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. In addition to the 1995 Revolving Facility, the Credit
Agreement provides for a Swingline Facility, funded by the daily
operating accounts of the Company and drawn for the daily
operating needs. The Swingline Facility cannot exceed $5 million
nor fall below zero. Any borrowings causing the Swingline
Facility to exceed $5 million or funding in excess of the
outstanding balance reverts to the 1995 Revolving Facility, in
increments pre-defined by the Credit Agreement. The Swingline
Facility bears interest at prime plus 1-1/2% and has no
conversion provision to a LIBOR-based rate. From inception
through the end of the current Fiscal Quarter, the 1995 Revolving
Facility also bore interest at prime plus 1-1/2%. In November
1995, $33 million of the 1995 Revolving Facility was 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 October 28,
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 nine-month period ended October 28, 1995, the Company
opened new store locations in Stafford, Appomattox, and
Wytheville, Virginia; Marion, North Carolina; and Humboldt,
Tennessee. In November 1995, new store locations in Auburn, New
York and Woodstock, Virginia were opened. 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. In addition to the Sylacauga location, the
Company has a signed noncancellable operating leases for store
locations in Paris and Winchester, Tennessee, representing
approximately 42,000 square feet, for a total fiscal 1996
commitment of 67,200 square feet. The Company is currently
evaluating a significant number of potential locations in its
current ten-state area and in contiguous states, such that the
remaining 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, and the Company believes 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.
<PAGE>
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27. Financial Data Schedule.
b. Reports on Form 8-K
None.
<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: December 6, 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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<PERIOD-END> OCT-28-1995
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