ITEM 1. BUSINESS.
GENERAL
Peebles Inc. and its subsidiaries (together, "Peebles" or the "Company") operate 124 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 the 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. is a wholly owned subsidiary of PHC Retail Holding Company ("PHC Retail"). PHC Retail is a closely held company, which has no significant assets other than the shares of Peebles common stock it owns. The subsidiaries of Peebles Inc. are Carlisle Retailers, Inc. ("Carlisle's"), acquired in May 1996, and Ira A. Watson Co. ("Watson's"), acquired in June 1998. All store locations operate under the Peebles name.
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 1996, 1997, 1998, 1999 and 2000 relate to the Company's fiscal years ended February 1, 1997, January 31, 1998, January 30, 1999, January 29, 2000 and February 3, 2001, respectively. Fiscal years 1996, 1997, 1998 and 1999 each include 52 weeks. Fiscal year 2000 consisted of fifty- three weeks.
OPERATING STRATEGY
The following are key elements of Peebles' operating strategy:
FOCUS ON SMALL MARKETS, DELIVER VALUE. Peebles locates its stores in smaller communities that typically do not have a fashion retailer. A Peebles market is generally between 10,000 and 25,000 households, but the Company is able to successfully operate in communities with as few as 5,000 households. Peebles provides the community with a shopping experience similar to that found in a larger, mall-based department store, but with a value emphasis. Lower initial markons and less promotional pricing result in a higher level of credibility with customers. Peebles' commitment to providing value to its customers is integral to developing repeat customers, a critical ingredient for success in smaller markets.
OPERATE SMALLER, FLEXIBLE STORES. Peebles operates stores that are significantly smaller than the traditional full-line department store. Peebles' stores range in size from 11,000 to 72,000 square feet and average 29,400 gross square feet, 23,800 of which, on average, is devoted to selling. The Company operates profitably by varying the store size and layout to meet the needs of the individual market. A Peebles store remains as dynamic as the market, with space re-allocations performed regularly to meet changing customer demand.
TAILOR FASHION TO LOCAL TASTES. The merchandise mix is tailored to individual stores to cater to local tastes and preferences. 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 complements to the apparel assortment, as fewer hard-line merchandise categories are offered. Customer feedback and store level, detailed sales information allow corporate buyers and store associates to work together to optimize the use of Peebles' smaller, yet flexible selling spaces to best meet customer demand. The store layout and visual presentation, customized to the individual market, targeted advertising and promotional programs, complete the Peebles image as the market's fashion leader.
DEVOTION TO THE SALES FLOOR THROUGH A CENTRALIZED BACK OFFICE. Peebles believes successful operations are directly related to the time devoted to the sales floor. Store management and sales associates spend over 85% of their hours in a selling and customer service capacity. To make this possible, "back office" functions are centralized where efficient.
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
From 1996 to 2000, the Company has expanded from 77 stores to 124, by both developing new locations and acquiring existing stores. In addition, the Company has expanded sales capacity by relocating its stores within existing markets and by remodeling and reallocating selling space. The Company anticipates continued expansion as follows:
DEVELOPING NEW LOCATIONS. The Company plans to open Peebles stores in two new markets in 2001. The new locations are planned in existing states and in contiguous markets where distribution efficiencies can be realized 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 relying only on new shopping center development, and Peebles actively considers space vacated by other retailers.
ACQUIRING EXISTING STORES. The Company is continually evaluating acquisitions of individual stores, groups of stores or entire chains for opportunities to compliment or expand existing markets. The Company currently plans to open nine acquired store locations in the third fiscal quarter of 2001 and management believes the economic environment in 2001 will continue to present acquisition opportunities. Since 1996, the Company acquired 29 new store locations from other retailers.
REMODELING AND RELOCATING STORES. In 2001, the Company is planning for major remodeling/space reallocations at 10 existing store locations. The Company strives to ensure its customers experience an updated, pleasant and fashion-oriented shopping environment, planned specifically to meet the needs of the specific market.
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 a leading grocery, discount and drug retailers will create a destination shopping location. Of the 124 stores currently in operation, 91 are located in strip shopping centers, 23 in enclosed malls and 10 in downtown locations.
MERCHANDISING
The Company's merchandise, approximately 85% 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 2000, a majority of the merchandise sold by the Company was nationally branded merchandise. Key brands featured by the Company include:
Ladies Alfred Dunner, Koret, Etienne Aigner, Liz Claiborne, Kellwood, Halmode Apparel, Lady Dorby, Woolrich, Playtex, Vanity Fair, Levi, Item Eyes;
Men's Ralph Lauren, Haggar, Arrow, Levi, Van Heusen, Foria International, Nike, Izod, Swank;
Young Men's and Juniors Levi, Tommy Hilfiger Jeans, Currants Jeri-Jo, Union Bay, Global Gold, Calvin Klein, L.E.I/R.S.V. Sport, Byer of California, Nautica Jeans, Jones Apparel;
Children's Tommy Hilfiger, H.H. Cutler, Levi, Kids Headquarters, Gerson & Gerson, Baby Togs, Samara Brothers, Fishman & Tobin, American Character, William Carter;
Shoes Nike, Reebok, Sketchers, Nine West, Easy Spirit, Keds/Stride Rite, Brown Shoe, Aerosoles, Wolverine, Maxwell Shoe, Adidas;
Home International Silver, Seymour Mann, PEM-America, White Collection, Mikasa, Springs, Westpoint- Stevens, New Creative Enterprises, Pacific Rim, Baum Bothers;
Cosmetics Estee Lauder, Elizabeth Arden, Clinique, Liz Claiborne, Calvin Klein, Belae Brands, Designer Fragrance, Markwins International, Aramis, Lancaster Group;
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, 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 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 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 emphasizes direct mail and newsprint over 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.
The Company's net advertising expenses in 1998, 1999 and 2000 were 2.4%, 2.7% and 2.2% 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. Net advertising expenses were higher in 1998 and 1999 due to the significant number of new store locations added in 1998.
PURCHASING AND DISTRIBUTION
The Company employs 30 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 had been a member of an international cooperative buying service (the "Co-Operative"), which the Company used primarily as a resource for its imported private label merchandise. In 1998 and 1999, the Co- Operative was the Company's largest supplier, representing approximately 9% and 7%, respectively, of total purchases. In 2000, the Co-Operative ceased operation in the third fiscal quarter, and as a result, represented approximately 3% of total purchases. The Company has obtained resources to supply its private label programs. The disruption to the flow of merchandise as a result of the Co-Operative no longer being available as a resource was not material to the overall purchasing process or the Company's merchandise mix.
Virtually all merchandise is shipped directly from vendors to the Company's distribution centers. In partnership with its vendors, the Company actively pursues efficiencies by having merchandise shipped floor ready and packed by store. Otherwise, merchandise is shipped in bulk to the distribution centers where it is inspected, sorted, marked, ticketed and packed by store. The Company does not warehouse merchandise and has a three-day processing goal through the distribution centers. All merchandise is shipped floor ready 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 centralization.
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 merchandise ticketing. All stores use at least 85% of their total payroll hours in a selling capacity.
Peebles encourages active participation of all store level management and sales associates in decisions affecting store operations and merchandise mix. 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 eleven 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
As a service to its customers, the Company offers credit through the use of its own Peebles Charge card. The Peebles Charge card customer usually resides in the local community immediately surrounding the individual store location and the Company does not require collateral. Peebles administers all aspects of its credit card program in-house. The Company believes Peebles Charge card customers are its most active and loyal customers, and these customers represent an important part of its advertising and marketing programs.
The extension of credit is governed by risk models and matrices, which are developed and reviewed by corporate credit executives. A satellite communication network links the store locations to the corporate office, automating the extension of credit and the authorization of individual purchases. Credit applications entered at a store location are scored within minutes and the actual credit limit is assigned and available for purchases. Individual charge transactions are authorized through this communications network, checked against established open-to-buy limits for each Peebles Charge account. In addition, frequently asked questions from Peebles Charge customers can be answered by store sales associates at any register. These questions include total balance due, available credit, account number look-up, minimum payment amount due and the next payment date. Also supporting questions or concerns from Peebles Charge card customers is an in-house customer service department, which can be accessed directly by phone, through an automated voice response system and through the internet.
The Company produces all monthly billing statements, processes all payments and performs all collection activities at the corporate office. 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.
In 1998, 1999 and 2000, 28.5%, 27.6% and 27.6%, respectively, of net sales were made using the Company's proprietary credit card. As of February 3, 2001, the Company had approximately 730,000 credit card accounts, of which 190,000 were billed that month. The Company collects income in the form of finance charges and late fees, and bears the risk related to uncollectible accounts. In 1998, 1999 and 2000, income from finance charges and late fees totaled $5.5 million, $5.8 million and $6.9 million, respectively. Uncollectible accounts considered bad debts totaled $1.3 million, $1.6 million and $2.7 million, respectively, in 1998, 1999 and 2000.
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.
EMPLOYEES
At February 3, 2001, the Company had 1,489 full-time employees and 2,017 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 ClassicT, Private ExpressionsT, Meherrin River OutfittersT and Sonoma BayT.
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.
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 11,000 square feet to 72,000 square feet, and average 29,400 square feet. In net selling square footage by state at February 3, 2001, the Company's stores were as follows:
State Stores Net SQ Ft State Stores Net SQ Ft ----- ------ --------- ----- ------ --------- Virginia 36 798,252 Pennsylvania 6 134,933 Tennessee 14 369,393 New York 5 122,221 North Ohio 4 75,971 Carolina 14 270,223 Delaware 3 80,611 Kentucky 11 297,083 New Jersey 2 52,807 Maryland 8 250,838 Indiana 2 49,614 South	 Missouri 1 24,625 Carolina 6 149,557 West Virginia 6 130,580 Alabama 6 107,039 Totals 124 2,913,747
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 1998, 1999 and 2000, the Company's aggregate rental payments on operating leases were approximately $12.5 million, $15.3 million and $15.4 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
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. 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's Credit Agreement limits, absent the consent of the lender, the payment of dividends, to the repurchase of PHC Retail common stock. The Company did not pay any dividends in 1998,1999 or 2000.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data for Peebles for the five fiscal years ended February 3, 2001 are derived from the Company's audited consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included on Page of this annual report on Form 10-K.
(Dollars in thousands except shares and per share amounts and selected other data)
ITEM 7.
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 of this annual report on Form 10-K.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information with respect to this Item is included under the caption "Market Risk" on Page of this annual report on Form 10-K.
ITEM 8.
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 of this annual report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and Directors, their ages, positions and years with the Company as of April 2, 2001, are as follows: YEARS WITH THE NAME AGE POSITION COMPANY ---- --- -------- -------- Michael F. Moorman 58 Chairman of the Board, 36 President and Chief Executive Officer
Ronnie W. Palmore 51 Senior Vice President, 28 Merchandising and Assistant Secretary
E. Randolph Lail 45 Senior Vice President, 13 Finance, Chief Financial Officer, Secretary and Treasurer
Russell A. Lundy II 38 Senior Vice President, Stores 16
Marvin H. Thomas,Jr. 45 Senior Vice President, 19 Operations
William C. DeRusha 51 Director 9
Malcolm S. McDonald 62 Director 9
Wellford L.Sanders, Jr. 55 Director 8
Thomas R. Wall, IV 42 Director 6
Frank T. Nickell 53 Director 6
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. Concurrently, 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 including store manager and buyer. 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 including store manager.
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 Certified Public Accountant and has been employed by the Company since January 1988.
Russell A. Lundy II has been Senior Vice President, Stores of PHC Retail and the Company since June 1999. Mr. Lundy served as Vice President, Human Resources of PHC Retail since June 9, 1995 and of the Company since June 1990. Mr. Lundy has been employed by the Company in variance positions since 1983 including store manager.
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 including store manager and buyer.
William C. DeRusha has been a Director of PHC Retail since June 9, 1995 and of the Company since March 1992. Mr. DeRusha is the former Chairman of the Board and Chief Executive Officer 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. Mr. McDonald is the former Chairman of the Board and Chief Executive Officer of Signet Banking 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 First Union Securities, Inc. Mr. Sanders is a former partner in the law firm of McGuireWoods, LLP.
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., Citation Corporation, Consolidated Vision Group, Inc., iXL Enterprises, Inc., Key Components, 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 Blackrock, Inc., Earle M. Jorgensen Company and The Bear 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.
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") and during 1998, 1999 and 2000.
OPTION GRANT TABLE. There were no options granted by the Company to the Named Executives during 2000.
OPTION EXERCISE TABLE. The following table sets forth information concerning the exercise of stock options during 2000 by each of the Named Executives and the year end value of unexercised options.
OPTIONS EXERCISED IN 2000 ------------------------- VALUE OF NUMBER OF UNEXERCISED IN SHARES UNEXERCISED MONEY OPTIONS ACQUIRED OPTIONS AT YEAR AT YEAR END NAME AND PRINCIPAL ON VALUE END EXECISABLE/ EXERCISABLE/ POSITION EXERCISE REALIZED UNEXERCISABLE(2) UNEXERCISABLE - ------------------ -------- -------- ---------------- -------------
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
E. RANDOLPH LAIL 0 $0 0 $0 Senior Vice President, Finance, Chief Financial Officer, Secretary and Treasurer
RUSSELL A. LUNDY, II 0 $0 0 $0 Senior Vice President, Stores
MARVIN H. THOMAS, JR. 0 $0 0 $0 Senior Vice President, Operations
---------------------
(1) There were no stock options exercised by the Named Executives in 2000. (2) There were no unexercised options at year end.
As of the fiscal year ended February 3, 2001, 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. ("Plan I"). Effective for the 2000 Plan I 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.
Years of Service Final ------------------------------------------ Average Salary 15 20 25 30 35 -------------- -- -- -- -- -- $ 75,000........ $11,115 $14,820 $18,525 $22,230 $22,230 100,000........ 15,990 21,320 26,650 31,980 31,980 125,000........ 20,865 27,820 34,775 41,730 41,730 150,000........ 25,740 34,320 42,900 51,480 51,480 175,000........ 30,615 40,820 51,025 61,230 61,230 200,000........ 35,490 47,320 59,150 70,980 70,980 225,000........ 40,365 53,820 67,275 80,730 80,730 250,000........ 45,240 60,320 75,400 90,480 90,480 300,000........ 54,990 73,320 91,650 109,980 109,980 350,000........ 64,740 86,320 107,900 129,480 129,480 400,000........ 74,490 99,320 124,150 148,980 148,980 450,000........ 84,240 112,320 140,400 168,480 168,480
Benefits under Plan I 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 Plan I 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.
Prior to 1998, Plan I covered substantially all employees. In 1997, the Board of Directors approved the adoption of The Employees Retirement Plan II of Peebles Inc. ("Plan II") effective February 1, 1998. The Plan I benefits of certain participants were frozen and spun-off to Plan II and no further benefits would accrue under Plan II. Further, Plan I and Plan II were closed to new participants at February 1, 1998. Plan II was terminated and all Plan II participant benefits were disbursed by January 30, 1999.
Mr. Moorman, Mr. Palmore, Mr. Lail, Mr. Lundy II and Mr. Thomas have no accrued benefits under Plan I.
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 and Mr. Palmore. 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 transferred to 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 2000, 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 2000.
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 2000 and affiliates of which own substantially all the common stock of PHC Retail. 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, Mr. Lundy 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.
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 2, 2001, 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.
(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, Goldberg, Wahrhaftig, Bynum and Berney 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, Goldberg, Wahrhaftig, Bynum and Berney share investment and voting power with respect to securities owned by other Kelso affiliates. Messrs. Schuchert, Nickell, Matelich, Wall, Goldberg, Wahrhaftig, Bynum and Berney 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 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 17,500, 5,500, 4,500, 1,500, and 2,874 for Messrs. Moorman, Palmore, Lail, Thomas and Lundy II, respectively.
ITEM 13.
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.
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 indices on page of this annual report on Form 10-K.
2. Financial statement schedules. ----------------------------- Schedule II Valuation and Qualifying Accounts appears in Note J on page 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. 10.11*+ Form of Indemnification, Guarantee and Contribution Agreement dated as of August 23, 1995 among 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 J on page 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.
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 6, 2001 ----------------------- Michael F. Moorman, President and Chief Executive Officer (Principal Executive Officer)
By /s/ E. Randolph Lail Date: April 6, 2001 --------------------- 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 6, 2001 ---------------------------- Wellford L. Sanders, Jr., Director
By /s/ William C. DeRusha Date: April 6, 2001 ---------------------- William C. DeRusha, Director
By /s/ Malcolm S. McDonald Date: April 6, 2001 ----------------------- Malcolm S. McDonald, Director
By /s/ Frank T. Nickell Date: April 6, 2001 -------------------- Frank T. Nickell, Director
By /s/ Thomas R. Wall Date: April 6, 2001 ------------------ 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.
Exhibit 21 Subsidiaries of Registrant
Name of Subsidiary Jurisdiction in which organized - ------------------------ ------------------------------- Carlisle Retailers, Inc. Ohio Ira A. Watson, Co. Delaware
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PEEBLES INC. AND SUBSIDIARIES
FEBRUARY 3, 2001
Report of Independent Auditors.......................
Consolidated Balance Sheets..........................
Consolidated Statements of Income....................
Consolidated Statements of Cash Flows................
Notes to Consolidated Financial Statements...........
Management's Discussion and Analysis of Financial Condition and Results of Operations..... ............
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 February 3, 2001 and January 29, 2000, and the related consolidated statements of income and cash flows for each of the three fiscal years in the period ended February 3, 2001. 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 auditing standards generally accepted in the United States. 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 February 3, 2001 and January 29, 2000, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP -----------------
Richmond, Virginia March 9, 2001
CONSOLIDATED BALANCE SHEETS PEEBLES INC. AND SUBSIDIARIES (in thousands, except shares and per share amounts)
FEBRUARY 3, JANUARY 29, 2001 2000 ---- ---- ASSETS CURRENT ASSETS Cash $ 1,686 $ 1,008
Accounts receivable, net 37,340 37,949 Merchandise inventories 70,580 70,181 Prepaid expenses 1,746 1,552 Income taxes receivable -- 1,201 Other 147 2,670 ------- ------- TOTAL CURRENT ASSETS 111,499 114,561
PROPERTY AND EQUIPMENT Fixtures and equipment 78,245 73,250 Land and building 14,453 14,593 Leasehold improvements 1,669 1,727 ------- ------- 94,367 89,570 Accumulated depreciation and amortization 44,235 36,507 ------- ------- 50,132 53,063
OTHER ASSETS Excess of cost over net assets acquired, net 37,140 39,100 Deferred financing costs, net 1,018 1,895 Sundry 3,060 2,441 ------- ------- 41,218 43,436 ------- ------- $202,849 $211,060 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 15,162 $13,638 Accrued compensation and other expenses 7,226 7,268 Deferred income taxes 1,711 2,139 Current maturities of long-term debt 13,471 9,439 Other 3,913 3,582 ------- ------- TOTAL CURRENT LIABILITIES 41,483 36,066 LONG-TERM DEBT 72,334 96,938 LONG-TERM CAPITAL LEASE OBLIGATIONS 499 614 DEFERRED INCOME TAXES 9,863 8,883 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: accumulated from May 27,1995 19,362 9,251 ------- ------- 78,670 68,559 ------- ------- $202,849 $211,060 ======= ======= See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME PEEBLES INC. AND SUBSIDIARIES (in thousands, except shares and per share amounts)
FISCAL YEARS ENDED ------------------ FEBRUARY JANUARY JANUARY 3, 29, 30, 2001 2000 1999 ---- ---- ---- NET SALES $306,608 $300,839 $265,215
COSTS AND EXPENSES Cost of sales 181,681 178,657 159,067 Selling, general and Administrative expenses 85,615 86,139 76,402 Depreciation and amortization 10,534 9,926 8,057 Asset impairment -- 2,182 -- ------- ------- ------- OPERATING INCOME 28,777 23,935 21,689
OTHER INCOME 94 -- 9
INTEREST EXPENSE 11,133 11,521 10,804 ------- ------- -------
INCOME BEFORE INCOME TAXES 17,738 12,414 10,894
INCOME TAXES (BENEFIT) Current 7,075 3,786 5,031 Deferred 552 1,599 (194) ------- ------- ------- 7,627 5,385 4,837
NET INCOME $ 10,111 $ 7,029 $ 6,057 ======= ======= =======
RETAINED EARNINGS (DEFICIT) BEGINNING OF PERIOD 9,251 2,222 (3,835) ------- ------- -------
RETAINED EARNINGS END OF PERIOD $ 19,362 $ 9,251 $ 2,222
NET INCOME PER SHARE $ 10,111 $ 7,029 $ 6,050 ======= ======= =======
Weighted average common stock outstanding 1,000 1,000 1,000 ======= ======= =======
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS PEEBLES INC. AND SUBSIDIARIES (in thousands) FISCAL YEARS ENDED ----------------------------- FEBRUARY JANUARY JANUARY 3, 29, 30, 2001 2000 1999 ---- ---- ---- OPERATING ACTIVITIES Net income $ 10,111 $ 7,029 $ 6,057 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,758 7,305 5,953 Amortization 3,747 4,015 3,415 Deferred income taxes 552 1,599 (194) Provision for doubtful accounts 3,320 1,663 1,330 LIFO/market reserve adjustment (769) (371) 51 Asset impairment -- 2,182 -- Changes in operating assets and liabilities net of effects from acquisition adjustments: Accounts receivable (2,711) (6,217) (1,759) Merchandise inventories 370 1,923 (3,498) Accounts payable 1,524 (4,721) 3,452 Other assets and liabilities 2,180 (546) (984) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 26,082 13,861 13,823 --- INVESTING ACTIVITIES Acquisition of Ira A. Watson Co. -- -- (4,451) Purchase of property and (4,797) (9,151) (13,394) equipment Other (35) (217) (204) ------- ------- -------
NET CASH USED IN INVESTING (4,832) (9,368) (18,049) ACTIVITIES
FINANCING ACTIVITIES Proceeds from revolving line of Credit and long-term debt 429,643 420,528 414,155 Reduction in revolving line of Credit and long-term debt (450,215) (424,077) (414,789) Proceeds from 1998 Credit Agreement- acquisition of Ira A. Watson Co. -- -- 24,000 Retirement of Ira A. Watson Co. pre-acquisition bank debt and trade liabilities -- -- (17,895) Financing fees - 1998 Credit Agreement -- -- (1,613) ------- ------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (20,572) (3,549) 3,858 ------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 678 944 (368)
Cash beginning of period 1,008 64 432 ------- ------- -------
CASH END OF PERIOD $ 1,686 $ 1,008 $ 64 ======= ======= =======
See notes to consolidated Financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PEEBLES INC. AND SUBSIDIARIES February 3, 2001
(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 February 3, 2001, the Company was operating 124 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 2000, 1999 and 1998 ended on February 3, 2001, January 29, 2000 and January 30, 1999, respectively. Results of operations consisted of fifty-three weeks in 2000, and fifty-two weeks in 1999 and 1998. References to years relate to fiscal years rather than calendar years. Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation.
USE OF ESTIMATIES: 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.
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.
CASH AND CASH EQUIVALENTS: Peebles considers all highly liquid investments maturing within three months of purchase to be cash equivalents. There were no cash equivalents at February 3, 2001 or January 29, 2000.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
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 $6,707, $8,015 and $6,462 for 2000, 1999 and 1998, respectively.
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.
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 2000, 1999 and 1998 was $1,960, $1,917 and $1,796, respectively. Accumulated amortization was $10,817 and $8,857 at February 3, 2001 and January 29, 2000, respectively.
DEFERRED FINANCING COSTS: Deferred financing costs are amortized by the interest method over a period consistent with the related financing. Amortization expense of $877, $1,394 and $1,294, is included in interest expense for 2000, 1999 and 1998, respectively. Accumulated amortization at February 3, 2001 and January 29, 2000 was $5,842 and $4,965, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying value of the Company's customer receivables, accounts payable and long-term debt approximate fair value.
ACCOUNTING PRONOUNCEMENTS: The Company is subject to the provisions of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB 101 did not have a material impact on the Company's consolidated financial statements. The Company will be subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities", as amended by SFAS No. 138, effective February 4, 2001. SFAS No. 133 and SFAS No. 138 are not expected to impact the Company's consolidated financial statements.
NOTE B-ACQUISITIONS OF WATSON'S
The Watson Merger: On June 29, 1998, Peebles Inc. acquired the Ira A. Watson Co. ("Watson's") for a cash purchase price of $4,451. The purchase method of accounting was used to allocate the purchase price. The excess of cost over net assets acquired, $6,102, is being amortized over a twenty-five year period beginning June 29, 1998.
NOTE C-ACCOUNTS RECEIVABLE
Accounts receivable are shown net of $2,400 and $1,800, representing the allowance for uncollectible accounts at February 3, 2001 and January 29, 2000, respectively. The provision for doubtful accounts was $3,320, $1,663 and $1,330, for 2000, 1999 and 1998, respectively. Finance charges on credit sales, included as a reduction of selling, general and administrative expenses, aggregated $6,106, $5,416 and $5,103 for 2000, 1999 and 1998, respectively.
As a service to its customers, the Company offers credit through the use of its own charge card and certain major credit cards. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
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: February 3, January 29, 2001 2000 ---- ----
Merchandise inventories at FIFO cost $ 63,366 $ 63,736 Fair Value Adjustment 7,436 7,436 LIFO/Market Reserve (222) (991) ------- -------
Merchandise inventories at lower of cost or market $ 70,580 $ 70,181 ======= =======
NOTE E-ASSET IMPAIRMENT
In 1999, the Company determined that an investment in a co- operative buying office, included in "Sundry" on the consolidated balance sheets in prior years, no longer had any economic fair value. The resulting impairment, representing the Company's entire investment in the buying office, reduced both 1999 operating income and income before income taxes by $2,182, and reduced current income taxes by $866.
NOTE F-LONG-TERM DEBT
Long-term debt consisted of the following:
February 3, January 29, 2001 2000 ---- ----
Senior Revolving Facility $ 26,145 $ 34,000 Senior Term Note A 5,988 9,750 Senior Term Note B 53,372 58,950 Swingline Facility -- 3,277 Other 300 400 ------- ------- 85,805 106,377 Less current maturities: Scheduled principal payments 3,700 3,700 Excess Cash Flow Prepayment Amount 9,771 5,739 ------- ------- Total current maturities 13,471 9,439 ------- -------
Long-term debt $ 72,334 $ 96,938 ======== ========
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 is secured by a first priority security interest in substantially all the personal and real property of Peebles. Restrictive covenants limit the payment of cash dividends in any fiscal year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE F-LONG-TERM DEBT-Continued
The Senior Term Facility includes two notes, Senior Term Note A and Senior Term Note B. 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 Note B currently bear interest at LIBOR plus 2.25% and LIBOR plus 2.75%, respectively. Scheduled principal payments are payable quarterly in arrears. Senior Term Note A and Senior Term Note B mature April 30, 2003 and 2004, respectively.
The total amount available under the Senior Revolving Facility (the "Revolver") and the Swingline Facility is determined by a defined asset based formula with maximum borrowings limited to $75,000, less outstanding amounts under letters of credit. At February 3, 2001, the total amount available to borrow was $68,414, of which $26,145 was in use. 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. The Revolver currently bears interest at LIBOR plus 2.25%.
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 currently bears interest at prime plus 1.00% and has no LIBOR conversion option.
The Credit Agreement requires that 75% of annual excess cash flow, as defined by the Credit Agreement, is used to reduce borrowings under the Senior Term Facility as an excess cash flow ("ECF") prepayment amount. The ECF prepayment amount for 2000, $9,771, is payable at the end of the first fiscal quarter of 2001 and therefore has been classified as a current maturity at February 3, 2001. The 1999 ECF prepayment amount, $5,739, was paid in 2000. The ECF prepayments are funded through the Revolver and reduce Senior Term Note A and Senior Term Note B ratably.
The Company had commitments under letters of credit of $1,719 and $5,021 at February 3, 2001 and January 29, 2000, respectively. The letters of credit, issued by a bank, are primarily to secure international shipments of merchandise.
The Company made cash interest payments of $10,266, $9,952, and $8,562 for 2000, 1999 and 1998, respectively.
Aggregate scheduled principal payments, exclusive of any ECF prepayments, on the long-term debt are as follows: 2001 -- $3,700; 2002 -- $2,702; 2003 -- $26,845; 2004 -- $42,787; thereafter -- $0.
NOTE G-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 2052. Total rental expense under operating leases was as follows: 2000 1999 1998 ---- ---- ----
Minimum $15,088 $14,924 $12,141 Contingent 273 392 363 ------- ------- ------- $15,361 $15,316 $12,504
Contingent rentals are based upon a percentage of annual sales in excess of specified amounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE G-LEASES-Continued
Future minimum lease payments under capital leases and noncancellable operating leases at February 1, 2001 were as follows:
Capital Operating Fiscal Year Leases Leases ----------- ------- ---------
2001 $ 180 $ 13,146 2002 180 12,005 2003 181 10,521 2004 181 9,183 2005 60 7,974 Thereafter 0 43,392 ------- ------- Total minimum lease payments 782 $ 96,221 Less: amounts representing interest (168) ------- Present value of net minimum Lease payments, including current maturities of $283, with interest rates ranging from 12.0% to 17.8% $ 614 =======
NOTE H-EMPLOYEE BENEFIT PLANS
The Company sponsors one defined benefit pension plan, The Employees Retirement Plan of Peebles Inc. (the "Plan"), and several Supplemental Benefits Programs. The Plan covers certain participants who in 1997 had reached certain age and years of service requirements. The Plan was closed to new participants at February 1, 1998. The Supplemental Benefits Programs provide certain key executives supplemental retirement income equal to 60% of final average compensation. The Company's funding policy for all plans is to make minimum annual contributions required by applicable regulations.
The following information relative to the above plans is disclosed in accordance with the requirements of SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". 2000 1999 ---- ---- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 6,336 $ 5,686 Service cost 204 157 Interest cost 484 379 Plan Amendments -- 91 Actuarial loss 1,066 583 Benefit payments (522) (560) ------- ------- Benefit obligation at end of year $ 7,568 $ 6,336 ====== =======
CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 5,083 $ 4,986 Actual return on plan assets 146 629 Employer contribution -- 28 Benefit payments (522) (560) ------- ------- Fair value of plan assets at end of year $ 4,707 $ 5,083 ====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE H-EMPLOYEE BENEFIT PLANS-Continued
2000 1999 ---- ---- FUNDED STATUS: Funded status $(2,861) $(1,254) Unrecognized actuarial loss 1,494 148 Unrecognized prior service cost 492 562 ------ ------ Accrued pension liability $ (875) $ (544) ====== =======
COMPONENTS OF NET PERIODIC PENSION COST: Service cost $ 204 $ 157 Interest cost 484 379 Expected return on plan assets (427) (422) Prior service cost recognized 70 70 Net periodic pension cost $ 331 $ 184 ======= =======
WEIGHTED AVERAGE ASSUMPTIONS AS OF MEASUREMENT DATE: Discount rate 7.50% 8.00% Expected return on plan assets 9.00% 9.00% Rate of compensation increase 5.00% 5.00%
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 $3,511, $1,499 and $0, respectively, as of February 3, 2001 and $2,432, $970 and $0, respectively, as of January 29, 2000.
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. The Company matches employee contributions up to 50% of an employee's first 6% of eligible compensation. The Company's matching contributions totaled $363, $325 and $260 in 2000, 1999 and 1998, respectively.
NOTE I - INCOME TAXES
The provisions for income taxes consisted of the following: 2000 1999 1998 ---- ---- ----
Current: Federal $ 5,926 $ 3,161 $ 4,201 State 1,149 625 830
Deferred: Federal 460 1,335 (162) State 92 264 (32) ------ ------ ------ $ 7,627 $ 5,385 $ 4,837 ====== ====== ======
Income taxes differ from the amounts computed by applying the applicable federal statutory rates due to the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE I - INCOME TAXES--Continued 2000 1999 1998 ---- ---- ----
Taxes at the federal Statutory rate $6,208 $4,345 $3,813 Increases (decreases): State income taxes, net of federal tax 806 581 526 Amortization of Goodwill 544 531 531 Other 69 (72) (33) ----- ----- -----
$7,627 $5,385 $4,837 ===== ===== =====
At February 3, 2001, the Company has net operating loss carryforwards of approximately $2,900 for income tax purposes, which expire in 2010.
Significant components of deferred tax liabilities and assets are as follows:
February 3, January 29, 2001 2000 ---- ----
Deferred tax liabilities: Inventory valuation $ 1,883 $ 1,707 Depreciation and amortization 11,447 10,658 Accounts receivable valuation 389 779 Other 359 313 ------- ------- 14,078 13,457 Deferred tax assets: Doubtful accounts (945) (709) Net operating loss carryforwards (1,150) (1,393) Other (409) (333) ------- ------- (2,504) (2,435) -------- ------- Net deferred tax liabilities $ 11,574 $ 11,022 ======== =======
Peebles made cash income tax payments of $5,650, $5,316 and $5,369 for 2000, 1999 and 1998, respectively.
NOTE J - VALUATION AND QUALIFYING ACCOUNTS
Activity related to valuation and qualifying accounts is as follows: Allowance for Net LIFO/ Doubtful Market Accounts Reserve ----------- ---------
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 Charges (credits) to expense 1,663 (371) Deductions - net write-off of uncollectible accounts (1,563) -- BALANCE JANUARY 29, 2000 1,800 991 ------ ------ Charges (credits) to expense 3,320 (769) Deductions - net write-off of uncollectible accounts (2,720) -- ------ ------ BALANCE FEBRUARY 3, 2001 $ 2,400 $ 222 ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued PEEBLES INC. AND SUBSIDIARIES
NOTE K - QUARTERLY FINANCIAL DATA (UNAUDITED)
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 that do not typically have a mall-based department store. At February 3, 2001, the Company operated 124 stores in 15 states, located primarily in the Southeast and Mid-Atlantic regions. The Company defines a comparable store as having operations for the entire twelve-month period in both the current and previous fiscal year. For fiscal 2000, 1999 and 1998, the Company had 117, 84 and 77 comparable stores, respectively.
Consolidated net sales and results of consolidated operations of the Company, expressed as percentages of net sales, are presented below for the 2000, 1999 and 1998 fiscal years.
(dollars in thousands) 2000 1999 1998 ---- ---- ---- Net sales $306,608 $300,839 $265,215 increase 1.9% 13.4% 21.8%
Comparable stores % increase In sales: .3% 1.3% 0.9% Total stores in operation at period end 124 121 117
Operations as a Percentage of Net Sales: - ----------------------------- Cost of sales 59.3% 59.4% 60.0% Selling, general & Administrative expenses 27.9 28.6 28.8 Depreciation and amortization 3.4 3.3 3.0 Asset impairment -- .7 -- ----- ----- ----- OPERATING INCOME 9.4 8.0 8.2
Interest expense 3.6 3.8 4.1 Provision for income taxes 2.5 1.9 1.8 ----- ----- ----- Net Income 3.3% 2.3% 2.3% ===== ===== =====
Net sales increased $5,769, or 1.9%, comparing the 53-week current year to the 52-week prior year. Comparing the 52- week period ended January 27, 2001 to the 52-week period ended January 29, 2000, net sales increased $1,975, or .7%. New store growth accounted for the increase in both comparisons. The Company opened four new stores in 2000 and closed one marginally profitable store in January 2001. Three of the new stores were opened in the third quarter and one in the fourth. In addition, net sales benefited from a full year of operations at five new store locations opened in 1999.
Net sales at comparable stores increased .3% in the 53-week versus 52-week comparison and declined .9% in comparing the 52-week periods. Comparable store net sales increases (decreases) by fiscal quarter as a percentage of the prior year comparable quarter, were as follows for the last two fiscal years:
Fiscal Quarter ------------------------------------ Total First Second Third Fourth Year ----- ------ ----- ------ ----- 2000 vs. 1999 (3.6%) 1.0% 1.5% 2.7% .3% 1999 vs. 1998 (2.6%) 3.6% 0.4% 3.2% 1.3%
Comparable store net sales continued to benefit from the overall strength of consumer demand for soft apparel. In comparing fiscal quarters from one year to the next, unseasonable weather variations have influenced "buy now, wear now" consumer demand. Weather related variations, however, have not been considered significant to net sales in total for any fiscal year.
In comparing 2000 to 1999, the decline noted in the first quarter was primarily a result of Mother's Day falling two weeks later in 2000 than 1999, coupled with unseasonably cold weather in the spring. After sixteen fiscal weeks, the weather had warmed and comparable store sales were down only .9%. During June and July comparable store sales benefited from strong weeks around Father's Day and early summer clearance. For the third consecutive year, severely hot weather through August pushed Back-to-School demand into September and early October. The Holiday season featured five weekends between Thanksgiving and Christmas, which made meaningful comparisons difficult, but net sales strength was noted immediately after Thanksgiving, and again as Christmas drew near.
Cost of sales as a percentage of net sales were 59.3%, 59.4% and 60.0%, in 2000, 1999 and 1998, respectively. The improvement results from consistent gross margin percentages at comparable stores, and continued improvement in the gross margins at new and acquired stores. 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. After approximately 24 to 36 months of operation, a new location generally attains the Company's mature store average cost of sales. A net 33 new and acquired store locations were opened during 1998, versus only 5 in 1999 and a net 3 in 2000. Overall, the Company's commitment to a less promotional, value priced, merchandise strategy has 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 27.9%, 28.6% and 28.8% of net sales in 2000, 1999 and 1998, respectively. Similar to the impact on cost of sales described above, 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. In 1997, when the Company was operating 84 stores instead of 124 and had one distribution center instead of two, SG&A expenses were 27.7% of net sales. The allowance for uncollectible accounts was increased $600, $100 and $300 in 2000, 1999 and 1998, respectively.
Depreciation and amortization expense as a percentage of net sales were 3.4%, 3.3% and 3.0% in 2000, 1999 and 1998, respectively. Significant capital expenditures required during the 12 to 18 month of significant store growth, beginning June 1998, were the primary reason depreciation expense has increased relative to net sales.
The asset impairment as a percentage of 1999 net sales was .7%, or $2,182. The asset impairment represented the Company's entire investment in a co-operative buying office (the "Co-Operative"). The Company had been a member of the Co-Operative, and therefore had an investment in it, for well over a decade. Purchases through the Co-Operative, primarily imported merchandise in support of the Company's private label program, totaled approximately 7% of 1999 purchases. The Company had no disruption in the merchandise flow as the Co-Operative was dissolved in the third fiscal quarter of 2000.
As a result of the factors discussed above, operating income in 2000, 1999 and 1998 as a percentage of total net sales was 9.4%, 8.0% and 8.2%, respectively.
Interest expense as a percentage of net sales was 3.6%, 3.8% and 4.1%, for 2000, 1999 and 1998, respectively. In June 1998, $24,000 was added to Senior Term Notes A and B to consummate the Watson Merger. As a result, interest expense increased relative to net sales in 1998. In both 1999 and 2000, profitable operations resulted in lower average borrowings, and interest expense declined relative to net sales. In 2000 moderating interest rates also resulted in a decrease in interest expense dollars.
Total income taxes as a percentage of net sales were 2.5%, 1.9% and 1.8% in 2000, 1999 and 1998, respectively. The effective tax rate for 2000, 1999 and 1998 was 43.0%, 43.4% and 44.4%, respectively. 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 3.3%, 2.3% and 2.3% in 2000, 1999 and 1998 respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital needs and for capital expenditures associated with new stores and the remodeling of existing stores. The Company's primary sources of funds are cash flow from continuing operations, borrowings under the 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 $26,082, $13,861 and $13,823 in 2000, 1999 and 1998. Profitable operations and greater use of vendor financing accounted for the majority of the increase in 2000. In 1999, as the Company transitioned from the use of the co-operative buying service for spring 2000 merchandise purchases, cash flow was temporarily affected by certain deposits and other current assets which were realized in 2000. Working capital decreased from $78,495 at January 29, 2000, to $70,016 at February 3, 2001, primarily as a result of this reduction in other current assets and as well as the inclusion of the ECF Prepayment in current maturities of long- term debt. The ECF prepayment classified as current at February 3, 2001 is $9,771, versus $5,739 at January 29, 2000. In 1999, accounts receivable used cash as the outstanding balance grew from 1998, primarily as a result of significant increases in charge sales at the former Watson stores. In 2000, the growth in accounts receivable balance moderated with the continued maturity of the stores opened in 1998.
Net cash used in investing activities was $4,832, $9,368 and $18,049 in 2000, 1999 and 1998, respectively. Investing activities included capital expenditures, primarily for fixturing and point of sale equipment in new and acquired store locations, of $4,797, $9,151 and $13,394 in 2000, 1999 and 1998, respectively. Capital expenditures for 2000 were significantly lower than 1999 and 1998 as only 4 new locations were opened during the fiscal year, and the majority of the capital improvements required by stores opened in 1998 and 1999 was completed in 1999. In 2000, capital expenditures included $1,500 at the four new store locations, and $1,300 for major remodelings and relocations. The remaining expenditures were primarily for space re-allocations and routine fixture upgrades at existing stores.
Financing activities reduced outstanding borrowings by $20,572 in 2000 and $3,549 in 1999. Scheduled debt service, primarily principal payments on the Senior Term Facility, used $3,700 in both 2000 and 1999. The 1999 ECF Prepayment, $5,739, which decreased amounts outstanding under the Senior Term Facility, was funded through the Revolver. The total balance of the Revolver and Swingline Facility was reduced from $37,277 at January 29, 2000 to $26,145 at February 3, 2001.
In June 1998, the Company amended and restated the Credit Agreement, at a cost of $1,613, 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.
In 2001, the Company's capital expenditures are expected to total approximately $11,900. The Company plans to open eleven new store locations, adding approximately 170,000 square feet, with total fixtures and equipment of $5,100. Major remodelings and/or space reallocations are planned at 10 existing stores and related capital expenditures are expected to total $3,800. The remaining capital expenditures are primarily for routine fixture/equipment upgrades at existing stores, except for approximately $1,200, which is planned for a significant upgrade in the satellite communications network.
As of March 2001, the Company had signed leases for two new store locations due to open in the third fiscal quarter of 2001. The Company expects to continue to lease its stores, and the typical new store is anticipated to average approximately 21,600 square feet but may vary depending on the individual market and real estate opportunity. Based on historical experience, the Company estimates that the cost of opening a new store will include capital expenditures of approximately $425 for leasehold improvements and fixtures and approximately $425 for initial inventory, approximately one-third of which is normally financed through vendor credit. Accounts receivable for new stores typically build to 11% of net sales or approximately $275 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 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 five fiscal years, quarterly sales as a percentage of total sales have been consistent at approximately 20%, 23%, 24% and 33% 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 Credit Agreement. The 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 $85,805 during the fiscal month of variance, interest expense would vary by approximately $72 for that fiscal month.
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; and vi) the successful management of inventory levels, related costs and selling, general and administrative costs.