SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999
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Commission file number 33-27126
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PEEBLES INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0332635
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(State of incorporation) (I.R.S. Employer Identification No.)
One Peebles Street
South Hill, Virginia 23970-5001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 447-5200
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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 mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant $-0- (determined by including all shares of Peebles common
stock owned by persons, (1) who hold less than 10% of the outstanding shares
of common stock and (2) are not an executive officer of the registrant.
Aggregate value is based upon the estimated fair value of common stock as of
February 1, 1999.)
As of April 1, 1999, 1,000 shares of common stock of Peebles Inc. were
outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K into which the document is incorporated: (1) Any annual
report to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
NONE
<PAGE>
PART I
Item 1. Business.
GENERAL
Peebles Inc. and its subsidiaries (together, "Peebles" or the "Company")
operate 117 specialty department stores offering predominately soft-apparel,
fashion merchandise for the entire family and selected decorative home
accessories. Founded in 1891, the Company operates primarily in smaller
communities in 15 southeastern and mid-Atlantic states. Peebles positions
itself as the leading fashion retailer in these communities, which typically
do not have a traditional mall-based department store, and locates its stores
in primary shopping destinations in its markets. Peebles offers its customers
consistent value by providing a broad assortment of moderately priced national
brands supplemented with quality private label merchandise. Peebles' attractive
stores and visual presentation, advertising and promotional programs further
reinforce its image as the market's fashion leader.
Peebles Inc. was acquired by PHC Retail Holding Company ("PHC Retail"),
effective May 27, 1995. PHC Retail, a closely held company, has no significant
assets other than the shares of Peebles common stock it owns, and had no
operations prior to the acquisition. The acquisition was accounted for using the
purchase method of accounting, and, accordingly, a new accounting basis was
established. The subsidiaries of Peebles Inc. are Carlisle Retailers, Inc.
("Carlisle's"), acquired in May 1996, and operating 6 stores under the Peebles
name at January 30, 1999, and Ira A. Watson Co. ("Watson's"), acquired in June
1998, and operating 22 stores under the Watson's name at January 30, 1999.
The Company's corporate headquarters is located in South Hill, Virginia.
The Company operates two distribution centers, one adjacent to the corporate
offices, and the other in Knoxville, Tennessee. The Knoxville facility was
acquired in June 1998 in connection with the acquisition of Watson's.
References to 1994, 1995, 1996, 1997 and 1998 relate to the Company's fiscal
years ended January 28, 1995, February 3, 1996, February 1, 1997, January 31,
1998 and January 30, 1999, respectively. Fiscal years 1994, 1996, 1997 and
1998 each include 52 weeks. Fiscal year 1995 consisted of fifty-three weeks,
with 17 weeks included in the four-month period ended May 27, 1995 and 36 weeks
in the eight-month period ended February 3, 1996. References herein to 1995
relate to the fifty-three week period ended February 3, 1996.
OPERATING STRATEGY
The following are key elements of Peebles' operating strategy:
Focus on Small Markets: Peebles locates its stores in smaller communities
that typically do not have a traditional mall-based department store,
thereby limiting competition and allowing Peebles to be the leading fashion
retailer in these communities. The Company believes its ability to
successfully operate in markets with as few as 5,000 households is an
important competitive advantage over large department stores, which
generally cannot profitably operate in such markets. Peebles has operated
in small communities for over 100 years and understands its markets and
customers.
Operate Small Stores with Lower Cost Structure: Peebles, with its
focus on small communities, operates stores that are significantly
smaller than the traditional full-line department store. Peebles'
stores range in size from 10,000 to 65,000 square feet and average
29,500 gross square feet, 24,500 of which, on average, is devoted to
selling. The Company operates profitably despite its smaller stores and
lower sales per square foot compared with other department store
companies by maintaining a merchandise assortment conducive to consistently
higher gross margins, emphasizing strict cost controls and centralizing
traditional "back office" store operations.
Deliver Fashion to Small Communities: Peebles strives to provide
its customers with a shopping experience similar to that found in a
larger, mall-based department store. Soft-apparel fashion merchandise
is predominate on the selling floor, as the Company emphasizes a broad
selection of moderately-priced national brands and private label
merchandise, which generally is not available through other retailers
in the market. Cosmetics and selected home accessories are the primary
compliments to the apparel assortment, as fewer hard-line merchandise
categories are offered. Peebles' attractive stores and visual
presentation, advertising and promotional programs further reinforce
its image as the market's fashion leader.
Offer Value to Customers: Peebles emphasizes value pricing and is
less promotional than traditional department stores. It is the
Company's strategy to use lower initial markons and promote less,
thereby maintaining a high level of credibility with its customers.
Peebles' commitment to providing value to its customers is integral
to developing repeat customers, a critical ingredient for success
in smaller markets.
Centralize Operations, but Tailor Merchandise Locally: Peebles believes
that centralized decision-making, controls and support functions are
critical to its cost-efficient operations and enable the Company's store
personnel to maximize the time devoted to selling. In contrast,
Peebles employs a decentralized approach in merchandising its
individual stores. The merchandise mix is tailored to individual stores
to cater to local tastes and preferences based on customer and sales
associate feedback and sales trends. Buyers and store associates
work together to optimize the use of Peebles' smaller selling spaces
to meet customer demand and maximize sales.
Adapt to Local Real Estate Opportunities: Smaller stores and a
flexible store format give the Company the ability to locate in a
variety of new or existing sites. As a result, Peebles' growth does
not depend upon the development of new malls. Peebles attempts to
position its stores in the primary shopping destination in its markets,
which are typically strip shopping centers co-anchored by leading discount,
grocery and drug retailers. The Company also operates successfully in
enclosed malls and downtown locations.
EXPANSION STRATEGY
The Company has expanded by opening new stores, acquiring and converting
stores and groups of stores, and remodeling or relocating existing stores.
The Company anticipates expanding its operations through the following:
Opening New Stores: The Company intends to open six new stores in 1999
and seven new stores in 2000. As of April 1, 1999, the Company had signed
five leases for stores scheduled to open in 1999, representing approximately
114,000 in total square footage. The Company's new stores will be
located in existing and contiguous markets where it can realize distribution
efficiencies and where the Peebles concept and merchandise mix will
correspond to local demographics. The Company explores a wider range of
real estate options than retailers which rely only on new shopping
center development, and actively considers space vacated by other retailers.
Remodeling and Relocating Stores: In addition to new store growth,
the Company has an ongoing remodeling program, both upgrading existing
stores and reallocating selling space to provide its customers a pleasant,
fashion-oriented shopping environment for the merchandise mix for that
market. The Company successfully relocated three stores in 1997 to the
desired shopping destination in that market. In 1998, seven store
locations were remodeled and/or had a space reallocation to better meet
customer preferences. In 1999, eight stores are scheduled for remodeling
and/or space reallocation.
Acquisitions: The Company is continually evaluating acquisitions of
individual stores, groups of stores or entire chains for opportunities
to compliment or expand existing markets. In 1998, 29 of the 33 new
store locations were acquired from other retailers. The acquisition
of Watson's in June 1998 accounted for 22 new store locations in
operation at January 30, 1999. In 1997, 3 of 8 stores were acquired
from a retailer exiting those markets and in 1996, 10 of the 14 new
stores were acquired.
PEEBLES STORES
Peebles stores are designed to create an appealing and satisfying
shopping experience for the customer. The layout is bright, modern
and accessible, with an emphasis on the visual presentation of
the merchandise and the creation of cross-selling opportunities.
The Company's stores are significantly smaller than the traditional
full-line department store and do not have a standard format. Rather,
they are designed for operational efficiency, including flexible
inventory management adapted to meet the needs of the individual community.
The Company targets communities having between 10,000 and 25,000
households, although the Company operates profitably in markets with
as few as 5,000 households. In addition, the Company enters larger
markets and suburban areas with 25,000 to 40,000 households where
the customer base and competitive factors exhibit characteristics
similar to markets where the Company's operating strategy has proven
successful. The Company prefers to locate its stores in strip
shopping centers and enclosed malls where other anchors such as leading
grocery, discount and drug retailers will create a destination shopping
location. Of the 117 stores currently in operation, 87 are located
in strip shopping centers, 22 in enclosed malls and 8 in downtown locations.
MERCHANDISING
The Company's merchandise, approximately 80% of which is apparel, is
targeted to middle income customers shopping for their families and homes.
The Company has fewer departments than a traditional full-line
department store, but strives to carry a wide assortment of merchandise
within its targeted categories in order to appeal to a broad range of
customers. To position itself as the primary fashion retailer in the
community with merchandise not found elsewhere in the market, the Company
emphasizes moderately-priced national brands supplemented by a limited
selection of prestige brand names and a selection of quality private
label merchandise. Peebles merchandise is fashion responsive rather
than fashion forward, limiting the Company's inventory exposure. The
Company's stores carry apparel for the entire family, accessories and
cosmetics, and decorative home accessories.
Management believes that brand name merchandise is a significant
attraction to its customers and intends to continue emphasizing such
merchandise in its stores. For example, the Company carries nationally
branded cosmetics in as many of its stores as possible because Peebles
is typically the only retailer in the community where consumers can
purchase that merchandise. While the gross margins on cosmetics are
typically lower than the Company's average gross margin, the
availability of this merchandise generates store traffic which facilitates
the sale of higher margin merchandise.
In 1998, a majority of the merchandise sold by the Company was
nationally branded merchandise. Key brands featured by the Company
include:
Ladies....... Alfred Dunner, Kellwood, Koret, Liz Claiborne,
Etienne Aigner, Item Eyes, Levi Strauss, Hanes,
Gloria Vanderbilt, E.M. Lawrence, Playtex,
Oak Hill, Halmode Apparel, Woolrich, Michael Blake,
Pendleton, Lee, First Options, Shadowline,
Periwinkle, Goodman Knitting
Men's........ Haggar, Ralph Lauren, Levi, Nike, Van Heusen,
Foria International, Bugle Boy, Arrow, Tropical
Sportswear
Young Men's and Juniors... Levi, Calvin Klein, Tommy Hilfiger Jeans,
Union Bay, JNCO by Revatex, Byer of California,
Bugle Boy, Currants Jeri-Jo, Fritzi of California,
Adidas, Nike
Children's.... American Character, HealthTex, Gerson & Gerson,
William Carter, Buster Brown, Baby Togs
Shoes......... Reebok, Nike, Maxwell Shoe, Adidas, Keds,
Candies, Aerosoles, Brown Shoe, Nunn Bush, G.H. Bass
Home.......... Springs, World Bazaars, Frenchtex, Bardwil Industries,
Mikasa, Westpoint-Stevens, Crown Crafts, Hollander
Cosmetics..... Estee Lauder, Elizabeth Arden, Clinique,
Calvin Klein, Aramis, Paul Sebastian, Liz Claiborne,
Fashion Fair
As a complement to its national brand merchandise, the Company offers
private label merchandise in selected departments to give its customers a
wider range of products. Management believes that its private label
merchandise provides value to the Peebles customer by offering a quality
merchandise alternative at prices lower than national brands. In addition,
private label merchandise often has higher gross margins than brand name
merchandise and allows the Company to avoid direct price competition.
In order to efficiently utilize its selling space, Peebles tailors the
merchandise selection at individual stores. The Company utilizes its
knowledge of its markets and customers developed over 107 years, along
with input from the store managers and sales associates, to allocate
merchandise to the stores. The Company also maintains an inventory tracking
system which provides daily information as to sales and inventory levels
by store, department, vendor, class, style, size and color. Based on this
information, the Company analyzes market trends, identifies fast or slow
moving merchandise and makes reordering, reallocation and pricing decisions
on a daily basis.
Peebles emphasizes value pricing and is less promotional than the
traditional department store. It is the Company's pricing strategy to use
lower initial mark-ons and promote less, thereby maintaining a high level
of credibility with its customers. Peebles' commitment to providing value
to its customers is integral to creating repeat customers, a critical
ingredient for success in smaller markets. Peebles is committed to
offering "Great Fashions, Great Prices, Everyday". With this program,
Peebles prices merchandise as low as possible in order to generate sales.
Products in this program are marketed through special point of sale displays
and are featured in the Company's advertising.
ADVERTISING AND PROMOTION
The Company's advertising and promotion strategy is designed to support
its marketing goals of providing quality merchandise at value-oriented prices
and reinforces the Company's image as the leading fashion retailer in its
markets. Peebles primarily utilizes a direct mail program, which in part
employs information obtained from its charge card program to target mailings
to its charge card holders. The Company emphasizes newspaper advertising
and mailers rather than television and radio, due to the size and nature of
the markets served. Peebles uses both black and white advertisements and
full color mailers to highlight promotional items and events as well as
products in its "Great Fashions, Great Prices, Everyday" program.
In addition, the Company's advertising and promotional staff organizes
special events at the stores and arranges for all Grand Opening and Grand
Reopening events. In 1998, the Company continued as an associate sponsor
of a racing team in the NASCAR Busch Grand National stock car racing series,
which the Company believes will increase its exposure in both existing and
potential markets.
The Company's net advertising expenses in 1996, 1997 and 1998 were 2.5%,
2.1% and 2.4% of net sales, respectively, which the Company believes is
lower than traditional department stores due to emphasis on an everyday fair
price policy and a less promotional strategy.
PURCHASING AND DISTRIBUTION
The Company employs 34 buyers and 6 merchandise managers who are
responsible for most merchandising decisions including purchasing, pricing,
sales promotions, inventory allocations and markdowns. While these
decisions are made centrally, the Company endeavors to refine its merchandise
assortment to appeal to the customers in each market. Peebles' buying staff
has developed specific knowledge with regard to purchasing, inventory and
promotions for the Company's smaller sized stores. The merchandising group
participates in an incentive plan based on sales, gross margin dollars
generated and inventory turnover.
The Company places special emphasis on maintaining all merchandise
in stock, particularly advertised and basic merchandise, to build and
maintain credibility with its customers. By monitoring unit sale
information by store, buyers are able to quickly determine the styles,
colors and sizes of merchandise to be reordered and distributed to
individual stores.
The Company purchases its merchandise from over 1,200 suppliers and
is not dependent on any single source of supply. The Company is a
member of Frederick Atkins, Inc., an international cooperative buying
service. This cooperative offers members merchandise purchasing
opportunities, which the Company has taken advantage of particularly
in connection with its imported private label merchandise. During 1997,
1998 and 1999, Frederick Atkins, Inc. was the Company's largest
supplier, accounting for retail purchases totaling approximately
15%, 10% and 9%, respectively. Frederick Atkins Inc. is currently
downsizing its operations and renegotiating its banking relationships
in response to the decrease in the number of members using the services
of Frederick Atkins Inc. The reduction in members has been caused by
the continuing department store industry consolidation. The Company is
evaluating its ability to procure merchandise normally purchased through
Frederick Atkins Inc. from other sources. The Company currently believes
that any disruption to the flow of merchandise from Frederick Atkins Inc.
or replacement sources will not be material to the overall purchasing
process or its merchandise mix.
Virtually all merchandise is shipped directly from vendors to the
Company's distribution centers where it is inspected, sorted, marked,
ticketed, packed and shipped to the individual stores. The Company does
not warehouse merchandise and has a three-day processing goal through the
distribution centers. Merchandise is shipped to each store an average
of twice a week on Company-owned trucks.
The Company's distribution centers feature modern merchandise handling
equipment and are located close to major interstates. Using one eight
hour shift at each facility, future growth in existing and contiguous
markets can be supported to approximately 200 store locations.
STORE OPERATIONS
The Company has structured its store operations to maintain what management
believes are key operating advantages, including a thorough knowledge of
its customer base, the ability to share information between the stores,
and cost efficient operations through centralized decision making.
Peebles performs as many traditional "back-office" functions as possible
at the corporate level so that store management and sales associates can
spend most of their time with customers. Non-sales store personnel are
kept to a minimum due to control functions performed at the corporate
offices, including sales associate scheduling, customer credit and marking
merchandise. All stores use at least 85% of their total payroll hours in
a selling capacity.
Peebles encourages the participation of all store level management and
sales associates in decision making, and management regularly solicits
input and suggestions from its employees who are closest to the customer.
In addition to its management information systems, Peebles stays in close
contact with store operations through its seven regional managers. Each
store manager reports to a regional manager. Regional managers visit their
stores regularly to review merchandise presentation, personnel training
and performance, enforcement of the Company's security procedures and
adherence to Company operating procedures. Each quarter, corporate
merchandising and operations executives meet with the regional managers
to share information.
The Company conducts a management training program, where on-the-job
training with seasoned store management and regional managers is coordinated
with instruction at the Company's corporate headquarters. The Company
stresses promotion from within, and substantially all of the current store
managers have been selected in this manner.
Most stores typically employ several assistant managers and approximately
30 sales associates, a number of whom are part-time. All Peebles' store
personnel, including assistant store managers and sales associates,
participate in incentive plans. The Company uses periodic productivity
reports and personal reviews to inform each employee of his or her
performance.
PEEBLES CHARGE CARD
In 1996, 1997 and 1998, 37.1%, 34.3% and 28.5%, respectively, of net
sales were made using the Company's proprietary credit card. As of January
30, 1999, the Company had approximately 714,000 credit card accounts, of
which 178,000 were billed that month.
Peebles' charge card sales represent an important element in its
marketing strategy because the Company believes that Peebles charge card
holders generally constitute its most loyal and active customers. Peebles
charge transactions are captured through store point-of-sale terminals and
transmitted directly to the corporate credit mainframe computer system,
where Peebles charge customer account information is updated. This
information is used to bill accounts as well as to provide marketing
information regarding purchasing habits and merchandise preferences.
The Company uses this data to develop segmented advertising and promotional
programs to reach specific groups of customers who have established
purchasing patterns for certain brands, departments and store locations.
Peebles administers all aspects of its credit card program in-house.
The extension of credit is governed by risk models and matrices, which
are developed and reviewed by corporate credit executives. Through a
communication network linking the store locations to the corporate office
and a credit bureau, in-store credit applications are scored within minutes
and the actual credit limit is assigned and available for purchases.
Inquiries by Peebles charge customers and in-store associates are answered
by a corporate customer service department. Monthly customer statements are
produced at the corporate office and, when prepared for mailing, can be
combined with selective promotional material or delinquency notices.
Management believes this in-house credit program provides the Company with
an important customer relations advantage over competing retailers which
administer their credit programs from remote processing locations or
contract for such services from unrelated third parties.
The Company's credit plans provide for the option of paying in full
within 28 days of the billed date with no finance charge or with revolving
credit terms. Terms of the short-term revolving charge accounts require
customers to make minimum monthly payments in accordance with prescribed
schedules. Peebles bears the risk of collecting its credit card receivables.
Peebles believes its credit card program has had a positive impact on net
income.
The following table presents a summary of information relating to the
Company's charge card sales and receivables (dollars in thousands):
Period-End Allowance
Net Bad Debt Expenses For Doubtful Accounts
--------------------- ---------------------
Period-
End Total-
Charge % of Chg Customer % of Total
Years Sales Amount Sales Receivables Amount Receivables
1996....$72,086 $1,192 1.7% $33,286 $1,224 3.7%
1997.... 74,657 1,327 1.8% 32,981 1,400 4.2%
1998.... 75,601 1,330 1.8% 35,195 1,700 4.8%
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems provide the daily financial
and merchandising information to make timely and effective pricing decisions
and for inventory control. The Company is able to allocate its inventory
effectively as a result of its management information systems and can tailor
the merchandise mix to meet the individual customer demands at each store.
The Company maintains central information and data processing systems at
its corporate headquarters. Each of its stores is equipped with compatible
point-of-sale registers, which are polled every evening by the central
system to gather sales, accounts receivable and inventory information.
The Company's management information and data processing systems primarily
use internally developed software. The Company believes this allows
management to more closely control the quality, suitability and expense of
information systems and data processing. The Company continues to make
selected improvements in computer hardware technology as well as enhancements
to software applications as needed.
For a discussion of the Company's year 2000 initiatives, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included on page F-14 of this annual report on form 10-K.
EMPLOYEES
At January 30, 1999, the Company had 1,695 full-time employees and
2,085 part-time employees. None of the Company's employees is covered by
a collective bargaining agreement. The Company considers its relations
with its employees to be good.
COMPETITION
The retail industry is highly competitive, with selection, price,
quality, service, location and store environment being the principal
competitive factors. The Company competes with national and local retail
stores, specialty apparel chains, department stores, discount stores and
mail order merchandisers, many of which have substantially greater financial
and marketing resources than the Company. Demographic changes may alter
the character of the Company's markets, which can result in increased
competition from other retailers.
TRADEMARKS
The Peebles name is registered as a trademark and a servicemark
of the Company. Additionally, the Company has registered several
merchandise labels as trademarks under which it sells quality merchandise
such as Cape Classic, Private Expressions, Meherrin River Outfitters,
Harmony Grove, and Sonoma Bay.
REGULATION
The Company is subject to federal, state and local laws and regulations
affecting retail department stores generally. The Company believes that
it is in substantial compliance with these laws and regulations.
Item 2. Properties.
All but one of the Company's stores are leased, and most of the leases
contain renewal options. In gross square footage, the stores range in size
from 10,000 square feet to 65,000 square feet, and average 29,500 square
feet. In net selling square footage by state at January 30, 1999, the
Company's stores were as follows:
State Stores Net SQ Ft State Stores Net SQ Ft
Virginia 35 774,080 Pennsylvania 5 117,581
Tennessee 14 369,393 Ohio 4 79,525
North Carolina 12 250,231 New York 3 84,983
Kentucky 11 297,083 Delaware 3 80,611
Maryland 8 250,838 New Jersey 2 52,807
West Virginia 6 130,580 Indiana 2 49,614
Alabama 6 107,039 Missouri 1 24,625
South Carolina 5 132,905
Totals 117 2,801,805
Store leases generally provide for a base rent of between $1.00 and
$8.00 per square foot per year. Most leases also have formulas requiring
the payment of additional rent based on a percentage of net sales above
specified levels. In 1996, 1997 and 1998, the Company's aggregate rental
payments on operating leases were approximately $8.2 million, $9.4 million
and $12.5 million, respectively.
The Company's owns, subject to deeds of trust and security interests
granted in connection with the Company's Credit Agreement, i) the corporate
headquarters and the 150,000 square foot distribution center facility located
on 31 acres in South Hill, Virginia; and ii) the 100,000 square foot
distribution center in Knoxville, Tennessee. The Company believes these
locations provide the Company with adequate undeveloped space to expand the
corporate headquarters and/or distribution centers to meet future growth
requirements.
Item 3. Legal Proceedings.
The Company is from time to time involved in routine litigation. Based
on consultations with legal counsel, the Company believes that none of the
litigation in which it is currently involved is material to its financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
MARKET INFORMATION
All of the Company's common stock is owned by PHC Retail Holding Company.
See Item 12. "Security Ownership of Certain Beneficial Owners and
Management." There is no existing market for the Common Stock, nor is the
Common Stock listed or traded on any exchange or other market. All currently
outstanding shares of common stock were issued pursuant to exemptions from
registration under the Securities Act of 1933, as amended (the "Act"), and
any resale of such shares of Common Stock can only be made pursuant to an
effective registration statement or an exemption from the registration
requirements of the Act.
DIVIDENDS
The Company does not currently pay any dividends on its Common Stock.
The Company's Credit Agreement prohibits the payment of dividends absent the
consent of the lender. Accordingly, the Company does not intend to pay any
dividends to the holders of the Common Stock in the foreseeable future.
<PAGE>
Item 6. Selected Financial Data.
The following selected historical consolidated financial data for Peebles
for the five fiscal years ended January 31, 1998 are derived from the
Company's audited consolidated financial statements. Effective May 27, 1995,
PHC Retail Holding Company ("PHC Retail") acquired the entire equity interest
of Peebles Inc. (the "1995 Acquisition"). The 1995 Acquisition was accounted
for as a purchase; and accordingly, a new basis of accounting was begun. As
a result, the consolidated financial data for the periods subsequent to the
1995 Acquisition is not comparable to the consolidated financial data for
the prior periods. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial
information included on Page F-0 of this annual report on Form 10-K.
<TABLE>
(Dollars in thousands except per share and selected other data)
Fiscal Year Four-Month Eight-Month Fiscal Year Fiscal Year Fiscal Year
Ended Period Ended Period Ended Ended Ended Ended
January 28, May 27, February 3, February 1, January 31, January 30,
1995 1995 1996 1997 1998 1999
(Pre-1995 Acquisition) (Post 1995 Acquisition)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C>
Net sales $167,662 $49,163 $126,501 $194,206 $217,694 $265,215
Cost of sales 98,066 29,935 72,994 116,236 130,820 159,067
-------- ------- -------- -------- -------- -------
Gross margin 69,596 19,228 53,507 77,970 86,874 106,148
Selling, general and
administrative
expenses 45,205 14,639 33,275 54,400 60,324 76,402
Depreciation and
amortization 6,729 2,349 4,339 7,499 6,648 8,057
Stock option settlement --- 3,089 --- --- --- ---
Asset impairment
revaluation --- --- --- 20,782 --- ---
--------- ------- -------- -------- ------- -------
Operating income
(loss) 17,662 (849) 15,893 (4,711) 19,902 21,689
Other income
(expenses) 131 77 (52) 687 444 9
Interest expense 4,569 1,414 6,565 9,148 9,609 10,804
--------- ------- -------- -------- ------- -------
Income (loss) before
income taxes
(benefit) and
extraordinary item 13,224 (2,186) 9,276 (13,172) 10,737 10,894
Income taxes (benefit) 5,747 (874) 4,246 1,743 4,687 4,837
--------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item 7,477 (1,312) 5,030 (14,915) 6,050 6,057
Extraordinary item --- (216) --- --- --- ---
--------- ------- -------- -------- ------- -------
Net income (loss) $ 7,477 $(1,528) $ 5,030 $(14,915) $ 6,050 $ 6,057
========= ======= ======== ======== ======= =======
Net income (loss)
per share $ 2.54 $ (.52) $ 5,030 $(14,915) $ 6,050 $ 6,057
Average common
stock and common
stock equivalents
outstanding 2,940,281 2,942,600 1,000 1,000 1,000 1,000
</TABLE>
<TABLE>
Selected other data: Twelve Month Data
<S> <C> <C> <C> <C> <C>
Net sales per store
(000's) (1) $ 3,189 $ 3,032 $ 2,921 $ 2,835 $ 2,750
Selling sq. ft. per
store (1) 26,000 26,300 26,032 24,550 24,305
Net sales per selling
sq. ft. (2) $117 $112 $108 $113 $113
Comparable store net
sales increase
(decrease) (1) 4.6% (5) (1.0%) (6) (1.3%) 5.3% 0.9%
Number of stores
(end of period) 58 65 77 84 117
Total selling sq. ft.
(end of period) 1,510,000 1,649,000 1,893,000 2,004,000 2,802,000
Capital expenditures
(000's) $8,454 $8,094 $8,783 $10,226 $13,394
Balance Sheet Data: January 28, February 3, 1996 February 1, January 31, January 30,
1995 1997 1998 1999
(Post 1995 Acquisition)
Working capital $ 49,872 $ 48,395 $ 58,213 $ 63,459 $ 75,794
Net property and
equipment 28,951 33,308 33,460 38,749 51,949
Total assets 148,954 165,553 163,568 172,456 208,286
Total debt (3) 41,955 76,778 90,962 87,299 110,921
Stockholders' equity (4) 82,234 64,338 49,423 55,473 61,530
Selected Financial Data Footnote Legend
N/M*- Not meaningful.
<FN>
(1) Only reflects data for comparable stores. Comparable stores for the current year are those
stores which were open for the entire period in the immediately preceding year.
(2) Net sales per selling square feet per store is based on stores open one full year.
(3) Includes the long-term portion of the capital lease obligations and the current portion of
long-term debt.
(4) Retained earnings, included in stockholders' equity has been adjusted to zero on February 1,
1992 and May 27, 1995. On February 1, 1992, an accumulated deficit of $10,477 was eliminated in a
quasi-reorganization resulting from the recapitalization of the Company. On May 27, 1995, accumulated
earnings of $16,022 were eliminated in purchase accounting.
(5) Comparable store net sales decreased 1% comparing the 53-week period ended February 3,
1996 versus the 52-week period ended January 28, 1995. Comparing the 53-week period ended February 3,
1996 to the corresponding 53-week period ended February 4, 1995, comparable store net sales decreased 2%.
(6) Comparable store net sales decreased 1.3% comparing the 52-week period ended February 1, 1997 versus
the 53-week period ended February 3, 1996. Comparable store net sales remained the same comparing the
52-week period ended February 1, 1997 versus the 52 week period ended February 3, 1996.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion and analysis included under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appears on Page F-14 of this annual report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information with respect to this Item is included under the caption
"Market Risk" on Page F-17 of this annual report on Form 10-K.
Item 8. Financial Statements and Supplementary Data.
Information with respect to this Item is contained in the consolidated
financial statements indicated on the indices on Page F-0 of this annual
report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
NONE
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Company's executive officers and Directors, their ages, positions and
years with the Company are as follows:
Years with
Name Age Position the Company
Michael F. Moorman 56 Chairman of the Board, President
and Chief Executive Officer 35
Ronnie W. Palmore 50 Senior Vice President, Merchandising
and Assistant Secretary 26
Russell A. Lundy, Sr. 63 Senior Vice President, Stores 45
E. Randolph Lail 43 Senior Vice President, Finance, Chief
Financial Officer, Secretary and
Treasurer 11
Marvin H. Thomas, Jr. 43 Senior Vice President, Operations 20
William C. DeRusha 49 Director 7
Malcolm S. McDonald 60 Director 7
Wellford L. Sanders, Jr. 53 Director 6
Thomas R. Wall, IV 40 Director 4
Frank T. Nickell 51 Director 4
Michael F. Moorman has been Chairman of the Board, Chief Executive
Officer, President and a Director of PHC Retail since June 9, 1995. Mr.
Moorman has also been Chairman of the Board and a Director of the Company
since September 1989, Chief Executive Officer of the Company since May 1989
and President of the Company since June 1988. Prior thereto, Mr. Moorman
served as Chief Financial Officer and Treasurer of the Company from August
1989 to June 1992 and Secretary of the Company from August 1989 to June 1990.
Mr. Moorman has been employed by the Company in various positions since 1964.
Mr. Moorman has been a Director of the Company since 1977.
Ronnie W. Palmore has been Senior Vice President, Merchandising of PHC
Retail since June 9, 1995 and of the Company since September 1989 and
Assistant Secretary of the Company since 1988. Mr. Palmore served as Senior
Vice President, Stores of the Company from June 1988 to August 1989 and has
been employed by the Company in various positions since 1973.
Russell A. Lundy, Sr. has been Senior Vice President, Stores of PHC Retail
since June 9, 1995 and of the Company since September 1989. Mr. Lundy served
as Vice President, Stores of the Company from 1984 to August 1989 and has
been employed by the Company in various positions since 1954.
E. Randolph Lail has been Senior Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer of PHC Retail since June 9, 1995.
Mr. Lail has also been Senior Vice President, Finance of the Company since
June 1993, Chief Financial Officer and Treasurer of the Company since June
1992 and Secretary of the Company since June 1990. Mr. Lail served as Vice
President, Finance of the Company from June 1990 to June 1993 and as
Controller of the Company from January 1988 to June 1990. Mr. Lail is a
has been employed by the Company since January 1988.
Marvin H. Thomas, Jr. has been Senior Vice President, Operations of PHC
Retail since June 9, 1995 and of the Company since June 1993. Mr. Thomas
served as Vice President, Operations of the Company from June 1990 to June
1993 and Vice President, Merchandise Manager of the Company from May 1988 to
June 1990. Mr. Thomas has been employed by the Company in various positions
since 1979.
William C. DeRusha has been a Director of PHC Retail since June 9, 1995
and of the Company since March 1992. Mr. DeRusha is Chairman of the Board
and Chief Executive Officer and a director of Heilig-Meyers Company.
Malcolm S. McDonald has been a Director of PHC Retail since June 9, 1995
and of the Company since April 1992. Mr. McDonald has retired from First
Union National Bank VA/MD/DC. From December 1996 until November 1997, Mr.
McDonald was Chairman of the Board and Chief Executive Officer of Signet
Banking Corporation. From May 1996 to December 1996, Mr. McDonald was
President and Chief Executive Officer of Signet Banking Corporation. Prior
to May 1996 he was President and Chief Operating Officer of Signet Banking
Corporation. Mr. McDonald is a director of First Union Corporation.
Wellford L. Sanders, Jr. has been a Director of PHC Retail since June 9,
1995 and of the Company since February 1992. Mr. Sanders is a Managing
Director of Bowles Hollowell Conner, a division of First Union Capital
Markets Corp. Until April 1997, Mr. Sanders was a partner in the law firm
of McGuire, Woods, Battle & Boothe, L.L.P. Mr. Sanders is a director of
Catherines Stores Corporation.
Thomas R. Wall, IV has been a Director of PHC Retail and the Company
since June 9, 1995. Mr. Wall has been Managing Director of Kelso & Company
since 1990 and prior thereto a General Partner of Kelso since 1989. Mr. Wall
is also a director of AMF Bowling Inc., Consolidated Vision Group, Inc.,
Cygnus Publishing, Inc., iXL Enterprises, Inc., Mitchell Supreme Fuel
Company, Mosler Inc., TransDigm, Inc. and 21st Century Newspapers, Inc.
Frank T. Nickell has been a Director of PHC Retail and the Company since
June 9, 1995. Mr. Nickell has been President and a director of Kelso &
Company since March 1989 and Chief Executive Officer since September 1997.
March 1989. He is also a director of Earle M. Jorgensen Company and The Bear
and Stearns Companies Inc.
Executive officers of Peebles are elected annually and serve at the
discretion of the Board of Directors.
DIRECTORS COMPENSATION
Mr. DeRusha, Mr. McDonald and Mr. Sanders are paid an annual retainer of
$20,000, payable quarterly in arrears. No other Director is paid a fee for
serving as a Director. All Directors are reimbursed for expenses incurred
in attending meetings of the Board of Directors.
AGREEMENTS TO INDEMNIFY.
Peebles has entered into agreements with each of its Directors and
officers of Peebles pursuant to which Peebles has agreed to indemnify such
Director or officer from claims, liabilities, damages, expenses, losses,
costs, penalties or amounts paid in settlement incurred by such Director or
officer and arising out of his capacity as a Director, officer, employee
and/or agent of the corporation of which he is a director or officer to the
maximum extent provided by applicable law. In addition, such Director or
officer shall be entitled to an advance of expenses to the maximum extent
authorized or permitted by law to meet the obligations indemnified against.
Such agreements also obligate the Company to purchase and maintain insurance
for the benefit and on behalf of its Directors and officers insuring against
all liabilities that may be incurred by such director or officer, in or
arising out of his capacity as a director, officer, employee and/or agent of
the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth a summary of compensation paid by the
Company to its five highest paid executive officers (the "Named Executives")
during 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Awards Payout
----------- ----------
Annual Compensation Number of
Other Annual Options/ Long-term
Name and Principal Salary Bonus ($) Compensation Warrants Incentive Plan
Position Year ($)(1) (1),(2) ($)(3) Granted Payouts ($)
- ------------------ ------ -------- --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Moorman
Chairman of the Board, 1998 $328,651 $326,706 $ -- -- --
President and Chief 1997 286,354 177,655 -- -- --
Executive Officer 1996 270,954 -- -- -- --
Ronnie W. Palmore
Senior Vice President, 1998 $179,993 $ 64,460 $ -- -- --
Merchandising and 1997 156,973 48,811 -- -- --
Assistant Secretary 1996 150,838 8,050 -- -- --
Russell A. Lundy, Sr. 1998 $139,364 $ 50,490 $ -- -- --
Senior Vice President, 1997 126,200 41,856 -- -- --
Stores 1996 121,013 11,758 -- -- --
E. Randolph Lail
Senior Vice President, 1998 $149,203 $ 72,888 $ 1,079 -- --
Finance, CFO, 1997 130,048 36,749 1,264 -- --
Secretary and Treasurer1996 122,254 9,375 1,268 -- --
Marvin H. Thomas, Jr. 1998 $111,959 $ 38,159 $ 877 -- --
Senior Vice President, 1997 99,325 29,118 1,027 -- --
Operations 1996 95,425 6,382 1,030 -- --
- --------------------------------------------------------
<FN>
(1) Salary and bonus amounts for 1996, 1997 and 1998 include tax-deferred
contributions of compensation to the Peebles Inc. 401(k) Profit Sharing
Plan. Also included in the salary amounts for 1998 and the bonus amounts
for 1997 and 1998 are the matching contributions made by the Company on
behalf of the Named Executives to the Peebles Inc. 401(k) Profit Sharing
Plan.
(2) Bonus amounts for each of the Named Executives include the accrued bonus
earned under the Company's annual incentive plans for the years shown.
(3) The amounts shown reflect the current value of the benefit to Mr. Lail
and Mr. Thomas, respectively, of the portion of premiums paid by the
Company with respect to a split dollar insurance arrangement. The
benefit was determined for each year by calculating the time value of
money (including the applicable long term federal funds rate) of the
premium paid by the Company in the years shown ($18,729 for Mr. Lail and
$15,221 for Mr. Thomas per year).
</TABLE>
OPTION GRANT TABLE. There were no options granted by the Company to
the Named Executives during 1998.
OPTION EXERCISE TABLE. The following table sets forth information
concerning the exercise of stock options during 1998 by each of the Named
Executives and the year end value of unexercised options.
<TABLE>
Options Exercised in 1998
-----------------------------------
Individual Grants
Number of Value of
Unexercised Unexercised In-the
Options at Year Money Options
Value End at Year end
Shares Acquired Realized Exercisable/ Exercisable/
Name and Principal Position on Exercise (1) ($) Unexercisable(2) Unexercisable($)
- --------------------------- --------------- -------- ---------------- ---------------
<S> <C> <C> <C> <C>
Michael F. Moorman 0 $0 0 $0
Chairman of the Board,
President and Chief Executive
Officer
Ronnie W. Palmore 0 0 0 0
Senior Vice President,
Merchandising, Assistant
Secretary
Russell A. Lundy, Sr. 0 0 0 0
Senior Vice President, Stores
E. Randolph Lail 0 0 0 0
Senior Vice President, Finance
Chief Financial Officer,
Secretary and Treasurer
Marvin H. Thomas, Jr. 0 0 0 0
Senior Vice President, Operations
_______________________________________
<FN>
(1) There were no stock options exercised by the Named Executives in 1998.
(2) There were no unexercised options at year end.
</TABLE>
As of the fiscal year ended January 30, 1999 there were no projected
long-term incentive payouts.
PENSION PLAN
The following table shows the annual benefit payable upon normal
retirement at age 65 to persons in specified earnings and years of service
classifications under the Employee's Retirement Plan of Peebles Inc. (the
"Pension Plan"). Effective for the Pension Plan's 1998 plan year, the
Internal Revenue Code limited the amount of earnings that could be taken
into account for purposes of calculating benefits to $160,000, and limited
the maximum annual benefit which could be paid from the Plan to any
participant to $130,000. The benefits shown below do not reflect these
limits.
Final Years of Service
Average Salary 15 20 25 30 35
$ 75,000........ $11,700 $15,600 $19,500 $23,400 $23,400
100,000........ 16,575 22,100 27,625 33,150 33,150
125,000........ 21,450 28,600 35,750 42,900 42,900
150,000........ 26,325 35,100 43,875 52,650 52,650
175,000........ 31,200 41,600 52,000 62,400 62,400
200,000........ 36,075 48,100 60,125 72,150 72,150
225,000........ 40,950 54,600 68,250 81,900 81,900
250,000........ 45,825 61,100 76,375 91,650 91,650
300,000........ 55,575 74,100 92,625 111,150 111,150
350,000........ 65,325 87,100 108,875 130,650 130,650
400,000........ 75,075 100,100 125,125 150,150 150,150
450,000........ 84,825 113,100 141,375 169,650 169,650
Benefits under the Pension Plan are based on a designated percentage of
the participant's average earnings for the participant's five highest years
of earnings, weighted according to years of credited service, and integrated
with Social Security covered compensation. Earnings are based on the
participant's total taxable wages for the year, including certain pre-tax
contributions to employee benefit plans, but excluding reimbursements,
certain expense allowances, deferred compensation, welfare and fringe benefits.
For Pension Plan purposes, earnings for the Named Executives are
substantially the same as the amounts listed in the Summary Compensation
Table. Benefits are computed on a straight life annuity basis.
The accrued benefits under the Plan for Mr. Moorman, Mr. Palmore,
Mr. Lail, Mr. Thomas and certain other employees were frozen and transferred
from the Plan to a newly established defined benefit pension plan ("Pension
Plan II") effective as of February 1, 1998. Pension Plan II was terminated
effective as of May 1, 1998, and each participant's accrued benefits were
distributed from Pension Plan II on or before January 31, 1999. As a result,
Mr. Moorman, Mr. Palmore, Mr. Lail and Mr. Thomas have no accrued benefits
under either the Pension Plan or Pension Plan II. Mr. Lundy, Sr. continues
to be covered and have an accrued benefit under the Pension Plan.
The estimated years of credited years as of normal retirement at age 65
for purposes of computing benefits under the Pension Plan for the Named
Executives are: Mr. Moorman, 44 years; Mr. Palmore, 42 years; Mr. Lundy,
Sr., 47 years; Mr. Thomas, 41 years; and Mr. Lail, 32 years.
The Company maintains a supplemental benefits program designed to provide
certain key executives retirement benefits. The Executive Employee
Supplemental Retirement Plan (the "SERP"), maintained for certain designated
executives, includes Mr. Moorman, Mr. Palmore, and Mr. Lundy, Sr. The SERP
is a non-qualified retirement plan that provides each participant with a
lump sum benefit based on 60% of the participant's earnings during the five
consecutive calendar years which produce the highest average reduced by the
sum of the benefits payable to the participant under the Pension Plan,
Executive Employee Benefit Restoration Plan (the "Restoration Plan") and
Social Security. Benefits under the SERP are fully vested upon the earliest
of the participant's completion of five years of service with the Company,
the participant's permanent disability or the date on which there is a change
of control of the Company. The Restoration Plan is a non-qualified plan
designed to provide supplemental benefits to certain employees, including
Mr. Moorman, whose accrued benefits under the Pension Plan were transfered and
distributed from the Pension Plan II. The benefit under the Restoration
Plan is payable in a single lump sum. A participant's benefits are forfeited
under the SERP and Restoration Plan if his employment is terminated for cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company has a Compensation Committee of the Board of Directors.
For 1998, the Board of Directors established compensation for the Company's
officers for such year. Michael F. Moorman, the sole officer or employee
of the Company who is also a member of the Board of Directors, made
recommendations to the Board of Directors concerning executive compensation
but did not otherwise participate in or vote upon the executive compensation
decisions made by the Board of Directors for such year. Mr. Moorman is not a
member of the Compensation Committee. No interlocking relationship currently
exists between any member of the Compensation Committee and any member of any
other company's board of directors or compensation committee, nor did any
such interlocking relationship exist during 1998.
CERTAIN RELATIONSHIPS
Frank T. Nickell and Thomas R. Wall, IV, members of the Board of Directors
of the Company, are affiliated with Kelso & Company, which rendered management
services to the Company during 1998. From time to time Kelso & Company has
provided financial advice to the Company for which the Company has reimbursed
certain of Kelso & Company's expenses.
EMPLOYMENT AGREEMENTS
Mr. Lail and Mr. Thomas participate in split dollar insurance
arrangements with the Company. The executive owns, and therefore has a
vested interest in, the cash surrender value of the policy in excess of the
Company's premium investment. At retirement, the executive can either use
the cash value for retirement income or keep the death benefit or a
combination of the two. The Company would recover its cost at retirement.
In the event of a change in control, the executive would have a
nonforfeitable right to the Company's share of the cash surrender value of
the policy.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of the outstanding common stock of the Company is owned by PHC Retail.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of PHC Retail, as of April 1, 1999, by (a) each
person known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common Stock, (b) each of the Company's Directors
and Named Executives who owns shares of Common Stock and (c) all Directors
and Named Executives of the Company as a group. Unless otherwise noted in the
footnotes to the table, the persons named in the table have sole voting and
investing power with respect to all shares of Common Stock indicated as
being beneficially owned by them.
CAPITAL STOCK OF PHC RETAIL
<TABLE>
Shares of Voting Shares of
Common Percent Nonvoting Percent of
Name of Beneficial Owner (1) Stock of Class Common Stock Class
<S> <C> <C> <C> <C>
Kelso Investment Associates V, L.P. (2),(3) 1,803,693 (3) 90.46 0 0
Kelso Equity Partners V, L.P. (2),(3) 52,973 2.66 0 0
Michael F. Moorman (6) 49,583 2.49 0 0
Ronnie W. Palmore (6) 14,051 * 0 0
Russell A. Lundy, Sr. (6) 9,730 * 0 0
E. Randolph Lail (6) 7,050 * 0 0
Marvin H. Thomas, Jr. (6) 5,536 * 0 0
William C. DeRusha 0 0 2,000 8.17
Malcolm S. McDonald 0 0 2,000 8.17
Wellford L. Sanders, Jr. 0 0 2,500 10.22
Joseph S. Schuchert (2),(3) 1,856,666 (3) 93.12 0 0
Frank T. Nickell (2),(3) 1,873,514 (4)(5)93.96 0 0
George E. Matelich (2),(3) 1,856,666 (3) 93.12 0 0
Thomas R. Wall, IV (2),(3) 1,873,514 (4)(5)93.96 0 0
Michael B. Goldberg (2),(3) 1,856,666 (3) 93.12 0 0
All Directors and Named Executives
as a group (10 persons) (6) 1,959,464 98.27 6,500 26.56
* Less than 1 Percent
<FN>
(1) The information as to beneficial ownership is based on statements furnished to the Company
by the beneficial owners. As used in this table, "beneficial ownership" means the sole or
shared power to vote, or direct the voting of a security, or the sole or shared investment
power with respect to a security (i.e., the power to dispose of, or direct the disposition
of). A person is deemed as of any date to have "beneficial ownership" of any security that
such person has the right to acquire within 60 days after such date. For purposes of
computing the percentage of outstanding shares held by each person named above, any security
that such person has the right to acquire within 60 days of the date of calculation is deemed
to be outstanding but is not deemed to be outstanding for purposes of computing the percentage
of any other person.
(2) The business address for such person(s) is C/O Kelso & Company, 320 Park Avenue, 24th Floor,
New York, New York 10022.
(3) Messrs. Schuchert, Nickell, Matelich, Wall and Goldberg may be deemed to share beneficial
ownership of shares of PHC Common Stock owned of record by Kelso Investment Associates V,
L.P. ("KIA V") and Kelso Equity Partners V, L.P. ("KEP V"), by virtue of their status as
general partners of such partnerships. Messrs. Schuchert, Nickell, Matelich, Wall and
Goldberg share investment and voting power with respect to securities owned by other Kelso
affiliates. Messrs. Schuchert, Nickell, Matelich, Wall and Goldberg disclaim beneficial
ownership of the shares of PHC Common Stock owned of record by KIA V and KEP V and the
securities owned by other Kelso affiliates.
(4) Includes 1,848 shares of PHC Common Stock held by trusts of which Mr. Nickell is trustee,
as to which shares Mr. Nickell disclaims beneficial ownership.
(5) Includes 15,334 shares of PHC Common Stock held by trusts of which Mr. Wall is trustee,
as to which shares Mr. Wall disclaims beneficial ownership.
(6) Includes unexercised vested stock options for the purchase of PHC Common Stock in the
amount of 14,583, 4,583, 3,230, 3,750, and 2,395 for Messrs. Moorman, Palmore, Lundy,
Lail and Thomas, respectively.
</TABLE>
Item 13. Certain Relationships and Related Transactions.
See "Item 10. Directors and Executive Officers of the Registrant" and
"Item 11. Executive Compensation" for a description of certain arrangements
with respect to present and former executive officers and directors of
Peebles.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial statements.
Information with respect to this Item is contained in
the consolidated financial statements indicated on the
indicies on page F-0 of this annual report on Form 10-K.
2. Financial statement schedules.
Schedule II Valuation and Qualifying Accounts appears
in Note I on page F-13 of this annual report on Form 10-K;
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
3. Exhibits.
The exhibits listed on the accompanying index to exhibits
are filed as part of this annual report on Form 10-K.
(b) Reports on Form 8-K.
NONE
(c) Exhibits.
2.1*** Form of Agreement and Plan of Merger dated April 3, 1995
among PHC Retail Holding Company, Peebles Acquisition Corp. and
Peebles Inc., exclusive of exhibits and schedules. The Registrant
hereby undertakes to furnish to the Commission supplementally upon
request a copy of any omitted exhibit or schedule.
3.1+ Form of Amended and Restated Articles of Incorporation of Peebles
Inc.
3.2+ Form of Amended and Restated Bylaws of Peebles Inc.
3.3*** Amendment to Amended and Restated Articles of Incorporation dated
May 3, 1993
3.4*+ Amendment to Amended and Restated Bylaws of Peebles Inc.dated
June 9, 1995.
3.5*+ Amendment to Amended and Restated Articles of Incorporation dated
June 9, 1995
10.1**+ Amended and Restated Credit Agreement, dated as of June 29,
1998 by and among Peebles Inc., Fleet Bank, N.A., as agent, and the
financial institutions as parties thereto, exclusive of exhibits
and schedules. The Registrant hereby undertakes to furnish the
Commission supplementally upon request a copy of any omitted exhibit
or schedule.
10.8*** Standard Service Agreement, as amended, dated January 17,
1995 between Frederick Atkins, Incorporated and Peebles Inc.
10.11*+ Form of Indemnification, Guarantee and Contribution Agreement
dated as of August 23, 1995 PHC Retail Holding Company, Peebles
Inc. and each of the directors and officers of Peebles Inc.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
____________________________
* Incorporated by reference from the Registration Statement of PBL and
Peebles on Form S-1 (Registration No. 33-27126), which was declared
effective by the Commission on July 14, 1989.
+ Incorporated by reference from the Form 10-K of the Company for the
fiscal year ended February 1, 1992.
*** Incorporated by reference from the Form 10-K of the Company for the
fiscal year ended January 28, 1995.
*+ Incorporated by reference from the Form 10-K of the Company for the
fiscal year ended February 3, 1996.
**+ Incorporated by reference from Exhibit 10.68 to the Company's
Quarterly Report on Form 10-Q for the quarter ended August 1, 1998.
(d) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts appears in Note I on
page F-13 of this annual report on Form 10-K.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PEEBLES INC.
---------------------------------
(Registrant)
By /s/ Michael F. Moorman Date: April 21, 1999
------------------------------
Michael F. Moorman, President
and Chief Executive Officer
(Principal Executive Officer)
By /s/ E. Randolph Lail Date: April 21, 1999
-------------------------------
E. Randolph Lail, Senior Vice President
Finance, CFO, (Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Wellford L. Sanders, Jr Date: April 21, 1999
--------------------------------
Wellford L. Sanders, Jr., Director
By /s/ William C. DeRusha Date: April 21, 1999
--------------------------------
William C. DeRusha, Director
By /s/ Malcolm S. McDonald Date: April 21, 1999
--------------------------------
Malcolm S. McDonald, Director
By /s/ Frank T. Nickell Date: April 21, 1999
--------------------------------
Frank T. Nickell, Director
By /s/ Thomas R. Wall Date: April 21, 1999
-------------------------------
Thomas R. Wall, IV, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
<PAGE>
Exhibit 21
Subsidiaries of Registrant
Name of Subsidiary Jurisdiction in which organized
Carlisle Retailers, Inc. Ohio
Ira A. Watson, Co. Delaware
<PAGE>
Audited Consolidated Financial Statements
PEEBLES INC. AND SUBSIDIARIES
January 30, 1999
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Changes in Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Management's Discussion and Analysis of Financial Condition
and Results of Operations F-14
F-0
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Peebles Inc.
We have audited the accompanying consolidated balance sheets of Peebles Inc.
and subsidiaries as of January 30, 1999 and January 31, 1998, and the
related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three fiscal years in the period ended January
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Peebles Inc. and subsidiaries at January 30, 1999 and January 31, 1998,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended January 30, 1999 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
-----------------------
Richmond, Virginia
March 8, 1999
F-1
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
PEEBLES INC. AND SUBSIDIARIES
(in thousands, except shares and per share amounts)
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 64 $ 432
Accounts receivable, net 33,495 31,581
Merchandise inventories 71,362 57,967
Prepaid expenses 1,084 1,145
Income taxes receivable 1,045 303
Other 1,289 773
-------- -------
TOTAL CURRENT ASSETS 108,339 92,201
PROPERTY AND EQUIPMENT
Fixtures and equipment 65,456 50,588
Land and building 14,734 10,348
Leasehold improvements 1,725 1,725
-------- -------
81,915 62,661
-------- -------
Accumulated depreciation and
amortization 29,966 23,912
-------- -------
51,949 38,749
OTHER ASSETS
Excess of cost over net assets
acquired, net 41,017 35,460
Deferred financing costs, net 3,289 2,442
Sundry 3,692 3,604
-------- -------
47,998 41,506
-------- -------
$208,286 $172,456
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 17,516 $ 13,606
Accrued compensation and other
expenses 6,625 5,055
Deferred income taxes 2,433 4,592
Current maturities of long-term debt 3,700 4,083
Other 2,271 1,406
-------- -------
TOTAL CURRENT LIABILITIES 32,545 28,742
LONG-TERM DEBT 106,325 82,077
LONG-TERM CAPITAL LEASE OBLIGATIONS 896 1,139
DEFERRED INCOME TAXES 6,990 5,025
STOCKHOLDERS' EQUITY
Preferred stock--no par value,
authorized 1,000,000 shares, none
issued or outstanding -- --
Common stock--par value $.10 per share,
authorized 5,000,000 shares, 1,000
issued and outstanding 1 1
Additional capital 59,307 59,307
Retained earnings (deficit):
accumulated from May 27, 1995 2,222 (3,835)
-------- -------
61,530 55,473
-------- -------
$208,286 $172,456
======== =======
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
PEEBLES INC. AND SUBSIDIARIES
(in thousands, except shares and per share amounts)
Fiscal Years Ended
------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
NET SALES $ 265,215 $ 217,694 $ 194,206
COSTS AND EXPENSES
Cost of sales 159,067 130,820 116,236
Selling, general and
administrative expenses 76,402 60,324 54,400
Depreciation and amortization 8,057 6,648 7,499
Asset revaluation -- -- 20,782
---------- --------- ---------
OPERATING INCOME (LOSS) 21,689 19,902 (4,711)
OTHER INCOME 9 444 687
INTEREST EXPENSE 10,804 9,609 9,148
---------- --------- ---------
INCOME (LOSS) BEFORE
INCOME TAXES (BENEFIT) 10,894 10,737 (13,172)
INCOME TAXES (BENEFIT)
Current 5,031 1,238 2,137
Deferred (194) 3,449 (394)
---------- --------- ---------
4,837 4,687 1,743
---------- --------- ---------
NET INCOME (LOSS) $ 6,057 $ 6,050 $ (14,915)
========== ========= =========
NET INCOME (LOSS) PER SHARE $ 6,057 $ 6,050 $ (14,915)
========== ========= =========
Weighted average common stock
outstanding 1,000 1,000 1,000
========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PEEBLES INC. AND SUBSIDIARIES
(in thousands, except share amounts)
Common Stock
------------------
Par Additional Retained
Shares Value Capital Earnings
-------- ----- ---------- --------
<S> <C> <C> <C> <C>
Balance February 3, 1996 1,000 $ 1 $ 59,307 $ 5,030
Net (loss) -- -- -- (14,915)
-------- ---- -------- -------
Balance February 1, 1997 1,000 1 59,307 (9,885)
Net income -- -- -- 6,050
-------- ---- -------- -------
Balance January 31, 1998 1,000 1 59,307 (3,835)
Net income -- -- -- 6,057
-------- ---- -------- -------
Balance January 30, 1999 1,000 $ 1 $ 59,307 $ 2,222
======== ==== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PEEBLES INC. AND SUBSIDIARIES
(in thousands)
Fiscal Years Ended
------------------------------------------------------
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 6,057 $ 6,050 $ (14,915)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 5,953 4,710 4,616
Amortization 3,415 2,902 3,842
Deferred income taxes (194) 3,449 (394)
Provision for doubtful accounts 1,330 1,503 1,192
LIFO/market reserve adjustment 51 250 39
Asset revaluation -- -- 20,782
Changes in operating assets
and liabilities net of
effects from acquisition
adjustments:
Accounts receivable (1,759) (1,022) (1,527)
Merchandise inventories (3,498) (3,786) (8,088)
Accounts payable 3,452 2,794 780
Other assets and liabilities (984) (1,762) (205)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 13,823 15,088 6,122
INVESTING ACTIVITIES
Acquisition of Ira A. Watson Co. (4,451) -- --
Acquisition of Carlisle Retailers Inc. -- -- (11,549)
Purchase of property and equipment (13,394) (10,226) (8,783)
Other (204) (879) (219)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (18,049) (11,105) (20,551)
FINANCING ACTIVITIES
Proceeds from revolving line
of credit and long-term debt 414,155 324,662 272,013
Reduction in revolving line
of credit and long-term debt (414,789) (328,441) (267,762)
Proceeds from 1998 Credit
Agreement-acquisition of
Ira A. Watson Co. 24,000 -- --
Proceeds from revolving
facilities-acquisition of
Carlisle Retailers, Inc. -- -- 10,213
Retirement of Ira A. Watson
Co. pre-acquisition bank
Debt and trade liabilities (17,895) -- --
Financing fees - 1998 Credit
Agreement (1,613) -- --
--------- --------- ---------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,858 (3,779) 14,464
--------- --------- ---------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (368) 204 35
Cash beginning of period 432 228 193
--------- --------- ---------
CASH END OF PERIOD $ 64 $ 432 $ 228
========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PEEBLES INC. AND SUBSIDIARIES
January 30, 1999
(in thousands, except shares and per share amounts)
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Peebles Inc. and subsidiaries ("Peebles" or the
"Company") operate retail department stores offering predominately fashion
merchandise for the entire family and selected home accessories. At January
30, 1999, the Company was operating 117 stores located primarily in small and
medium sized communities which typically do not have a mall-based department
store. The stores serve communities in 15 states, located primarily in the
Southeast and Mid-Atlantic.
ORGANIZATION AND BASIS OF FINANCIAL STATEMENT PRESENTATION:
Consolidation: Peebles Inc. is a wholly owned subsidiary of PHC Retail
Holding Company ("PHC Retail"). PHC Retail, a closely held company, has no
significant assets other than the entire equity interest of Peebles Inc.
common stock, $.10 par value (the "Common Stock"). The consolidated financial
statements include the accounts of Peebles Inc. and its wholly owned
subsidiaries, Carlisle Retailers, Inc. ("Carlisle's") and Ira A. Watson Co.
("Watson's"). All significant intercompany balances and transactions have
been eliminated.
FISCAL YEAR: The Company's fiscal year ends on the Saturday nearest January
31. Fiscal years 1998, 1997 and 1996, ended on January 30, 1999, January 31,
1998 and February 1, 1997, respectively. Results of operations consisted of
fifty-two weeks in all three fiscal years. References to years relate to
fiscal years rather than calendar years. Certain amounts in the fiscal 1997
and 1996 consolidated financial statements have been reclassified to conform
to the fiscal 1998 presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
REVENUE: Retail sales are of merchandise. "Net Sales" as shown are net of
actual returns for the period and exclude all taxes. Revenue from in-store
services and finance charges on credit balances are recorded as a reduction
to selling, general and administrative expenses.
CASH AND CASH EQUIVALENTS: Peebles considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
There were no cash equivalents at January 30, 1999 or January 31, 1998.
MERCHANDISE INVENTORIES: Merchandise inventories are accounted for by the
retail inventory method applied on a last in, first out ("LIFO") basis.
PROPERTY AND EQUIPMENT: Property and equipment is stated on the basis of cost.
Depreciation of property and equipment is provided primarily by the straight-
line method over the estimated useful lives of the related assets, generally
7 to 10 years for fixtures and equipment and 20 years for buildings. The cost
of leasehold improvements is amortized over the shorter of the economic lives
or the terms of the leases by the straight-line method. Amortization of
buildings under capital leases is computed by the straight-line method over the
lease term and is included in depreciation and amortization expense.
STORE OPENING COSTS: Store opening costs are charged to selling, general and
administrative expenses as incurred.
ADVERTISING COSTS: Advertising costs, charged to selling, general and
administrative expenses as incurred, were $6,462, $4,551 and $4,917 for 1998,
1997 and 1996, respectively.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
LONG-LIVED ASSETS: The Company periodically reviews the carrying value of
long-lived assets to determine if an impairment has occurred. The primary
indicators of impairment are, but not limited to, significant changes in
competition or demographics, recent historical operating profitability,
projected profitability and the related cash flows of each. Projections are
based on management's best estimates of future performance. In 1996, the
carrying values of certain store assets, related intangibles and allocated
goodwill were reduced by a total of $20,782 and recorded as an operating
expense.
EXCESS OF COST OVER NET ASSETS ACQUIRED: The excess of cost over net assets
acquired ("Goodwill") is being amortized on a straight-line basis over a
twenty-five year period. Goodwill amortization expense for 1998, 1997 and
1996 was $1,796, $1,488 and $2,255, respectively. Accumulated amortization
was $6,940 and $5,144 at January 30, 1999 and January 31, 1998, respectively.
DEFERRED FINANCING COSTS: Deferred financing costs are amortized by the
interest method over a period consistent with the related financing.
Amortization expense of $1,294, $965, and $884, is included in interest
expense for 1998, 1997 and 1996, respectively. Accumulated amortization
at January 30, 1999 and January 31, 1998 was $3,794 and $2,500, respectively.
INCOME TAXES: Deferred income taxes are provided for temporary differences
between income and expense for financial reporting purposes and for income
tax purposes.
NET INCOME PER SHARE: Net income per share is based on the weighted-average
number of shares outstanding.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's
customer receivables, accounts payable and long-term debt approximate fair
value.
NOTE B-ACQUISITIONS OF WATSON'S AND CARLISLE'S
The Watson Merger: On June 29, 1998, a merger (the "Watson Merger") was
consummated whereby Watson's, a Delaware corporation, became a wholly-owned
subsidiary of Peebles Inc. Watson's operated 24 store locations in seven
states. The results of operations for the Watson's stores are included in
Peebles' Consolidated Statement of Income since the date of acquisition.
The Watson Merger has been accounted for using the purchase method of
accounting. The $4,451 cash purchase price included $1,848 to the equity
holders of Watson's, $1,352 to a financial services company for the Watson's
proprietary credit card accounts receivable, and $1,251 in acquisition
expenses. Proceeds used to fund the Watson Merger were provided by the
Credit Agreement, as amended and restated on June 29, 1998.
The allocation of the purchase price is as follows:
Purchase Price $ 4,451
Tangible net assets (liabilities) acquired:
Accounts receivable, net $ 1,185
Merchandise inventory, net 10,000
Fixed assets, net 5,446
Bank debt (10,403)
Trade liabilities, net (6,290)
Other net liabilities (1,589)
---------
Tangible net assets (liabilities) acquired (1,651)
--------
Excess of cost over net assets acquired $ 6,102
========
The excess of cost over net assets acquired is being amortized over a
twenty-five year period beginning June 29, 1998.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE B-ACQUISITIONS OF WATSON'S AND CARLISLE'S --Continued
The following unaudited pro forma financial information reflects the results
of operations as if the Watson Merger had occurred at the beginning of the
1998 and 1997 fiscal years. These pro forma results have been prepared for
comparison purposes only and do not purport to be indicative of what would
have occurred had the Watson Merger been completed at the beginning of
either of the fiscal years.
1998 1997
---------- ----------
Net sales $ 289,423 $ 298,135
Net income 1,811 2,258
Net income per share 1,811 2,258
Acquisition of Carlisle Retailers, Inc: On May 20, 1996, Peebles Inc.
acquired Carlisle Retailers, Inc., an Ohio corporation ("Carlisle's"), for
$11,549 in cash, which included $6,311 to common shareholders of Carlisle's,
$3,458 to a financial services company for the majority of the outstanding
proprietary credit card accounts receivable portfolio, and $1,780 in
acquisition expenses (the "CRI Merger"). The results of operations for the
Carlisle's stores are included in Peebles' Consolidated Statement of Income
since May 20, 1996. The CRI Merger was accounted for using the purchase
method of accounting, and as such, the purchase price was allocated to the
fair value of tangible assets and the excess of cost over net assets acquired.
NOTE C-ACCOUNTS RECEIVABLE
Accounts receivable are shown net of $1,700 and $1,400, representing the
allowance for uncollectible accounts at January 30, 1999 and January 31, 1998,
respectively. The provision for doubtful accounts was $1,330, $1,503 and
$1,192, for 1998, 1997 and 1996, respectively. Finance charges on credit
sales, included as a reduction of selling, general and administrative expenses,
aggregated $5,103, $5,089 and $5,050 for 1998, 1997 and 1996, 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 usually resides in the local community immediately surrounding
the store location. Peebles stores serve these local customers in 15 states:
Virginia, Tennessee, North Carolina, Maryland, Kentucky, West Virginia,
Alabama, Pennsylvania, South Carolina, Ohio, Delaware, New York, Indiana, New
Jersey and Missouri. The Company does not require collateral from its customers.
NOTE D-MERCHANDISE INVENTORIES
Merchandise inventories are accounted for by the retail inventory method
applied on a last-in, first-out ("LIFO") basis. In connection with an
acquisition of the Company in May 1995 accounted for using the purchase
method, the then existing LIFO reserve was eliminated and a new LIFO base
year was established which included an adjustment to fair value (the "Fair
Value Adjustment"). The "LIFO/Market Reserve" adjusts inventory to the lower
of LIFO cost or market.
Merchandise inventories consisted of the following:
January 30, 1999 January 31, 1998
---------------- ----------------
Merchandise inventories
at FIFO cost $ 65,288 $ 51,234
Fair Value Adjustment 7,436 7,436
LIFO/Market Reserve (1,362) (703)
---------- ----------
Merchandise inventories at
lower of cost or market $ 71,362 $ 57,967
========== ==========
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE E-LONG-TERM DEBT
Long-term debt consisted of the following:
January 30, 1999 January 31, 1998
---------------- ----------------
Senior Revolving Facility $ 34,000 $ 32,000
Senior Term Note A 12,750 15,275
Senior Term Note B 59,550 37,094
Swingline Facility 3,225 1,791
Other 500 --
---------- ---------
110,025 86,160
Less current maturities: 3,700 4,083
---------- ---------
Long-term debt $ 106,325 $ 82,077
========== =========
The Company has a credit facility (the "Credit Agreement") which provides a
Senior Term Facility, a Senior Revolving Facility, and a Swingline Facility.
The Credit Agreement was amended and restated (the "1998 Credit Agreement")
on June 29, 1998 (the "Restatement Date") to facilitate the Watson Merger.
The 1998 Credit Agreement i) provided an additional $24 million in proceeds
under the Senior Term Facility; ii) reduced the scheduled principal payments
under the Senior Term Facility; iii) extended the maturity dates of both the
Senior Term Facility and the Senior Revolving Facility; and iv) adjusted the
applicable interest rates to vary based on certain Company performance
criteria tied to certain restrictive covenants. The Company deferred $1,613
in financing fees to amend and restate the Credit Agreement. These financing
fees are being amortized over a five-year period. The 1998 Credit Agreement
is secured by a first priority security interest in substantially all the
personal and real property of Peebles. Restrictive covenants prohibit the
payment of cash dividends in any fiscal year.
The Senior Term Facility includes two notes, Senior Term Note A and Senior
Term Note B. On the Restatement Date, the outstanding principal balances of
Senior Term Note A and Senior Term Note B were increased $644 to $15,000 and
$23,008 to $60,000, respectively. Under the 1998 Credit Agreement, Senior
Term Note A and Senior Term Note B accrue interest quarterly in arrears at a
LIBOR based rate which is expected to vary 25 to 50 basis points, dependent
primarily on the Company's operating performance in relation to outstanding
debt at the end of each fiscal quarter. Senior Term Note A and Senior Term
B currently bear interest at LIBOR plus 2.50% and LIBOR plus 3.00%,
respectively. Senior Term Note A and Senior Term Note B mature April 30, 2003
and 2004, respectively.
The amount available under the Senior Revolving Facility (the "Revolver") is
determined by a defined asset based formula with maximum borrowings limited
to $75 million less outstanding amounts under letters of credit. The Revolver
matures on April 30, 2003 and has no specific paydown provisions. The Company
pays a fee of 1/2 of 1% per annum on any unused portion of the Revolver.
Under the 1998 Credit Agreement, the Revolver bears interest at the same rate
as Senior Term Note A.
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. Excess borrowings or funding
outside these amounts revert to the Revolver. The Swingline Facility bears
interest at prime plus 1.5% and has no LIBOR conversion option.
The Company made cash interest payments of $8,562, $8,311 and $7,866 for
1998, 1997 and 1996, respectively.
Aggregate scheduled principal payments on the long-term debt are as follows:
1999 -- $3,700; 2000 -- $3,700; 2001 -- $3,700; 2002 -- $3,700;
2003 -- $38,675; thereafter -- $56,550.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE F-LEASES
The Company leases substantially all of its store locations under capital
and operating leases with initial terms ranging from 1 to 25 years and
renewal options of 1 to 10 years expiring at various dates through 2040.
Total rental expense under operating leases was as follows:
1998 1997 1996
--------- -------- --------
Minimum $ 12,141 $ 8,913 $ 7,742
Contingent 363 483 453
--------- -------- --------
$ 12,504 $ 9,396 $ 8,195
========= ======== ========
Contingent rentals are based upon a percentage of annual sales in excess of
specified amounts. Future minimum lease payments under capital leases and
noncancellable operating leases at January 30, 1999 were as follows:
Capital Operating
Fiscal Year Leases Leases
- ------------------------------ ---------- ----------
1999 $ 377 $ 13,073
2000 377 12,619
2001 180 11,988
2002 180 10,903
2003 181 9,519
Thereafter 241 56,803
-------- ---------
Total minimum lease payments 1,536 $114,905
Less: amounts representing =========
interest (397)
Present value of net minimum lease --------
payments, including current
maturities of $242, with interest
rates ranging from 12.0% to 17.8% $ 1,139
========
NOTE G-EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS: Through January 31, 1998, the Company provided
one defined benefit pension plan, The Employees retirement Plan of Peebles Inc.
("Plan I"), which covered substantially all employees. In November 1997, the
Board of Directors approved: i) the adoption of The Employees Retirement Plan II
of Peebles Inc. ("Plan II") effective February 1, 1998 (the "Curtailment Date"),
and ii) the fifth amendment to Plan I. Under the amendment, the Plan I benefits
of certain participants were frozen at the Curtailment Date and spun-off to
Plan II. Further, both Plan I and Plan II were closed to new participants at
the Curtailment Date. Plan II was terminated and all Plan II participant
benefits were disbursed by January 30, 1999.
SUPPLEMENTAL BENEFITS PROGRAM: The Company maintains a benefits program
designed to provide certain key executives supplemental retirement income
equal to 60% of final average compensation.
The following information is disclosed in accordance with the requirements
of Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits", which the Company adopted in
1998.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE G-EMPLOYEE BENEFIT PLANS--Continued
1998 1997
-------- --------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 8,030 $ 8,060
Service cost 117 400
Interest cost 520 566
Actuarial loss 440 15
Curtailments -- (289)
Benefit payments 3,421 722
-------- --------
Benefit obligation at end of year $ 5,686 $ 8,030
======== ========
Change in Plan Assets:
Fair value of plan assets at beginning
of year $ 7,419 $ 6,509
Actual return on plan assets 587 1,632
Employer contribution 401 --
Benefit payments 3,421 722
-------- --------
Fair value of plan assets at end of year $ 4,986 $ 7,419
======== ========
Funded Status:
Funded status $ (700) $ (611)
Unrecognized actuarial (gain) (230) (730)
Unrecognized prior service cost 542 601
-------- --------
Accrued pension (liability) $ (388) $ (740)
======== ========
Components of Net Periodic Pension Cost:
Service cost $ 117 $ 400
Interest cost 520 567
Expected return on plan assets 649 551
Prior service cost recognized 60 69
Recognized (gains) or losses (20) (11)
Loss (Gain) due to curtailment 22 (231)
-------- --------
Net periodic pension cost $ 50 $ 243
======== ========
Weighted Average Assumptions as of
Measurement Date:
Discount rate 6.80% 7.28%
Expected return on plan assets 9.00% 9.00%
Rate of compensation increase 4.42% 4.48%
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the Supplemental Benefits Program with
accumulated benefit obligations in excess of plan assets were $1,157, $867
and $0, respectively, as of January 30, 1999, and $855, $614 and $0,
respectively, as of January 31, 1998.
THE PEEBLES INC. 401 (K) PROFIT SHARING PLAN: The Company maintains a
qualified profit sharing and retirement savings plan, which under Section 401
(k) of the Internal Revenue Code, allows tax deferred contributions from
eligible employees of up to 12% of their annual compensation. On February 1,
1998, the Company began matching employee contributions up to 50% of an
employee's first 6% of eligible compensation. For 1998, the Company
contributed $260.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE H - INCOME TAXES
The provisions for income taxes consisted of the following:
1998 1997 1996
--------- -------- ---------
Current: Federal $ 4,201 $ 1,089 $ 1,591
State 830 149 546
Deferred: Federal (162) 2,861 (214)
State (32) 588 (180)
--------- -------- ---------
$ 4,837 $ 4,687 $ 1,743
========= ======== =========
Income taxes differ from the amounts computed by applying the applicable
federal statutory rates due to the following:
1998 1997 1996
--------- --------- ---------
Taxes at the federal statutory rate $ 3,813 $ 3,650 $(4,479)
Increases (decreases):
State income taxes, net of
federal tax 526 486 232
Amortization of Goodwill 531 478 745
Asset revaluation -- -- 5,175
Other (33) 73 70
-------- -------- -------
$ 4,837 $ 4,687 $ 1,743
======== ======== =======
At January 30, 1999, the Company has net operating loss carryforwards of
approximately $4,100 for income tax purposes, which expire in 2010.
Significant components of deferred tax liabilities and assets are as follows:
January 30, 1999 January 31, 1998
---------------- ----------------
Deferred tax liabilities:
Inventory valuation $ 1,603 $ 3,092
Depreciation and amortization 9,021 6,657
Accounts receivable valuation 1,168 2,052
Other 332 308
--------- ---------
12,124 12,109
Deferred tax assets:
Doubtful accounts (669) (539)
Net operating loss carryforwards (1,635) (1,835)
Other (397) (118)
--------- ---------
(2,701) (2,492)
--------- ---------
Net deferred tax liabilities $ 9,423 $ 9,617
========= =========
Peebles made cash income tax payments of $5,369, $2,506 and $2,100 for 1998,
1997 and 1996, respectively.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
PEEBLES INC. AND SUBSIDIARIES
NOTE I - VALUATION AND QUALIFYING ACCOUNTS
Activity related to valuation and qualifying accounts is as follows:
Allowance for Net LIFO/
Doubtful Market
Accounts Reserve
------------- ----------
Balance February 3, 1996 $ 960 $ 414
Charges to expense 1,192 39
Increase due to Acquisition of
Carlisle's 264 --
Deductions - net write-off of
uncollectible accounts (1,192) --
-------- --------
Balance February 1, 1997 1,224 453
Charges to expense 1,503 250
Deductions - net write-off of
uncollectible accounts (1,327) --
-------- --------
Balance January 31, 1998 1,400 703
Charges to expense 1,330 51
Increase due to Acquisition of
Watson's 300 608
Deductions - net write-off of
uncollectible accounts (1,330) --
-------- --------
Balance January 30, 1999 $ 1,700 $ 1,362
======== ========
NOTE J - QUARTERLY FINANCIAL DATA (UNAUDITED)
The Watson Merger was completed on June 29, 1998. As a result, the second,
third and fourth quarters of 1998 reflect the related incremental sales and
expenses.
(dollars in thousands)
<TABLE>
FISCAL QUARTER
-------------------------------------------------------------------------
First Second Third Fourth
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $51,013 $45,150 $57,698 $49,808 $65,601 $52,411 $90,903 $70,325
Cost of Sales 31,225 28,262 33,512 29,515 40,512 32,077 53,818 40,966
Gross Margin 19,788 16,888 24,186 20,293 25,089 20,334 37,085 29,359
Operating
Income 3,126 2,192 4,891 3,490 3,200 3,156 10,472 11,064
Net Income 563 49 1,456 721 206 389 3,832 4,891
Net Income
Per Share $ 563 $ 49 $ 1,456 $ 721 $ 206 $ 389 $ 3,832 $ 4,891
</TABLE>
F-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Peebles operates specialty department stores offering predominately fashion
merchandise for the entire family and other selected home accessories to small
and medium sized communities which do not typically have a mall-based department
store. At January 30, 1999, the Company operated 117 stores in 15 states,
located primarily in the Southeast and Mid-Atlantic regions. The consolidated
operations of the Company include the results of 95 stores operating either the
entire year or opened under the "Peebles" name, and 22 stores operating under
the "Watson's" name, acquired on June 29, 1998 in the Watson Merger.
Consolidated net sales and results of consolidated operations of the Company,
expressed as percentages of net sales, are presented below for the 1998, 1997
and 1996 fiscal years.
(dollars in thousands)
1998 1997 1996
--------- --------- ---------
Net sales $ 265,215 $ 217,694 $ 194,206
% increase 21.8% 12.1% 10.6%
**Comparable stores % increase
in sales: 0.9% 5.3% 0.0%
Total stores in operation
at period end 117 84 77
Operations as a Percentage of Net Sales:
Cost of sales 60.0% 60.1% 59.9%
Selling, general & administrative
expenses 28.8 27.7 28.0
Asset revaluation -- -- 10.7
Depreciation and amortization 3.0 3.1 3.8
------- ------- -------
Operating Income (Loss) 8.2 9.1 (2.4)
Interest expense 4.1 4.4 4.7
Other income -- .2 .4
Provision for income taxes 1.8 2.1 .9
------- ------- -------
Net Income (Loss) 2.3% 2.8% (7.7)%
======= ======= =======
** - The Company defines a comparable store as having operations for the
entire twelve-month period in both the current and previous fiscal year.
The 1998 increase in net sales was due primarily to stores opened/acquired
in 1998 and 1997, or non-comparable stores. During 1998, the Company opened
11 stores under the Peebles name and acquired 24 stores in the Watson Merger,
22 of which were still in operation and operating under the Watson's name at
the fiscal year end. The 11 new Peebles stores added $9,106, or 3.4%, to
total 1998 net sales and the Watson's stores added $31,836, or 12.0%. In
1997, the Company opened 8 new Peebles stores and closed 1 marginally
profitable store. These net new 1997 Peebles stores contributed $15,293 to
1998 net sales, an increase of $4,633 over the $10,660 contributed to 1997
net sales. The 1997 net sales increase over 1996 was also driven by
non-comparable stores, although comparable stores provided a greater share of
the increase in 1997 over 1996 than was achieved in comparing 1998 to 1997.
F-14
<PAGE>
Comparable store net sales, which showed increases in all four fiscal quarters
of 1997, continued to show strength in the first and second fiscal quarters of
1998 before declining in the third and fourth fiscal quarters. Comparable
store net sales increases as a percentage of the prior year comparable quarter
for 1997 and 1998 were as follows:
Fiscal Quarter
--------------------------------------------
First Second Third Fourth Total Year
1997 vs.
1996 5.1% 7.7% 6.9% 3.3% 5.3%
1998 vs.
1997 6.2% 2.9% (2.8%) (1.2%) 0.9%
In 1998, comparable store net sales continued to benefit from the generally
favorable condition of the economy and strong consumer demand for soft apparel.
Weather conditions influenced sales throughout 1998. Milder weather in the
first fiscal quarter of 1998 strengthened consumer demand for Spring
merchandise. Net sales and cost of sales were favorably affected. This
strong demand, however, reduced summer clearance merchandise, and although
gross margins continued to strengthen in the second fiscal quarter, net sales
increases slowed. Record heat in the Company's primary Mid-Atlantic and
Southeastern regions continued through the third fiscal quarter, which, coupled
with a less definitive Back-to-School selling season, dampened consumer demand
and resulted in the net sales decline in comparable stores. In the fourth
fiscal quarter, comparable store sales steadied to approximately match levels
in 1997, until a severe ice storm on December 23rd and 24th adversely
impacted the important late-Christmas sales demand.
The Company's cost of sales as a percentage of net sales were 60.0%, 60.1% and
59.9% in 1998, 1997 and 1996, respectively. The shifts in consumer demand
described above and the Company's substantial new store growth since 1995 had
the greatest impact on cost of sales. New and acquired stores typically run
a higher cost of sales percentage relative to mature stores, especially those
in markets new to the Company, due to a stronger promotional effort and lack
of comparable sales history. Since February 3, 1996, the end of fiscal 1995,
the Company has increased the number of stores in operation from 65 to 117,
an 80% increase. In the current year, the Company opened or acquired 35 stores
and closed 2 stores acquired in the Watson Merger. Cost of sales in 1998 at
non-comparable stores was approximately 63.0% of net sales, while at comparable
stores the cost of sales percentage was approximately 59.2%. New and acquired
stores generally attain the Company's mature store average cost of sales after
24 to 36 months of operation. Diligent inventory controls and the Company's
commitment to its less promotional, value priced merchandise strategy have
favorably influenced cost of sales during periods of inconsistent consumer
demand and significant store growth.
Selling, general and administrative ("SG&A") expenses, exclusive of depreciation
and amortization, were 28.8%, 27.7% and 28.0% of net sales in 1998, 1997 and
1996, respectively. New and acquired stores typically have a higher expense
structure than mature stores for the first 12 to 18 months after opening as
advertising and payroll expenses are planned at a higher percentage of sales
to achieve a market presence. In addition, new stores frequently have higher
occupancy costs than mature stores. Net stores opened or acquired in 1998,
1997 and 1996 were 33, 8 and 14, respectively. The Company began operating a
second distribution center, located in Knoxville, Tennessee, upon completion
of the Watson Merger. The increased processing capacity will be leveraged
through economies of scale in future periods, but its impact on SG&A was
adverse as a percentage of incremental sales serviced through the facility
in 1998. These increases in SG&A were partially offset by economies of scale.
Management periodically reviews the carrying value of long-lived assets to
determine if impairment has occurred. In 1996, management determined that
the aggregate estimated undiscounted cash flows to be generated by certain
store assets would be less than the carrying values of those assets, related
intangibles and allocated Goodwill. As a result, fair value was calculated
using a multiple of undiscounted projected cash flows and the Company increased
operating expenses in 1996 by $20,782, or 10.7% of net sales. No impairment
adjustments were considered necessary in 1998 or 1997.
Depreciation and amortization expenses declined as a percentage of net sales
in 1998 and 1997 as increases in annual capital expenditures, coupled with
the 1998 increases in the amortization of Goodwill and deferred financing costs
associated with the Watson Merger, were not proportionate to increases in sales.
F-15
<PAGE>
As a result of the factors discussed above, operating income in 1998 decreased
to 8.2% of net sales from 9.1% in 1997. Adjusting 1996 for the impact of the
asset revaluation, operating income would have totaled 8.1% of net sales.
Interest expense as a percentage of net sales was 4.1%, 4.4% and 4.7% for 1998,
1997 and 1996, respectively. Long-term debt increased in 1998, primarily as a
result of the Watson Merger, which added $24,000 to Senior Term Notes A and B
at June 29, 1998. Borrowings on the Revolver and the Swingline Facility were
slightly higher during 1998 and at January 30, 1999 than in 1997 and at January
31, 1998, primarily as a result of funding inventory and fixturing requirements
of the new and acquired stores. Increases in these borrowings, however, were
offset by a lower effective borrowing rate in 1998 as compared to 1997.
Further, the resulting increase in interest expense was not proportionate to
the increase in sales. In 1997, the Company had reduced outstanding borrowings
from 1996 as fewer new store locations were opened in 1997 compared to 1996,
and the funds required to consummate the acquisition of Carlisle's in May 1996
had increased borrowings during that fiscal year.
Total current and deferred income taxes as a percentage of net sales were 1.8%,
2.1% and .9% in 1998, 1997 and 1996, respectively. The effective tax rate for
1998 and 1997 was 44.4% and 43.6%, respectively. In 1996 the asset revaluation
impacted intangible assets, the amortization of which is not tax deductible in
total, resulting in income tax expense, even though the Company experienced a
net pre-tax loss. The effective tax rate in all three fiscal years is higher
than statutory rates because of non-deductible amortization of intangible
assets.
As a result of the above factors, the Company had net income as a percentage
of net sales of 2.3% and 2.8% in 1998 and 1997 respectively, and a net loss
as a percentage of net sales of 7.7% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for capital expenditures in
connection with the new store expansion and remodeling program and for
working capital needs. The Company's primary sources of funds are cash flow
from continuing operations, borrowings under the 1998 Credit Agreement and
trade accounts payable. The Company's inventory levels typically build
throughout the fall, peaking during the Christmas selling season, while
accounts receivable peak during December and decrease during the first
quarter. Capital expenditures typically occur evenly throughout the first
three quarters of each year.
The Company's operating activities provided net cash of $13,823, $15,088 and
$6,122 in 1998, 1997 and 1996, respectively, as cash provided by profitable
operations exceeded the funding required to increase working capital.
Working capital increased to $75,794 at January 30, 1999, up from $63,459 at
January 31, 1998 and $58,213 at February 1, 1997. The return on the net assets
of continuing operations was 19.0%, 20.8% and 18.9% in 1998, 1997 and 1996,
respectively. Return on the continuing operation's net assets represents
operating income as a percentage of the average investment in operating assets,
calculated as: i) current assets, plus ii) net property and equipment, less
iii) current liabilities and capital leases. In the 1996 percentage, the
effects of the asset revaluation have been added back to operating income.
Net cash used in investing activities was $18,049, $11,105 and $20,551 in
1998, 1997 and 1996, respectively. Investing activities included capital
expenditures, primarily for fixturing and point of sale equipment in new and
acquired store locations, of $13,394, $10,226 and $8,783 in 1998, 1997 and
1996, respectively. In 1998, capital expenditures included $8,800 at the 33
new and acquired stores and $4,300 at existing stores, $2,000 of which was
used in the major remodeling/space allocation of seven stores. In 1997 and
1996, capital expenditures at new and acquired stores totaled $3,600 and
$2,100, respectively. In 1997, three existing stores were relocated, requiring
an additional $3,100 in capital expenditures. The acquisitions of Watson's and
Carlisle's, in 1998 and 1996, respectively, used cash of $4,451 and $11,549,
respectively.
F-16
<PAGE>
Financing activities provided cash of $3,858 in 1998. The Company amended
and restated its Credit Agreement, at a cost of $1,613, in June 1998 to
facilitate the Watson Merger. As a result, borrowings under Senior Term
Notes A and B were increased by $24,000, retiring $17,895 of Watson's
pre-acquisition debt and trade liabilities, and funding the $4,451 cash
purchase price. The cash purchase price included $1,848 for the entire
equity interest, $1,352 to a third party for the proprietary charge card
receivables, and $1,251 in acquisition fees. Exclusive of the funding
related to the Watson Merger, the Company reduced outstanding borrowings
by $634 in 1998 and $3,779 in 1997. In 1996, the Company drew $10,213 from the
Revolver to facilitate the acquisition of Carlisle's and an additional $4,251
to fund new store growth.
In 1999, the Company's capital expenditures are expected to total approximately
$11,900, which reflect the planned opening of 6 new store locations at
approximately $3,000, the relocation/major remodeling/space re-allocation of
seven stores at $3,500 and the introduction of radio frequency scanners at all
store locations for approximately $750. Remaining capital expenditure dollars
are allocated to fixturing at existing stores, including the Watson's stores
where the name will be changed to Peebles in Spring 1999. As of March 1999,
the Company had signed leases for five new store locations, three of which
will open in Spring 1999. The Company expects to continue to lease its stores,
and the typical new store is anticipated to average approximately 22,500
square feet but may vary depending on the market and real estate availability.
Based on historical experience, the Company estimates that the cost of opening
a new store will include capital expenditures of approximately $425,000 for
leasehold improvements and fixtures and approximately $425,000 for initial
inventory, approximately one-third of which is financed through vendor credit.
Accounts receivable for new stores typically build to 15% of net sales or
approximately $300,000 within 24 months of the store opening. The Company may
also incur capital expenditures to acquire existing stores.
The Company finances its operations, capital expenditures, and debt service
payments in part with funds available under its Revolver. The maximum amount
available under the Revolver is $75 million less amounts outstanding under
letters of credit. The actual amount available is determined by an asset-based
formula. The Company believes the cash flow generated from operating activities
together with funds available under the Revolver will be sufficient to fund its
investing activities and the debt service of the 1998 Credit Agreement.
SEASONALITY AND INFLATION
As a retailer offering predominately soft-apparel and selected home accessories,
the Company's business is seasonal, although less heavily weighted in the fourth
quarter than retailers with comparable offerings of merchandise. Over the past
three fiscal years, quarterly sales as a percentage of total sales have been
consistent at approximately 20%, 22%, 24% and 34% for the first through fourth
quarters, respectively. Peebles' positioning of its stores in small to medium
sized communities with limited competition, along with the Company's less
promotional, every day fair value, pricing strategy, produces operations less
dependent on the fourth quarter. However, the third and fourth quarters are
generally bolstered by the back-to-school and Christmas holiday selling seasons.
The Company does not believe that inflation has had a material effect on its
results of operations during the past three fiscal years. Peebles uses the
retail inventory method applied on a LIFO basis in accounting for its
inventories. Under this method, the cost of products sold reported in the
financial statements approximates current costs and thus reduces the likelihood
of a material impact that increases costs. However, there can be no assurance
that the Company's business will not be impacted by inflation in the future.
MARKET RISK
The Company's interest expense is affected by changes in short-term interest
on the debt outstanding under the 1998 Credit Agreement. The 1998 Credit
Agreement bears interest at rates based on both the LIBOR and prime lending
rates (the "Borrowing Rates"). Assuming: i) the Borrowing Rates vary by 100
basis points from their current levels in any given fiscal month, and ii) the
Company maintains an aggregate outstanding debt balance subject to these rates
of $110,000 during the fiscal month of variance, interest expense would vary by
approximately $92 for that fiscal month.
F-17
<PAGE>
YEAR 2000 TECHNOLOGICAL ISSUES
In 1997, the Company began a comprehensive analysis of its information
systems to determine the impact of date-related processing when the year
changes to 2000 and the systems do not recognize this year as greater than
1999. This analysis was completed in the second Fiscal Quarter of 1998.
Management expects the Company's information systems to be prepared to
accurately process information after the year changes to 2000 by June 1999.
The Company's primary information systems are on two IBM AS400 mainframes,
with the majority of the software developed internally. In 1985, Peebles
implemented standards for in-house programmers to follow which considered
the year 2000 issue. As a result, many of the Company's in-house information
systems, with programs written or modified after 1985, are already year 2000
compliant. Currently, four programmers are performing a detailed review of
all in-house programming code, which for discussion purposes, is segregated
into three primary operating systems: a) point of sale ("POS") transactions;
b) cash management; and c) merchandise inventory purchasing and management.
although this segregation is not all-inclusive, it provides an understanding
of the systems vital to conduct business as a soft apparel retailer.
Point of Sale Transactions: The Company transacts sales with customers using
IBM 4690 registers. Register systems are controlled within each store location
by an IBM PC controller which facilitates communication to the corporate office
mainframe system, an IBM AS400. IBM has certified that the 4690 registers are
year 2000 compliant. The Company has replaced all in-store IBM PC Controllers
within the past 18 months as a component of its ongoing communications
enhancements program, exclusive of any year 2000 remediation strategy, and
therefore in the Company's normal capital expenditures budget. These recently
purchased in-store PC controllers have been certified as year 2000 compliant
by IBM. The Company offers credit through its proprietary charge card and
through the use of major bankcards (Mastercard, Visa and Discover). With
regard to its proprietary charge card, AS400 based systems controlling the
authorization of both new accounts and individual transactions on existing
accounts have been reviewed and all necessary programming chnages related to the
year 2000 have been completed. The Company uses industry leader First Data
Corp. to authorize and clear bankcard transactions. The Company is in the
process of obtaining year 2000 compliance assurance from First Data Corp.
Accordingly, management expects to be able to transact sales with customers
without significant interruption related the date change to the year 2000
situation.
Cash Management - Sources: The Company's material sources of cash are
a) in-store cash transactions; b) payments on outstanding proprietary charge
card balances; and c) reimbursement for bankcard sales transactions. The
Company's AS400 based cash management system related to receipts has been
reviewed and all necessary programming changes related to the year 2000
have been completed. The Company manages proprietary charge accounts and
produces monthly customer statements using an AS400 based system. The review
of this system is complete and programming changes related to the year 2000
are approximately 80% complete, with an April 1999 target completion date. The
Company's material corporate cash accounts are with Fleet bank. The Company
is in the process of obtaining year 2000 compliance assurance from Fleet Bank
that individual store accounts can be drafted and reimbursements from First Data
Corp. can be received. Management does not anticipate significant interruption
to cash inflows as a result of the year 2000 situation.
Cash Management - Disbursements: The Company's major cash disbursements are
for merchandise purchases, SG&A expenses and payroll. The review for year
2000 compliance and all related programming changes have been completed.
However, actual parallel testing will not take place until April 1999. At
this point, the risk exists that: i) due dates are not calculated correctly
and ii) associate time and attendance systems may generate incorrect
information. The most reasonable worst case scenario would require the Company
to generate merchandise and expense disbursements daily and require hourly
associates to work with regimented schedules mirroring those of salaried
associates. Additional costs associated with this most reasonable worst
case scenario would not be material to the financial position or results of
operations of the Company.
F-18
<PAGE>
Merchandise Purchasing and Management: The Company purchases merchandise
inventory from over 1,200 vendors, with no individual vendor representing
more than 10% of total purchases. Purchase orders are produced, merchandise
is received, and inventory is tracked using an AS400 based purchasing
management system. The review of this in-house system is complete, and
approximately 70% of the programming required to ensure year 2000 compliance
has been completed. The system is expected to be substantially compliant,
including testing, by May 1999. The Company has begun communications with its
top vendors to determine year 2000 compliance. Risks include an interrruption
in a portion of the merchandise flow in the first fiscal quarter of 2000.
January and February purchases are traditionally lowest volume months of the
year, and represent predominately Spring and early Summer fashions. Any
interruption to the merchandise flow can impact the Company's profitability, but
management believes an interruption to a portion of the merchandise flow
in January and/or February would not result in material, adverse consequences.
The costs associated with the evaluation and modification of its information
systems are being expensed as incurred and are not material to the financial
position or results of operations of the Company. To date, the Company has
not completed a comprehensive contingency plan to address year 2000
non-compliance. Contingency planning is being performed in conjunction with
the year 2000 compliance analysis by major information system.
FORWARD-LOOKING STATEMENTS
Certain statements in this annual report are forward-looking, based on the
Company's evaluation of historical information and judgments on future events,
based on the best information available at the time. Underlying these
statements are risks and uncertainties which could cause actual results to
differ materially from those forward-looking statements. These risks and
uncertainties include, but are not limited to: i) consumer demand for the
Company's soft-apparel merchandise; ii) competitive and consumer demographic
shifts within the Company's markets; iii) the Company's access to, and cost
of, capital; iv) the Company's ability to locate and open new store locations
on a timely and profitable basis; v) the Company's ability to integrate
acquired stores into Peebles' overall operations on a timely basis; vi) the
successful management of inventory levels, related costs and selling, general
and administrative costs; and vii) the timely resolution of year 2000
compliance issues by the Company and its vendors.
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 64
<SECURITIES> 0
<RECEIVABLES> 35195
<ALLOWANCES> 1700
<INVENTORY> 71362
<CURRENT-ASSETS> 108339
<PP&E> 81915
<DEPRECIATION> 29966
<TOTAL-ASSETS> 208286
<CURRENT-LIABILITIES> 32545
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 61529
<TOTAL-LIABILITY-AND-EQUITY> 208286
<SALES> 265215
<TOTAL-REVENUES> 265215
<CGS> 159067
<TOTAL-COSTS> 159067
<OTHER-EXPENSES> 84459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10804
<INCOME-PRETAX> 10894
<INCOME-TAX> 4837
<INCOME-CONTINUING> 6057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6057
<EPS-PRIMARY> 6057
<EPS-DILUTED> 6057
</TABLE>
