SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of l934
For the fiscal year ended March 30, 1996 Commission File No. 0-12375
PEACHES ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2166041
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 East Hallandale Beach Boulevard, Hallandale, Florida 33009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 454-5554
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 l934 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 ______ NO X
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.
YES ______ NO X
The aggregate market value (based on the closing bid and asked prices) of the
voting stock held by non-affiliates of the registrant was, as of February 6,
1997, approximately $65,000.
As of February 12, 1997 the registrant's transfer agent reported as issued and
outstanding (before the issuance of an additional 20,000,000 shares as reported
below):
19,781,270 Shares of Common Stock
PART I
Item 1. BUSINESS
Peaches Entertainment Corporation ("PEC" or the "Company"), a Florida
corporation, was incorporated in 1982. Its executive offices are located at 1180
East Hallandale Beach Boulevard, Hallandale, Florida, 33009. Its telephone
number is 954-454-5554. PEC is engaged in the operation of retail stores which
sell prerecorded music, videos, and related products (the "Retail Business") in
the Southeastern part of the United States under the name "PEACHES".
URT Industries, Inc. ("URT"), a Florida corporation, presently is the
beneficial owner of approximately 93.5% of PEC's issued and outstanding shares
of common stock and all of its issued and outstanding shares of preferred stock
and controls PEC. The remaining approximately 6.5% of PEC's issued and
outstanding shares of common stock are owned by non-affiliated persons.
Petition for Relief under Chapter 11
On January 16, 1996 (the "Petition Date"), PEC filed a voluntary petition
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Florida (the "Bankruptcy Court"). During the pendency of such
proceeding (the "Chapter 11 proceeding"), PEC continued to manage its affairs
and operate its business as a debtor-in-possession (subject to the approval of
the Bankruptcy Court with respect to transactions outside of the ordinary course
of business), while it developed a Plan of Reorganization that would allow it to
continue in business. PEC's Amended Plan of Reorganization, dated October 23,
1996, as modified by the Bankruptcy Court's Order of January 17, 1997 (the "Plan
of Reorganization"), was confirmed by the Bankruptcy Court on such date, and was
to become effective on February 3, 1997, subject to the satisfaction of certain
conditions. Such conditions were satisfied on February 19, 1997, and the Plan of
Reorganization became effective on such date (the "Effective Date"). For a
discussion of the Plan of Reorganization and other action taken in connection
with the Chapter 11 proceeding, see "LEGAL PROCEEDINGS" below.
The Peaches Stores
The following table sets forth the number of stores which were open at the
beginning of the year, which opened during the year, which closed during the
year and which were open at the end of the year, with respect to PEC's last five
complete fiscal years ended March 30, 1996:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Number of stores:
At beginning of period 19 20 21 22 21
Opened during period 0 1 0 0 2
Closed during period (6) (2) (1) (1) (1)
--- --- --- --- ---
At end of period 13 19 20 21 22
-2-
Three of the six stores which were closed by PEC during the fiscal year
ended March 30, 1996 (the "1996 fiscal year") were closed prior to the Petition
Date. The other three stores were closed on or about the Petition Date. All six
of such stores had been operating unprofitably, and pursuant to its rights under
the Bankruptcy Code, PEC obtained approval of the Bankruptcy Court to reject the
unexpired term of the leases pertaining to such stores. (See "LEGAL
PROCEEDINGS"). As to the remaining thirteen stores which are presently in
operation, PEC has renegotiated five of the leases pertaining to such stores on
terms which are more favorable to PEC. The other eight stores are either
operated under the same leases as were in effect prior to the Petition Date or,
as to the one store which is owned rather than leased by PEC, is not subject to
any leasehold arrangement.
The thirteen "Peaches" stores (the "'Peaches' stores") which are presently
in operation are located in the following four states: Florida (seven stores),
Virginia (three stores), North Carolina (two stores), and Alabama (one store).
The utilized space of the stores ranges from approximately 7,000 square feet to
approximately 14,000 square feet. Each store either has its own parking area or
is located in a shopping center which provides parking. PEC has options to renew
most of its leases for various periods.
Two of the Florida stores, one in Fort Lauderdale and the other in Orlando,
are currently leased from the Chairman of PEC and his brother, a former director
of PEC. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
For information concerning real property owned by PEC, see "Properties".
Trademarks
PEC is the registered owner of and owns nationwide rights to the tradename,
service mark and trademark "PEACHES" (the "Trademarks") in connection with the
operation of the Retail Business.
Operation of the Peaches Stores
The "Peaches" stores are all similar in appearance. They have distinct,
wood panelled interiors, are decorated in a manner which identifies them as
"Peaches" stores and carry a wide selection of prerecorded music as well as
recorded and blank video tapes, accessory items and specialty items such as
T-shirts and crates. Some stores are free standing and others are contiguous to
other stores in shopping centers. At present, each "Peaches" store is managed by
an individual director who is responsible for ordering, pricing and displaying
merchandise sold in the store, hiring and firing personnel and other matters
relating to store administration, including re-orders of merchandise. Certain
other matters, including relationships with landlords and the purchase and
allocation of new releases, are handled by the home office. PEC has a
computerized inventory control system in place at each of its stores.
As of the last day of the 1996 fiscal year, PEC purchased merchandise from
approximately 59 suppliers, among whom the principal ones were BMG, CEMA, PGD,
SONY,
-3-
UNI, WEA, and Bassin. Approximately 81% of the merchandise purchased during the
1996 fiscal year came from such seven principal suppliers. Purchases from given
suppliers are, to a great extent, determined by which of them are manufacturing
or distributing the most popular prerecorded music products at a given time, as
well as the credit and other terms on which such suppliers are willing to sell
to PEC. PEC is not obligated to purchase merchandise from any supplier. It has
numerous alternate sources of supply for inventory, although in some cases, the
expenses are or would be greater if such alternate sources are utilized.
Merchandise is delivered directly by suppliers to the stores.
Prior to its filing for protection from its creditors, the usual terms
received by PEC from suppliers provided for payment to be made within 60 days
from the end of the month in which a purchase is made. In addition, PEC normally
received an additional 30 to 120 days to pay for certain purchases during the
course of the year. Such terms are usual in the industry.
Prior to its filing for protection from its creditors, PEC was also able to
return merchandise, without limitation, to all suppliers, who charged a penalty
if returns exceeded certain percentages of the dollar amounts of gross
purchases. Such return policies did not have any adverse effect on PEC's
business.
For a short period after the Chapter 11 filing, PEC was not able to obtain
delivery from any of its principal suppliers of merchandise, except Bassin
(which supplied the inventory which might otherwise have been ordered through
other suppliers), and was not able to return merchandise in accordance with the
return policies described above. Eventually, during the course of the Chapter 11
proceeding all of PEC's principal suppliers resumed shipping merchandise to PEC
and agreed to allow PEC to make returns of unneeded inventory for credit against
pre-petition indebtedness. In some cases, suppliers also agreed to ship
merchandise on credit. During the pendency of the Chapter 11 proceeding, PEC was
able to obtain approximately 80% of its inventory on credit, and was able to
return most of its unused inventory for credit against prepetition indebtedness.
Because of the resumption in deliveries from suppliers, as well as the use of
alternate sources of merchandise, the Chapter 11 filing did not have a
materially negative effect on PEC's ability to obtain inventory or to return
unused inventory for credit, although the cost of such inventory was generally
higher than it would otherwise have been and the terms for the return of unused
inventory were sometimes different than those which were in effect prior to the
Petition Date.
Subsequent to the Effective Date, all of PEC's seven principal suppliers
and most of its other suppliers have agreed on terms with respect to payment for
merchandise and the return of unused merchandise for credit which are the same
or similar to the terms which were in effect prior to the Chapter 11 proceeding.
Advertising in local newspapers and media is determined by consultation
between each store director and PEC management. PEC also engages in cooperative
advertising with suppliers who pay a portion of the cost. In addition to the
director, each "Peaches" store is staffed with managers, cashiers and sales and
stock room personnel. The stores are open seven days a week.
-4-
Based on management's experience to date, retail business sales fluctuate during
the year and are generally at their highest levels during the holiday season,
i.e., between October and December. During the last three fiscal years, sales
between January and March were approximately 22% of total sales for each year;
sales between April and June were approximately 24% of total sales; sales
between July and September were approximately 22% of total sales; and sales
between October and December were approximately 32% of total sales.
Competition
The retail sale of prerecorded music and video products is highly
competitive. There are hundreds of retail stores and department, discount and
variety stores and supermarkets which offer such merchandise to the public.
PEC's share of the retail market in the Southeastern United States is not
significant. In recent years, in addition to usual competition, there has been a
proliferation of non-traditional music outlets, such as appliance and computer
retailers and superbookstores, some of whom have used very aggressive price
cutting tactics including selling some products below actual cost in order to
attract customers and sell non-music and video products. For a discussion of
action taken to attempt to address such competitive factors, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Employees
As of the last day of the 1996 fiscal year, PEC employed approximately 249
persons in all capacities. It is not a party to any collective bargaining
agreements. Relations with employees have been satisfactory and there have been
no work stoppages.
Management Agreements Between URT and PEC
Pursuant to a management agreement, as amended, which was in effect between
URT and PEC through December 31, 1995, URT was required to provide PEC with the
services of Allan Wolk as President and Chairman of PEC, PEC was entitled to
payment from URT for certain accounting and administrative services performed by
PEC for URT at the rate of $39,600 per annum (subject to periodic equitable
adjustment depending upon the amount of such services), and so long as URT and
PEC filed consolidated income tax returns, their respective liabilities for such
taxes were required to be equitably apportioned as provided in such agreement.
For the above described services of Allan Wolk, PEC was required to pay URT, in
equal weekly installments, a fee at the rate of $750,000 per annum for that
portion of the 1996 fiscal year ending on December 31, 1995, as compared to a
fee at the rate of $1,000,000 per annum with respect to the preceding
approximately six month period commencing October 2, 1994 and ending April 1,
1995, and a fee during earlier periods based on a percentage of PEC's net sales.
-5-
The management agreement described above was terminated by URT and PEC
effective as of December 31, 1995, and replaced by three new agreements, each
effective from and after January 1, 1996. Under the three new agreements, two
between URT and PEC and the third between URT and Allan Wolk, the following
arrangements have been agreed to: URT and PEC will continue to equitably
apportion taxes so long as they continue to file a consolidated federal return;
for the period from January 1, 1996 through March 31, 2000, URT will continue to
provide to PEC the services of Allan Wolk as PEC's Chairman, President and Chief
Executive Officer; PEC, in lieu of paying a management fee to URT, is required
to pay to Mr. Wolk during such period, so long as he continues to provide such
services, a salary at the rate of $500,000 per annum; and the amount so paid by
PEC to Mr. Wolk pursuant to such arrangement shall be credited against the
amount payable by URT to Mr. Wolk pursuant to the employment agreement between
them.
As a result of the above-described arrangements, the amounts required to be
paid by PEC, as management fees to URT or as salary to Allan Wolk were reduced
from $1,024,386 during the fiscal year ended April 1, 1995 (the "1995 fiscal
year") to $687,500 during the 1996 fiscal year (without accounting for the
expenses as described above of approximately $39,600 for which URT reimbursed
PEC during the 1995 fiscal year). This resulted in a net savings to PEC in the
approximate amount of $297,000. The $687,500 so paid by PEC during the 1996
fiscal year consisted of management fees to URT of $562,500 (covering the period
through December 31, 1995 when the prior management agreement was in effect),
and compensation to Allan Wolk in the amount of $125,000 (covering the period
beginning January 1, 1996 when the three new agreements came into effect).
During both the 1996 and 1995 fiscal years, Mr. Wolk devoted approximately
75% of his working time to the business of PEC.
Item 2. PROPERTIES
Since April, 1996, PEC's headquarters have been located in Hallandale,
Florida in a building which is leased by PEC. Such building contains a total of
approximately 6,000 square feet of office space. Prior to April, 1996, PEC's
headquarters had been located in a larger and more expensive facility of
approximately 26,000 square feet in Miramar, Florida in a building which was
leased by PEC and included both office and warehouse space. The new headquarters
has no warehouse space, as all merchandise is shipped directly from suppliers to
stores. The move to smaller facilities with no warehouse space, and the
elimination of payroll expenses associated with the old warehouse facility, has
resulted in savings to PEC in excess of $200,000 per year. The lease for the old
headquarters was among the leases which PEC rejected in connection with the
Chapter 11 proceeding. (See "LEGAL PROCEEDINGS").
PEC owns real property in Mobile, Alabama on which it constructed and
operates a "Peaches" store. Such property is subject to a first mortgage to an
institutional lender and to a second mortgage to URT. PEC made all payments on
the first mortgage as they became due during the Chapter 11 proceeding, and
negotiated a longer payout of such mortgage during the course of such
proceeding. The second mortgage secures a debt owed by PEC to URT as a result of
a loan
-6-
which was made by URT to PEC in January, 1997 in order for PEC to satisfy
certain of its obligations to creditors under the Plan of Reorganization. (See
"LEGAL PROCEEDINGS").
All "Peaches" stores, other than the Mobile, Alabama store discussed
immediately above, are leased. For information concerning such other stores
operated by PEC, see "BUSINESS--The Peaches Stores".
Item 3. LEGAL PROCEEDINGS
PEC's above-described voluntary petition for relief under Chapter 11 of the
Bankruptcy Code resulted in the above-described Plan of Reorganization. The Plan
of Reorganization, as so confirmed by the Bankruptcy Court, provided for the
following:
(a) All unsecured creditors, including all of PEC's inventory suppliers,
but excluding landlords under leases rejected by PEC, are entitled to 100% of
their allowed claims (the total of which is approximately $4,922,000). PEC's
seven principal suppliers (whose allowed claims total approximately $4,372,000
out of such $4,922,000) are entitled to payment and inventory returns equal to
approximately 70% of their allowed claims (80% in the case of one such supplier)
within approximately 60 days after the Effective Date. The balance of the
payments to such seven principal suppliers (approximately $1,284,000) is payable
with interest at the prime rate charged by Chase Manhattan Bank, N.A. over a
period of 24 months commencing in March, 1997. The amounts due to such suppliers
are secured by a perfected first lien and security interest in the inventory
originally distributed by the secured party which was sold to PEC or is
otherwise in the possession of and owned by PEC. The remaining unsecured
creditors (whose allowed claims total approximately $550,000) were entitled to
and received the full amount of their allowed claims on the Effective Date.
(b) Landlords under the leases which were rejected by PEC in connection
with the bankruptcy filing were entitled to approximately $311,000 (30% of the
approximately $1,000,000 in allowed claims with respect to such leases), all of
which was paid on the Effective Date.
(c) PEC's sole secured creditor, the holder of the first mortgage with
respect to the store property owned by PEC in Mobile, Alabama, whose allowed
claim was approximately $466,000, will receive 100% of such amount, with
interest, in accordance with the amortization schedule previously in effect,
except that the balloon payment on such mortgage which would otherwise have been
due in September, 1997 was extended to September, 2002.
(d) The priority tax claim in the approximate amount of $118,000 which is
owed to the Florida Department of Revenue will be payable with interest over a
period of two years commencing 30 days from the Effective Date.
-7-
(e) The priority administrative claims, including professional fees in the
approximate amount of $200,000 which were incurred in connection with the
reorganization, were paid on the Effective Date.
In order for PEC to be able to effect the Plan of Reorganization on the
terms described above, URT, in exchange for the issuance to it of 20,000,000
shares of PEC's authorized common stock (including 218,730 treasury shares),
agreed that, subject to the terms of the Plan, it would contribute $350,000 to
the capital of PEC, waive an aggregate of $75,000 of dividends payable by PEC to
URT, guarantee the approximately $1,284,000 which is due to the principal
suppliers after the Effective Date pursuant to the arrangements described in
subparagraph (a) above, and lend $700,000 to PEC on the Effective Date. The loan
by URT to PEC is required to be paid back by PEC with interest over a period of
four years beginning on the third anniversary of the Effective Date. The debt so
owed by PEC to URT is subordinate to the amounts owed to PEC's principal
suppliers, and is secured by a second mortgage on PEC's Mobile, Alabama
property. ( For additional information pertaining to such arrangements between
PEC and URT, see "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
During the course of the Chapter 11 proceeding, the Bankruptcy Court issued
orders authorizing the following:
(a) PEC's rejection of the unexpired portion of the leases covering PEC's
former corporate headquarters in Miramar, Florida, as well as the six stores
closed by PEC during the 1996 fiscal year (See "PROPERTIES" and "BUSINESS--The
Peaches Stores").
(b) PEC's rejection of the unexpired portion of the lease covering a store
in Charlotte, North Carolina which had been closed by PEC during the 1991 fiscal
year and as to which PEC remained responsible for the shortfall between the
amount payable under PEC's lease for such store and the amount being paid by a
subtenant of such store.
(c) PEC's assumption of the unexpired portion of the leases covering PEC's
new corporate headquarters and the stores which are leased and are to be kept in
operation.
(d) PEC's execution of a settlement agreement containing a reduction of the
amounts payable by PEC to its former Executive Vice-President under a consulting
arrangement with him (See "EXECUTIVE COMPENSATION--Employment Contracts").
(e) PEC's entry into post-petition agreements with its suppliers of
inventory under which PEC was permitted to return merchandise to such suppliers
for a credit against prepetition claims, and under which PEC was entitled to
purchase merchandise on credit from certain of such suppliers. (See "BUSINESS -
Operation of the Peaches Stores").
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
PEC's Common Stock is quoted by market makers on the over-the-counter
market. The following table sets forth the high and low, bid and asked
quotations for PEC's Common Stock for the calendar periods indicated, based on
information supplied by the National Quotation Bureau, Incorporated:
Bid Prices Asked Prices
---------- ------------
High Low High Low
1994
Quarter ended March 31, 1/16 1/16 5/16 1/4
Quarter ended June 30, 1/16 1/16 5/16 1/4
Quarter ended Sept. 30, 1/16 .02 5/16 1/8
Quarter ended Dec. 31, 1/32 .02 9/32 .12
1995
Quarter ended March 31, 1/32 1/32 9/32 7/32
Quarter ended June 30, 1/32 1/32 9/32 7/32
Quarter ended Sept. 30, 1/32 1/32 9/32 7/32
Quarter ended Dec. 31, 1/32 1/32 9/32 7/32
1996
Quarter ended March 31, 1/32 .001 9/32 7/32
Quarter ended June 30, .03125 .03125 .21875 .15625
Quarter ended Sept. 30, .03125 .001 .15625 .15625
Quarter ended Dec. 31, .03125 .005 .15625 .05
1997
Quarter through Feb. 6, .005 .001 .05 .05
The above over-the-counter quotations represent prices between dealers, do
not include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
-9-
Dividends
There has been no payment of dividends on PEC's Common Stock since its
inception and payment of dividends on such stock in the future will depend upon
its earnings and needs. PEC is required to pay dividends on its outstanding
shares of preferred stock. In connection with the Chapter 11 proceeding, URT,
the owner of such preferred stock, agreed to waive dividends on such stock for
the period beginning January 1, 1996 and ending March 29, 1997. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
Approximate Number of Equity Security Holders
The following table indicates the approximate number of holders of record
of each class of PEC's common equity securities as of February 12, 1997, based
on information supplied by PEC's transfer agent:
Number of Record
Title of Class Holders
-------------- -------
Common Stock, $.01 par value 1,515
-10-
Item 6 Selected Financial Data
The following table sets forth selected financial data and other
operating information of the Company. The selected financial data
should be read in conjunction with the financial statements and
related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
March 30, April 1, April 2, April 3, March 28,
1996 1995 1994 1993(1) 1992
---- ---- ---- ------- ----
Operating statement data:
Net sales $ 23,626,489 31,960,953 36,303,455 37,861,389 35,565,512
Net income (loss) (2,416,051) (1,995,408) (108,456) 296,426 (328,890)
Income (loss) per common share (.12) (0.10) (0.01) 0.01 (0.02)
Weighted average
number of common
shares outstanding 19,781,270 19,781,270 19,781,270 19,781,270 19,781,270
Balance sheet data:
Working capital
excluding liabilities
subject to compromise in 1996 $ 6,083,691 2,058,184 3,550,371 3,514,978 2,679,448
Total assets 9,442,616 11,224,889 13,390,533 14,025,154 12,698,325
Current portion of long-
term obligations 124,774 110,028 131,173 174,579 188,524
Long-term obligations 810,367 929,654 705,109 836,282 1,010,861
Liabilities subject to compromise 5,671,434 -- -- -- --
Shareholders' equity 1,429,226 3,890,277 5,945,685 6,114,141 5,877,715
Store data:
Weighted average square
feet of selling space 88,012 130,157 137,145 139,850 145,279
Weighted average sales
per square foot of selling $ 268 246 265 271 245
space
Number of stores open at
end of period 13 19 20 21 22
There were no cash dividends declared for common stock in any of the periods
presented.
(1) Includes 53 weeks of operations.
-11-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "believe", "anticipate", "estimate",
"project" and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management orally or in
writing, including, but not limited to, in press releases, as part of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and as a part of other sections of this Annual Report or other
filings. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their respective dates, and
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should any of the underlying
assumptions prove incorrect, actual results of current and future operations may
vary materially from those anticipated, estimated or projected.
Results of Operations
FISCAL YEAR ENDED MARCH 30, 1996 (1996) COMPARED TO FISCAL YEAR ENDED
APRIL 1, 1995 (1995)
Net sales for 1996 decreased 26.1% compared to 1995. Such decrease is attributed
principally to the closing of unprofitable stores during 1996, as well as the
effect of the opening of new stores during 1996 by certain of PEC's competitors.
11.8% of such decrease was attributable to comparable store sales and 14.3% of
such decrease was attributable to stores that opened or closed during 1996
versus 1995.
During the last few years, non-traditional music retailers such as appliance and
computer retailers and super bookstores have begun to sell prerecorded music and
video products. They have adopted policies of selling music product at near or
below wholesale cost as a means of attracting customers to sell other products.
The Company continued to suffer the effect of such competition during 1996 and,
as a result, filed its voluntary petition for relief under Chapter 11 of the
Bankruptcy Code on January 16, 1996.
Recently, the Company's primary suppliers have taken steps to help protect the
retail marketplace from certain low cost retailers of music. These steps include
not disbursing cooperative advertising funds to retailers which engage in low
cost selling practices in violation of the minimum advertised pricing policies
of such suppliers. Management believes that such initiatives, in combination
with the other factors mentioned immediately below, should help the Company to
restore itself to a competitive position in subsequent fiscal years. Other
factors which, in management's opinion, should help the Company to restore
itself to a competitive position in the future are the closing of the six
unprofitable stores which were closed during 1996, the closing of the former
headquarters and warehouse, the termination of other unprofitable business
arrangements as described herein and concentration on advantages which PEC has
over certain of its competitors, including large inventory, convenient store
locations and a high level of customer service.
-12-
The cost of sales for 1996 was lower than that for 1995 due principally to a
decrease in net sales. Cost of sales as a percentage of net sales has increased
from 63.7% in 1995 to 64.8% in 1996 due to a reduction in retail prices in an
effort to meet the increased competition, a change in terms with PEC's principal
suppliers during the Chapter 11 proceeding and the effects of buying a portion
of PEC's inventory during the Chapter 11 proceeding from alternate sources with
higher prices.
Selling, general, and administrative (SG&A) expenses in 1996 decreased 17.1%
compared to 1995. Such decrease is attributable to a decrease in store operating
expenses of stores that opened or closed during 1996 versus 1995 (15.0%) and a
decrease in corporate overhead (2.5%), offset by an increase in comparable store
expenses (0.4%). SG&A expenses, as a percentage of net sales, increased from
35.9% in 1995 to 40.2% in 1996 due to the fixed nature of certain expenses and
the decrease in net sales in addition to the aforementioned items.
The Company incurred a net loss of approximately $2,416,000 in 1996 versus a net
loss of approximately $1,995,000 in 1995 due principally to the costs associated
with the closing of four stores, professional fees associated with the Chapter
11 proceeding and the reduction of net sales and gross profits as described
above. The two other stores closed during 1996 are reflected in the financial
statements for 1995.
FISCAL YEAR ENDED APRIL 1, 1995 (1995) COMPARED TO FISCAL YEAR ENDED APRIL
2, 1994 (1994)
Net sales for 1995 decreased 12.0% compared to 1994. Such decrease is attributed
to an 8.2% decrease in comparable store sales, and a 3.8% decrease in sales in
those stores that opened or closed during 1995 versus 1994.
The cost of sales for 1995 was lower than that for 1994 due to the decrease in
net sales. Cost of sales as a percentage of net sales increased from 62.7% in
1994 to 63.7% in 1995 due to a reduction in retail pricing in an effort to meet
the increased competition.
Selling, general, and administrative (SG&A) expenses in 1995 decreased 6.3%
compared to 1994. Such decrease is attributable to a decrease in comparable
store expenses (1.1%), a decrease in store operating expenses of stores that
opened or closed during 1995 versus 1994 (2.9%), a decrease in corporate
overhead (1.9%), and a decrease in the cost of store openings (0.4%). SG&A
expenses, as a percentage of net sales, increased from 33.7% in 1994 to 35.8% in
1995 due to the fixed nature of certain expenses and the decrease in net sales
in addition to the aforementioned items.
Store closing costs increased in 1995 over 1994 due to the fact that the cost of
closing 1 store is included in 1994, and the cost of closing 4 stores is
included in 1995.
The Company incurred a net loss of approximately $1,995,000 in 1995 versus a net
loss of approximately $108,000 in 1994 due to costs of closing four stores, a
loss on litigation, and the reduction in net sales and gross profit as described
above.
-13-
FISCAL YEAR ENDED APRIL 2, 1994 (1994) COMPARED TO FISCAL YEAR ENDED APRIL
3, 1993 (1993)
Net sales for 1994 decreased 4.1% compared to 1993. Such decrease is attributed
to the fact that 1993 included 53 weeks of operations (1.7%), a decrease in
comparable store sales (1.6%), store closings due to inclement weather (0.3%)
and a decrease in sales in those stores that opened or closed during 1994 versus
1993 (0.5%).
The costs of sales for 1994 was lower than that for 1993 due to decreased net
sales. Cost of sales as a percentage of net sales for both 1994 and 1993 was
62.7%.
Selling, general and administrative (SG&A) expenses in 1994 increased 1.8%
compared to 1993. Such increase is attributable to an increase in comparable
store expenses (1.9%), an increase in corporate overhead (1.6%), an increase in
the cost of store openings (0.8%), offset by a decrease in store expenses that
opened or closed during 1994 versus 1993 (1.5%), and a decrease due to the fact
that 1993 included 53 weeks of operations (1.0%). SG&A expenses, as a percentage
of net sales, increased from 31.8% in 1993 to 33.7% in 1994 due to the fixed
nature of certain expenses and the decrease in net sales in addition to the
aforementioned items.
In 1994, the Company adopted the provisions of Financial Standards No. 109 (SFAS
109) Accounting for Income Taxes, which established new financial accounting and
reporting standards for income taxes. Such adoption resulted in a cumulative
adjustment of approximately $74,000 of income which has been reflected in the
statement of operations for 1994.
The Company incurred a net loss of approximately $108,000 in 1994 versus net
income of approximately $296,000 in 1993 due to the decrease in net sales and an
increase in certain SG&A expenses as discussed above. Approximately $55,000 of
net income in 1993 is due to the fact that 1993 included 53 weeks of operations.
Liquidity and Capital Resources
The Company had working capital of $6,083,691 at March 30, 1996 (excluding
liabilities subject to compromise in 1996) compared to working capital of
$2,058,184 at April 1, 1995 and a current ratio (the ratio of total current
assets to total current liabilities) of 5.6 to 1 at March 30, 1996 (excluding
liabilities subject to compromise in 1996) compared to a current ratio of 1.35
to 1 at April 1, 1995. The amount of the liabilities which were subject to
compromise is $5,671,434.
At March 30, 1996, the Company had long-term obligations of $810,367 (which does
not include liabilities subject to compromise of $5,671,434). Management
anticipates that its ability to repay its long-term obligations will be
satisfied primarily through funds generated from its operations.
Management anticipates that cash generated from operations and cash equivalents
on hand will provide sufficient liquidity to maintain adequate working capital
for operations. Management would attempt to obtain financing for the opening of
any new stores which it may plan to open during the next few years.
-14-
Inflation trends have not had an impact upon revenues because increases in costs
have been passed along to customers.
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the third fiscal quarter, which includes the Christmas
selling season.
The Company has issued and outstanding 2,500 shares of $100 par, 11%, Series A
Cumulative Convertible Preferred Stock and 2,500 shares of $100 par, 13%, Series
B Cumulative Convertible Preferred Stock. All of such shares are owned by URT.
During the 1996 fiscal year, the Company paid dividends of $45,000 to its
preferred shareholder, based on the dividends requirements relating to the
outstanding Series A and Series B Preferred Stock, less the amount agreed to be
waived by such shareholder. The Company recently agreed to issue to URT certain
shares of Series C preferred stock containing a cumulative preferred dividend of
10% per annum. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
For a discussion of recent developments and uncertainties affecting the
Company's liquidity and capital resources, see note 2 (Petition for Relief under
Chapter 11) to the financial statements which are set forth at Item 8 below.
In March, 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed Of, which became effective for fiscal years beginning
after December 15 ,1995. This standard establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets and certain intangibles to be disposed of. The Company
believes that adoption of this standard will not have a material impact on the
financial condition or operating results of the Company.
-15-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PEACHES ENTERTAINMENT CORPORATION
Table of Contents
Independent Auditors' Report 17
Financial Statements:
Balance Sheets as of March 30, 1996 and April 1, 1995 18
Statements of Operations for each of the years in the three
year period ended March 30, 1996 19
Statements of Shareholders' Equity for each of the years in
the three year period ended March 30, 1996 20
Statements of Cash Flows for each of the years in the three
year period ended March 30, 1996 21
Notes to Financial Statements 23
-16-
Independent Auditors' Report
Directors and Shareholders
Peaches Entertainment Corporation
Hallandale, Florida:
We have audited the accompanying balance sheets of Peaches Entertainment
Corporation (the "Company") as of March 30, 1996 and April 1, 1995, and the
related statements of operations, shareholders' equity and cash flows for each
of the years in the three-year period ended March 30, 1996. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Peaches Entertainment
Corporation as of March 30, 1996 and April 1, 1995, and the results of its
operations and its cash flows for each of the years in the three-year period
ended March 30, 1996 in conformity with generally accepted accounting
principles.
As discussed in note 3 to the financial statements, the Company changed its
method of accounting for income taxes in 1994 to adopt the provisions of the
Financial Accounting Board's SFAS No. 109, Accounting for Income Taxes.
/s/ KPMG Peat Marwick LLP
June 29, 1996, except as to note 2,
which is as of February 3, 1997
Ft. Lauderdale, Florida
-17-
PEACHES ENTERTAINMENT CORPORATION
Balance Sheets
March 30, 1996 and April 1, 1995
Assets 1996 1995
------------ ------------
Current assets:
Cash and cash equivalents $ 1,917,566 1,537,293
Inventories 4,954,260 5,578,737
Prepaid inventory 254,249 --
Pre paid expenses and other current assets 279,346 289,413
Land held for sale -- 300,000
Refundable income taxes 9,136 257,229
------------ ------------
Total current assets 7,414,557 7,962,672
Property and equipment, net 1,843,708 3,072,869
Other assets 184,351 189,348
------------ ------------
$ 9,442,616 11,224,889
============ ============
Liabilities and Shareholders' Equity
Liabilities not subject to compromise
Current liabilities:
Current portion of long-term obligations 124,774 110,028
Accounts payable 103,038 4,130,530
Accrued liabilities 1,103,054 1,663,930
------------ ------------
Total current liabilities 1,330,866 5,904,488
Long-term obligations 810,367 929,654
Deferred rent 200,723 500,470
------------ ------------
Total liabilities not subject to compromise 2,341,956 7,334,612
Liabilities subject to compromise 5,671,434 --
------------ ------------
Total liabilities 8,013,390 7,334,612
------------ ------------
Shareholders' equity:
Preferred stock, $100 par value; 50,000 shares
authorized; 5,000 shares issued and outstanding 500,000 500,000
Common stock, $.01 par value; 40,000,000 shares
authorized; 20,107,850 shares issued 201,079 201,079
Additional paid-in capital 1,284,471 1,284,471
Retained (deficit) earnings (496,429) 1,964,622
------------ ------------
1,489,121 3,950,172
Treasury stock, 326,580 common shares, at cost (59,895) (59,895)
------------ ------------
Total shareholders' equity 1,429,226 3,890,277
Commitments and contingencies
------------ ------------
$ 9,442,616 11,224,889
============ ============
See accompanying notes to financial statements.
-18-
PEACHES ENTERTAINMENT CORPORATION
Statements of Operations
For each of the years in the three-year period ended March 30, 1996
1996 1995 1994
------------ ------------ ------------
Net sales $ 23,626,489 31,960,953 36,303,455
------------ ------------ ------------
Costs and expenses:
Cost of sales 15,316,441 20,347,493 22,762,742
Selling, general and administrative expenses 9,513,941 11,473,660 12,245,048
Store closing costs 189,623 548,701 278,377
Loss on litigation -- 431,692 --
Management fees 562,500 1,024,386 1,263,010
------------ ------------ ------------
25,582,505 33,825,93 2 36,549,177
------------ ------------ ------------
Loss from operations (1,956,016) (1,864,979) (245,722)
------------ ------------ ------------
Other (expense) income:
Interest expense (111,451) (82,332) (8 8,971
Interest income 22,566 48,891 58,522
------------ ------------ ------------
(88,885) (33,441) (30,449)
------------ ------------ ------------
Loss before reorganization costs,
provision (benefit) for income
taxes and cumulative effect of
change in accounting for income
taxes (2,044,901) (1,898,420) (276,171)
Reorganization costs:
Professional fees (88,223) -- --
Store closing costs (282,927) -- --
------------ ------------ ------------
(371,150) -- --
Loss before provision (benefit) for income taxes
and cumulative effect of change in accounting
for income taxes (2,416,051) (1,898,420) (276,171)
Provision (benefit) for income taxes -- 96,988 (94,000)
------------ ------------ ------------
Loss before cumulative effect of
change in accounting for income taxes (2,416,051) (1,995,408) (182,171)
Cumulative effect of change in accounting for
income taxes -- -- 73,715
Net loss $ (2,416,051) (1,995,408) (108,456)
============ ============ ============
Net loss per common share $ (.12) (.10) (.01)
============ ============ ============
See accompanying notes to financial statements.
-19-
PEACHES ENTERTAINMENT CORPORATION
Statements of Shareholders' Equity
For each of the years in the three-year period ended March 30, 1996
Preferred stock Common stock Treasury stock Capital Retained
----------------- ---------------------- --------------------- in excess earnings
Shares Amount Shares Amount Shares Amount of par (deficit) Total
------ --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, April 3, 1993 5,000 $500,000 20,107,850 $201,079 326,580 $(59,895) 1,284,471 4,188,486 6,114,141
Net loss -- -- -- -- -- -- -- (108,456) (108,456)
Payment of preferred stock
dividend to Parent -- -- -- -- -- -- -- (60,000) (60,000)
------ --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, April 2, 1994 5,000 500,000 20,107,850 201,079 326,580 (59,895) 1,284,471 4,020,030 5,945,685
Net loss -- -- -- -- -- -- -- (1,995,408) (1,995,408)
Payment of preferred stock
dividend to Parent -- -- -- -- -- -- -- (60,000) (60,000)
------ --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, April 1, 1995 5,000 500,000 20,107,850 201,079 326,580 (59,895) 1,284,471 1,964,622 3,890,277
Net loss -- -- -- -- -- -- -- (2,416,051) (2,416,051)
Payment of preferred stock
dividend to Parent -- -- -- -- -- -- -- (45,000) (45,000)
------ --------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Balance, March 30, 1996 5,000 $500,000 20,107,850 $201,079 326,580 $(59,895) 1,284,471 (496,429) 1,429,226
====== ========= ========== ========== ========== ========= ========== ========== ==========
See accompanying notes to financial statements.
-20-
PEACHES ENTERTAINMENT CORPORATION
Statements of Cash Flows
For each of the years in the three-year period ended March 30, 1996
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(2,416,051) (1,995,408) (108,456)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 455,156 559,450 518,240
Loss on abandonment of leasehold
improvements
190,601 -- 141,828
Deferred income taxes -- 337,321 (133,715)
Deferred rent (299,747) 15,402 51,134
Changes in assets and liabilities affecting
cash flows from operating activities:
(Increase) decrease in:
Inventories 624,477 263,579 188,165
Prepaid inventory (254,249) -- --
Prepaid expenses and other current assets 10,067 27,108 58,223
Refundable income taxes 248,093 (221,229) (36,000)
Other assets 4,997 46,980 (65,985)
Increase (decrease) in:
Accounts payable (4,027,492) (484,050) (402,842)
Accrued liabilities (420,893) 230,012 30,781
Long-term obligations (61,022) 334,573 --
Income taxes payable -- -- (45,659)
Liabilities subject to compromise 5,671,434 -- --
Changes due to reorganization activities:
Loss on abandonment of leasehold
improvements 296,509 -- --
----------- ----------- -----------
Net cash provided by (used in)
operating activities 21,880 (886,262) 195,714
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (168,331) (920,477) (176,480)
Proceeds from land, property and equipment 615,243 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities 446,912 (920,477) (176,480)
----------- ----------- -----------
Cash flows from financing activities:
Increase in notes payable -- -- 75,000
Repayment of note payable -- (75,000) --
Repayment of long-term obligations (43,519) (131,173) (174,579)
Dividends paid (45,000) (60,000) (60,000)
----------- ----------- -----------
Net cash used in financing
activities (88,519) (266,173) (159,579)
----------- ----------- -----------
-21-
PEACHES ENTERTAINMENT CORPORATION
Statements of Cash Flows, Contiued
1996 1995 1994
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents
$ 380,273 (2,072,912) (140,345)
Cash and cash equivalents, beginning of year 1,537,293 3,610,205 3,750,550
----------- ----------- -----------
Cash and cash equivalents, end of year $ 1,917,566 1,537,293 3,610,205
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest $ 111,451 82,332 88,971
=========== =========== ===========
Income tax payments (refund), net $ (248,093) (19,104) 63,651
=========== =========== ===========
See accompanying notes to financial statements.
-22-
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
March 30, 1996, April 1, 1995 and April 2, 1994
(1) Organization and Basis of Presentation
Peaches Entertainment Corporation (the "Company") is engaged in the
business of retailing prerecorded music, video and accessory items,
principally in the southeastern United States. The Company is an 87
percent-owned subsidiary of URT Industries, Inc. (the "Parent").
(2) Petition for Relief Under Chapter 11
On January 16, 1996 (the "Petition Date"), the Company commenced
reorganization proceedings under Chapter 11 of the United States Bankruptcy
Code. On January 17, 1997, the Company's plan of reorganization was
confirmed by the Bankruptcy Court for the Southern District of Florida
("Bankruptcy Court"). In Chapter 11, the Company continued to manage its
affairs and operate its business as debtor-in-possession while it developed
a plan of reorganization to restructure and allow its emergence from
Chapter 11. As debtor-in-possession in Chapter 11, the Company could not
engage in transactions outside of the ordinary course of business without
approval, after notice and hearing, of the Bankruptcy Court.
Under Chapter 11 proceedings, litigation and actions by creditors to
collect certain claims in existence at the petition date ("prepetition")
are stayed, absent specific bankruptcy court authorization to pay such
claims. The Company believes that appropriate provisions have been made in
the accompanying financial statements for the prepetition claims that could
be estimated at the date of these financial statements. Such claims are
reflected as "liabilities subject to compromise" at March 30, 1996.
Additional claims (liabilities subject to compromise) may arise subsequent
to the filing date resulting from the rejection of executory contracts,
including leases and from the determination of the court (or agreed to by
parties-in-interest) of allowed claims for contingencies and disputed
amounts.
As debtor-in-possession, the Company has the right, subject to Bankruptcy
Court approval and certain other limitations, to assume or reject certain
executory contracts, including unexpired leases. Any claim for damages
resulting from the rejection of an executory contr act or an unexpired
lease is treated as a general unsecured claim in the Chapter 11
proceedings. The Company affirmed 13 leases (5 of which were modified on
terms more favorable to Peaches) and rejected 8 leases.
-23-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
On August 5, 1996, the Company filed its plan of reorganization with the
Bankruptcy Court. An amended plan of reorganization was filed on October
23, 1996. The amended plan of reorganization was confirmed by the
Bankruptcy Court on January 17, 1997 (the "confirmation date"), and became
effective February 3, 1997 (the "effective date"), subject to all
conditions precedent being satisfied in which all conditions precedent were
satisfied on February 19, 1997. Among the principle terms of the confirmed
plan, subject to certain changes contained in the order of approval, are
the following:
o All unsecured creditors, including all the Company's inventory
suppliers, but excluding landlords under leases rejected by the
Company, are entitled to 100 percent of their allowed claims (the
total of which is approximately $4,922,000). The Company's seven
principal suppliers (whose allowed claims total approximately
$4,372,000 out of such $4,922,000) are entitled to payment and
inventory returns equal to approximately 70 percent of their allowed
claims (80 percent in the case of one such supplier) within
approximately 60 days after the effective date, and the balance
(approximately $1,284,000) is payable with interest at prime over a
period of 24 months commencing March 1997. The remaining unsecured
creditors (whose allowed claims total approximately $550,000) were
entitled to and received the full amount of their allowed claims on
the effective date. The principal suppliers will be secured by a
perfected first lien and security interest in the inventory originally
distributed by the secured party which was sold to the Company or is
otherwise in the possession and owned by the Company.
o Landlords under the leases rejected by the Company in connection with
the bankruptcy filing will be entitled to 30 percent of the allowed
claims with respect to such leases, all of which will be payable on
the effective date.
o The mortgage holder will receive 100 percent of the allowed claim,
with interest, in accordance with the amortization schedule previously
in effect, except that the balloon payment on such mortgage which
would otherwise have been due in September 1997 was extended to
September 2002. All mortgage payments under the amortization schedule
were paid timely during the Chapter 11 proceedings.
o The priority tax claim in the approximate amount of $118,000, which is
owed to the Florida Department of Revenue, will be payable with
interest at 8 percent over 2 years from the effective date.
o The priority administrative claims, including professional fees in the
approximate amount of $200,000 which have been incurred in connection
with the reorganization, are payable on the effective date.
In order for the Company to be able to effect the Plan of Reorganization on
the terms described above, the Parent, in exchange for the issuance to it
of 20 million shares of the Company's authorized common stock, contributed
$350,000 to the capital of the Company, waived an aggregate of $75,000 of
dividends payable by the Company to the Parent, guaranteed, subject to the
terms of the Plan, the approximately $1,284,000 which is due the principal
suppliers in accordance with the foregoing, and loaned $700,000 to the
Company. The loan will be repaid to the Parent with interest at prime over
a period of four years beginning on the third anniversary of the effective
date, subordinate to the amounts owed to the principal suppliers, and
secured by inventory and all the assets of the Company.
In March 1997, the Parent and the Company agreed that the above-described
$700,000 loan would be reduced by an amount equal to the lesser of $200,000
or the difference between $1,000,000 and the total shareholders' equity of
the Company as of the end of its 1997 fiscal year, without taking such debt
reduction into account, and cause the amount of such aggregate debt
reduction to be transferred to the capital account of the Company in
exchange for shares of a new class of cumulative preferred stock, entitled
Series C preferred stock, in an amount as shall be determined by dividing
the amount of such aggregate debt reduction by $100. The Series C preferred
stock to be so issued shall have a par value of $100 and a cumulative
preferred dividend of 10% per annum. The approval of the holders of a
majority of the shares of Series C preferred stock, voting as a separate
class, shall be required with respect to all matters on which the
shareholders have a right to vote.
-24-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(3) Summary of Significant Accounting Policies
(a) Fiscal Year
The Company's fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to the end of March. The fiscal years ended March 30,
1996, April 1, 1995 and April 2, 1994 consisted of 52 weeks,
respectively.
(b) Cash Equivalents
The Company considers highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Cash equivalents totaled approximately $1,082,100 and $89,000 at March
30, 1996 and April 1, 1995, respectively. The carrying amount
approximates fair value because of the short-term maturity of these
investments. The fair values are estimated based on quoted market
prices for these or similar instruments.
The Company has an agreement to purchase securities overnight under
agreements to resell ("repos"). At March 30, 1996 and April 1, 1995,
the outstanding repos, included above, approximated $0 and $37,000,
respectively, which approximated market. The repos are collateralized
by U.S. government and agency securities.
(c) Inventories
Inventories, comprised of compact discs, cassettes, videos and
accessories, are stated at the lower of cost (principally average)
including freight in, or market.
(d) Property and Equipment
Property and equipment are stated at cost. The assets are depreciated
over their estimated useful lives ranging from five to 31.5 years
using both straight-line and accelerated methods. The Company's policy
is to retire assets from its accounts as they become fully
depreciated.
(e) Income Taxes
The Company files a consolidated income tax return with its Parent.
Any applicable tax charges or credits are allocated to the Company on
a separate return basis. Provision is made for deferred income taxes
which result from certain items of income and expense being reported
for tax purposes in periods different than those reported for
financial reporting purposes. These items relate principally to the
methods of accounting for store leases with future scheduled rent
payment increases, inventory and the utilization of different methods
of depreciation for financial statement and income tax purposes.
-25-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
Effective April 4, 1993, the Company adopted the provisions of
Financial Accounting Standards Board's ("SFAS") No. 109, Accounting
for Income Taxes and has reported the cumulative effect of that change
in the method of accounting for income taxes in the statements of
operations. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Loss Per Common Share
Loss per common share was computed by dividing net loss, after
deducting preferred dividend requirements, by the weighted average
number of common shares outstanding during the years. The weighted
average number of common shares outstanding was 19,781,270 for the
years ended March 30, 1996, April 1, 1995 and April 2, 1994.
(g) Store Closing Costs
Store closing costs are recorded in the period the Company decides to
close the store. Such costs include the book value of abandoned
leasehold improvements, provision for the present value of future
lease obligations, less estimated sub-rental income as well as other
costs incident to the store closing.
(h) Reorganization Costs
Reorganization costs include: (a) professional fees relating to legal,
accounting and consulting services provided in connection with the
Chapter 11 proceedings, (b) costs and expenses associated with the
closing of locations, including an estimated accrual for the expected
allowed claims related to rejected executory contracts.
(i) Use of Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reported period. Actual results could differ
from those estimates. See discussion in note 2 concerning
uncertainties due to Chapter 11 proceedings.
-26-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(j) New Accounting Standard
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long Lived Assets to be Disposed Of, which became effective
for fiscal years beginning after December 15, 1995. This standard
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
intangibles to be disposed of. The Company believes that adoption of
this standard will not have a material impact on the financial
condition or operating results of the Company.
(k) Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
(4) Property and Equipment, net
Property and equipment consist of the following at March 30, 1996 and April
1, 1995:
1996 1995
---- ----
Land $ 395,570 395,570
Building 538,093 538,093
Leasehold improvements 1,867,903 3,356,279
Furniture and equipment 1,602,467 1,587,697
Building under capitalized lease 206,964 206,964
----------- -----------
4,610,997 6,084,603
Less accumulated depreciation and amortization (2,767,289) (3,011,734)
----------- -----------
$ 1,843,708 3,072,869
=========== ===========
-27-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(5) Long-term Obligations
Long-term obligations consists of the following at March 30, 1996 and April
1, 1995:
1996 1995
----------- -----------
Capital lease obligation, due in monthly installments of
$3,382, including interest at 17.5%; final payment due
March 2005 $ 183,353 191,096
Mortgage payable, due in equal installments of $2,981 per
month, plus interest at prime plus 0.5%; collateralized
by the mortgaged property with depreciated cost of
$819,244; final balloon payment of $284,500 due
September 2002 (note 2) 478,238 514,013
Lease obligation on closed store, net of sublease
rentals, including interest at 10%, payable in monthly
installments until November 2004, subject to
compromise at March 30, 1996 (note 2) -- 334,573
Settlement agreement with former director/shareholder,
due in monthly installments of $5,699, final
payment due January 2000 273,550 --
----------- -----------
935,141 1,039,682
(124,774) (110,028)
----------- -----------
Less current portion $ 810,367 929,654
=========== ===========
The capital lease pertains to the building portion of property owned by one
director and one former director. The rent expense on the land portion of
this lease was $113,000 for 1996 and $99,000 for 1995 and 1994.
The following represents future minimum lease payments under the capital
lease obligation:
Fiscal year Amount
----------- ------
1997 $40,600
1998 40,600
1999 40,600
2000 40,600
2001 40,600
Thereafter 162,160
-------
Total minimum lease payments 365,160
Less amount representing interest (181,807)
--------
Present value of minimum lease
payments $183,353
========
-28-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
Maturities of long-term obligations, excluding the capital lease
obligation, to maturity, are as follows:
Fiscal year Amount
----------- ------
1997 $115,560
1998 104,162
1999 104,163
2000 92,765
2001 35,775
Thereafter 299,363
--------
$751,788
========
The Company has a standby letter of credit of $64,800 available to a
landlord that was not drawn upon as of March 30, 1996. The letter of credit
is fully collateralized by a certificate of deposit, which is included in
other assets. In addition, the Company has an irrevocable letter of credit
of $150,000 that was not drawn upon as of March 30, 1996.
(6) Accrued Liabilities
Accrued liabilities consist of the following at March 30, 1996 and April 1,
1995:
1996 1995
---------- ----------
Gift certificate and credit slip liability $ 371,647 484,501
Payroll and related benefits 196,699 141,002
Taxes payable 280,191 134,318
Other 254,517 904,109
---------- ----------
$1,103,054 1,663,930
========== ==========
(7) Liabilities Subject to Compromise
Liabilities subject to compromise at March 30, 1996 include the following:
Lease rejection claims $ 600,000
Trade and other miscellaneous claims 5,071,434
-----------
$ 5,671,434
===========
Liabilities subject to compromise under the Chapter 11 proceedings include
substantially all trade and other payables as of the petition date. As
discussed in note 2, payment of these liabilities, including the maturity
of debt obligations, were stayed while the Company continued to operate as
a debtor-in-possession.
On January 17, 1997, the Company's plan of reorganization was confirmed by
the Bankruptcy Court. During fiscal 1997, the Company recorded an
extraordinary gain of approximately $488,000 as a result of the settlement
of lease rejection claims and vendor liabilities (note 2) (unaudited).
-29-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(8) Commitments and Contingencies
(a) Leases
The Company is a lessee under various operating leases, several of
which provide for percentage rent. An insignificant amount of
percentage rent was incurred in each of the years in the three-year
period ended March 30, 1996. Most of the leases contain renewal
options. In connection with the Chapter 11 filing, the Company
affirmed 13 leases (5 of which were modified on terms more favorable
to Peaches) and rejected 8 leases.
The aggregate minimum rental commitments under all noncancelable
operating leases at March 30, 1996 (including any modifications due to
leases rejected and affirmed), which are subject to further
modification in the Chapter 11 proceedings, are as follows:
Fiscal year Amount
----------- ------
1997 $1,173,515
1998 1,033,769
1999 855,836
2000 646,112
2001 545,822
Thereafter 511,745
----------
$4,766,799
==========
Rental expense under noncancelable operating leases, included in
selling, general and administrative expenses in the accompanying
statements of operations amounted to $1,853,000, $2,367,000 and
$2,531,000, respectively, for each of the years in the three-year
period ended March 30, 1996.
Rental expense on two stores owned by two directors and/or their
relatives was $215,417, $251,667 and $245,250, respectively, for each
of the years in the three-year period ended March 30, 1996.
(b) Legal Matters
The Company has been party to a lawsuit involving the Company's
closing of a store which it had leased in Charlotte, North Carolina
and its refusal to pay rent with respect to such store from and after
February 1991. In February 1995, the court entered a judgment ordering
the Company to pay the sum of $405,460 to plaintiff. The Company
recorded a charge to operations for the year ended April 1, 1995
related to the loss on such litigation and paid such amount in March
1995.
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business in the
opinion of management, all such matters are without merit or involve
such amounts that unfavorable disposition will not have a material
impact on the financial position or results of operations of the
Company.
-30-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(c) Employment Agreement
On March 18, 1996, the United States Bankruptcy Court Southern
District of Florida approved the settlement of an employment agreement
with a former officer. Peaches is to pay an amount of $273,550 over a
period of four years (note 5). Under the original terms of the
employment, the officer would have been entitled to in excess of
$870,000 in the aggregate.
(d) Management Agreement
On March 29, 1993, as amended, the Company entered into a management
and intercorporate agreement (the "Management Agreement") with the
Parent whereby the Company was required to pay the Parent an annual
fee; the Parent was required to provide the Company with the services
of the person who is the president and chairman; the Parent was
required to pay the Company for certain accounting and administrative
services performed by the Company; and so long as the Parent and the
Company filed consolidated income tax returns, their respective
liabilities for such taxes would be equitably apportioned as provided
in such agreement. Effective as of the close of business on December
31, 1995, the Management Agreement was terminated and replaced with
three new agreements which became effective January 1, 1996. In lieu
of paying a management fee to the Parent, the three new agreements
require payment to the Parent's president and chairman as long as he
continues to provide services similar to those performed under the
original Management Agreement.
(9) Shareholders' Equity
For each of the years in the three-year period ended March 30, 1996, the
Company had 2,500 shares of $100 par, 11 percent, Series A Cumulative
Preferred Stock and 2,500 shares of $100 par, 13 percent, Series B
Cumulative Preferred Stock authorized, issued and outstanding. The Parent
is the owner of all outstanding shares of Preferred Stock. In connection
with the reorganization, the Parent agreed to waive dividends in its shares
for the period beginning January 1, 1996 and ending March 29, 1997. The
Company can issue up to 50,000 shares of preferred stock, and the directors
have the authority to issue such shares in one or more additional series.
Each share of Series A and Series B Cumulative Preferred Stock is entitled
to one vote and has the same voting powers as the common stock, except that
all matters on which the vote of shareholders is required must, in order to
be approved, receive the requisite vote of either (i) both the Series A and
Series B, voting as separate classes or (ii) the common stock and either
the Series A or Series B, voting as separate classes. The shares of Series
A stock may be convertible into shares of the Company's common stock upon
the holders' compliance with cer tain surrender and notice provisions. In
March 1997, the conversion feature was eliminated. The liquidating value
for both the Series A and Series B shares is par value plus all accrued and
unpaid dividends.
(10) Pension Plan
Effective September 15, 1994, the Company curtailed its noncontributory
defined benefit plan which it had maintained with its Parent. As a result
of this curtailment all future benefit accruals were eliminated and accrued
benefits became fully vested. The net impact of this curtailment and
settlement in plan liabilities is a loss of $24,949, which is reflected in
selling, general and administrative expenses in fiscal year 1995.
-31-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
(11) Income Taxes
The provision (benefit) for income taxes consists of:
1996 1995 1994
--------- --------- ---------
Current:
Federal $ -- (240,000) (36,000)
State -- -- --
--------- --------- ---------
-- (240,000) (36,000)
Deferred:
Federal -- 292,000 (58,000)
State -- 45,000 --
--------- --------- ---------
-- 337,000 (58,000)
--------- --------- ---------
$ -- 97,000 (94,000)
========= ========= =========
Reasons for differences between income tax provision (benefit) and the
amount computed by applying the statutory federal income tax rate of 34
percent to pretax loss were:
1996 1995 1994
--------- --------- ---------
Income tax benefit at applicable statutory tax
rate of loss before income taxes $(821,000) (645,000) (94,000)
Add:
State income tax benefit, net of federal
benefit (81,000) (79,000) --
Change in valuation allowance 852,000 811,000 --
Other 50,000 10,000 --
--------- --------- ---------
Income tax provision (benefit) for the year $ -- 97,000 (94,000)
========= ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at March 30, 1996 and April 1, 1995 are
presented below.
1996 1995
----------- -----------
Deferred tax assets:
Inventories, principally due to additional costs
capitalized for tax purposes $ 87,340 50,051
Property and equipment, net, principally due to
differences in depreciation 152,139 187,037
Accrued rent, principally due to accrual for
financial reporting purposes 90,780 202,758
Provision for store closings 80,340 208,114
NOL carry forward 1,099,553 126,026
Accrued expenses 177,185 62,147
Other 28,427 27,125
----------- -----------
Total gross deferred tax assets 1,715,764 863,258
Less valuation allowance (1,715,764) (863,258)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
-32-
(Continued)
PEACHES ENTERTAINMENT CORPORATION
Notes to Financial Statements
At March 30, 1996, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $2,912,000 which is available
to offset future federal taxable income, if any, through 2011.
A valuation allowance is provided to reduce deferred tax assets to a level
which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from
future profitability which can be predicted with reasonable certainty.
(12) Fair Value of Financial Instruments
It was not practicable to estimate the fair value of the Company's
financial instruments due to the Chapter 11 proceedings. The impact of the
confirmed plan of reorganization on the estimated fair value of the
Company's financial instruments is disclosed in note 2.
(13) Business and Credit Concentrations
The retail sale of prerecorded music and video products is highly
competitive. The Company's share of the retail market in the Southeastern
United States is not significant. However, management believes the Company
has certain competitive advantages, including more convenient store
locations, a large selection of inventory and superior customer service.
The Company purchased approximately 81 percent of its merchandise from
seven principal suppliers (BMG, CEMA, PGD, Sony, Uni, WEA and Bassin)
during the fiscal year ended March 30, 1996. Purchases from given suppliers
are, to a great extent, determined by which of them are manufacturing or
distributing the most popular prerecorded music products at a given time,
as well as the credit and other terms on which such suppliers are willing
to sell to the Company.
The Company is not obligated to purchase merchandise from any supplier. It
has numerous alternate sources of supply for inventory, although in some
cases, the expenses are or would be greater if such alternate sources are
utilized.
-33-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of this filing, the directors and executive officers of PEC
are:
Name Position Age
---- -------- ---
Allan Wolk Chairman of the Board,
President (Chief Executive
Officer) and Director 58
Brian Wolk Executive Vice-President and Director 31
Jason Wolk Executive Vice-President, Chief Financial Officer
(Principal Financial and Accounting Officer),
Treasurer and Director 29
Allan Wolk has been the Chief Executive Officer and a director of PEC since
its formation in 1982. He has also been the Chief Executive Officer of URT since
its formation. He has been engaged in the prerecorded music business for more
than 35 years, principally in the rack merchandising and retail segments
thereof.
Brian Wolk, an attorney, has been employed by PEC in various capacities and
at various times since 1982 and has been employed by it, full time, since 1992.
He is a son of Allan Wolk. He has been a director of PEC and URT since 1994 and
a vice-president of both companies since June of 1995. He was appointed
Executive Vice-President of both companies in March, 1996.
Jason Wolk, a certified public accountant, has been employed by PEC in
various capacities and at various times since 1983 and has been employed by it,
full time, since 1994. He is a son of Allan Wolk. Prior to his full time
employment by PEC, he had been employed as an accountant by KPMG Peat Marwick
LLP. He has been a director of PEC and URT since 1994 and a vice-president and
the secretary of both companies since June, 1995. He was appointed Treasurer and
Chief Financial Officer (Principal Financial and Accounting Officer) of both
companies in September, 1995, and was appointed Executive Vice-President of both
companies in March, 1996.
-34-
The term of office of each director continues until the next annual meeting
of the stockholders and until his or her successor is elected. Mr. Wolk has an
employment agreement with URT. (See "EXECUTIVE COMPENSATION--Employment
Contracts"). Under the management agreements referred to above, PEC has the
right to use the services of Mr. Wolk. (See "BUSINESS- -Management Agreements
Between URT and PEC").
Item 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued by PEC for
services rendered in all capacities to it during the 1996 fiscal year and the
two prior fiscal years to (i) PEC's chief executive officer ("CEO") and (ii)
each of the other most highly compensated executive officers of PEC whose cash
compensation exceeded $100,000 and who were serving as executive officers at the
end of the 1996 fiscal year or for whom disclosure would otherwise be provided
but for the fact that such person was no longer serving as an executive officer
at the end of such fiscal year.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Long
Options/ Term
Other Stock Incen. All
Annual Restricted App. Plan Other
Name and Fiscal Salary Bonus Compensa- stock Rights Pay-outs Compensa-
position Year ($) ($) tion($) award(s)($) (#) ($) tion($)
- -------- ---- --- --- ------- ----------- --- ------- -------
Allan Wolk, 1996 125,000(2) -0- -0- (2) -0- -0- -0- 308,222(5)
Chairman 1995 -0- (2) -0- -0- (2) -0- -0- -0- -0-
& CEO 1994 -0- (2) -0- -0- (2) -0- -0- -0- -0-
David Jackowitz, 1996 247,947(1) -0- (4) -0- -0- -0- 244,900(5)
Vice-Pres. & 1995 289,897 -0- (4) -0- -0- -0- -0-
Treas.(1) 1994 326,889 -0- 33,646(3) -0- -0- -0- -0-
-35-
- ----------
(1) Mr. Jackowitz is no longer employed by PEC, and no longer holds any
position with PEC or URT, due to the termination of his employment,
effective as of September 30, 1995. The salary listed as paid to him with
respect to 1996 represents ordinary salary payments through the date of
termination ($115,576) and consulting fees paid subsequent to such
termination ($132,371) pursuant to a consulting arrangement with him. Such
consulting arrangement has since been terminated by PEC in connection with
the Chapter 11 proceeding. (See "EXECUTIVE COMPENSATION--Employment
Contracts" and "LEGAL PROCEEDINGS").
(2) Mr. Wolk is employed and compensated under an employment agreement with URT
which continues in effect until March 31, 2000. PEC receives the services
of Mr. Wolk under the management agreements described above (See
'BUSINESS--Management Agreement Between URT and PEC"). Pursuant to such
agreements, effective only as of January 1, 1996, PEC became obligated to
pay to Mr. Wolk a salary at the rate of $500,000 per annum and the amount
so paid by PEC to Mr. Wolk is credited against the amount payable by URT to
Mr. Wolk pursuant to the employment agreement between them.
(3) Includes life insurance premiums and amounts required to be credited to Mr.
Jackowitz under his then-existing employment agreement with PEC against
amounts which were then owed by him to URT.
(4) Pursuant to applicable rules, information is not included with respect to
other annual compensation which does not exceed the lesser of $50,000 or
10% of the salary and bonus reported for the named executive officer.
(5) The amounts set forth above represent a one-time distribution to such
individuals as a result of the termination of the pension plan described
below.
Employment Contracts
When the 1996 fiscal year began, an Amended and Restated Employment
Agreement dated December 14, 1994 (the "Jackowitz agreement") had been in place
between PEC and David Jackowitz, who also served as President, Treasurer and a
director of URT. Such employment was terminated by PEC effective as of September
30, 1995 pursuant to a provision of the Jackowitz agreement which so authorized
PEC to terminate Mr. Jackowitz' employment, without cause, at any time beginning
on such date. Pursuant to the provisions of the Jackowitz agreement pertaining
to the termination of his employment, Mr. Jackowitz was required to provide
consulting services to PEC, up to a maximum of 10 hours per month, beginning on
the effective date of his termination and continuing until September 3, 2005.
PEC, in consideration for such consulting services, was required
-36-
to provide a variety of health and other benefits to Mr. Jackowitz, and was
further required to pay to him compensation at the rate of $225,000 per annum
during the first year, $125,000 per annum during the second year and $65,000 per
annum during the balance of the consulting period.
As a result of the Chapter 11 proceeding, PEC took action to reject the
executory portion of the Jackowitz agreement. Mr. Jackowitz contended that he
was entitled to the full amount provided under such agreement. Such position on
the part of Mr. Jackowitz was challenged by PEC, and ultimately resulted in a
settlement with him. Pursuant to the terms of such settlement, which was
approved by the Bankruptcy Court, the Jackowitz agreement is rejected and Mr.
Jackowitz received the sum of $9,000, as an administrative claim, upon
confirmation of the Plan, and, as reflected in the financial statements for the
1996 fiscal year, is entitled to payment of the sum of $273,550 over a period of
4 years, payable in equal monthly installments commencing February, 1996.
Pursuant to the terms of such settlement, Mr. Jackowitz also released PEC and
URT from any and all liabilities (except those described immediately above) and
also executed a confidentiality agreement and an indemnification agreement in
the same form as agreements previously signed by him. Under the agreement with
Mr. Jackowitz which had previously been in effect (and which is described in the
preceding paragraph), the amount that would have been payable to Mr. Jackowitz
if such agreement had remained in effect would have exceeded $870,000.
Compensation Committee Interlocks and Insider Participation
PEC does not have a compensation committee or other board committee
performing equivalent functions. During the 1996 fiscal year, all deliberations
concerning executive officer compensation or any other arrangements between PEC
and any executive officers were conducted by PEC's full board of directors,
provided, however, that no director voted on compensation payable to him as an
executive officer or any other arrangement between him and PEC.
Pension Plan
In March of 1995, PEC and URT decided to terminate the PEC defined benefit
pension plan and trust (the "Pension Plan"), effective May 12, 1995, and to file
documents with the Internal Revenue Service for such purpose. On February 7,
1996, the Internal Revenue Service issued a determination letter that the
termination of the Pension Plan does not adversely affect its qualification for
federal tax purposes. As a result, the assets of the Pension Plan have been
distributed to Pension Plan participants.
Interests in the Pension Plan were computed on the basis of compensation
and service. As a result of the termination of the Pension Plan, the following
executive officers or former executive officers received one-time distributions
in the amounts set forth below:
-37-
Name of Individual Amounts
------------------ -------
Allan Wolk $ 308,222
David Jackowitz $ 244,900
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
As of the date of this filing, URT is the beneficial owner of approximately
37,213,370 shares of PEC common stock, constituting approximately 93.5% of the
issued and outstanding shares of such common stock, and all of PEC's issued and
outstanding shares of Series A and Series B preferred stock. All of such shares
of PEC stock are owned directly with voting and investment power. PEC has also
agreed to issue to URT shares of a new series of preferred stock. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
As set forth in the following table, Allan Wolk and members of his
immediate family own approximately 30% of URT's Class A common stock and
approximately 58% of URT's Class B common stock. The two classes of URT's common
stock are identical except that each class votes separately so that all matters
requiring the vote of stockholders require the approval of both classes of
common stock voting as separate classes. By reason of such ownership and his
position as Chairman of URT and Chairman of PEC, Mr. Wolk may be deemed to have
effective control of PEC.
The following table contains information concerning the number of shares of
each class of URT's common stock which was owned by each person who, as of
February 12, 1997, owned, beneficially, more than 5% thereof, and the number of
shares of each class of such stock owned beneficially, directly or indirectly,
by each executive officer and director and by all directors and executive
officers as a group on such date:
Amount & Nature
of Beneficial Percent
Title of Class Name Ownership of Class
- -------------- ---- --------- --------
Class A Common Executive Officers
Stock, par value and Directors
$.01 per share
Allan Wolk 3,194,186(1) 29.4%
Allan Wolk and
Lawrence Strauss,
as Trustees 33,072(2) *
Brian Wolk 12,980(3) *
-38-
Jason Wolk 17,480(3) *
All officers and
directors as a
group (3 persons) 3,257,718 30.0
Other
Scorpio Music, Inc.
P. O. Box A
Trenton, N.J. 08691 1,195,550(4) 11.0%
Amount & Nature
of Beneficial Percent
Title of Class Name Ownership of Class
- -------------- ---- --------- --------
Class B Common Executive Officers and Directors
Stock, par value
$.01 per share Allan Wolk 786,654(5) 58.4%
All officers and
directors as a
group (1 person) 786,654 58.4%
(1) Includes 3,150,786 shares owned by Allan Wolk, 25,920 shares owned by his
wife and 17,480 shares held by him for his daughter. However, Mr. Wolk has
renounced all voting and investment power with respect to those shares of
URT which are held by him for his daughter. He believes that his wife will
vote the shares owned by her in favor of proposals which he favors, but
disclaims beneficial ownership of any shares owned by her or held for the
benefit of his daughter.
(2) Such shares are held by Lawrence Strauss and Allan Wolk as trustees for the
benefit of children of Sheffield Wolk, Mr. Wolk's brother. Allan Wolk has
renounced all voting and investment power with respect to those shares of
URT which are so held in trust for the benefit of children of Mr. Wolk's
brother. All such powers as trustee are exercised exclusively by the
co-trustee, and Mr. Wolk disclaims beneficial ownership of such shares.
(3) Such shares are held in the name of Allan Wolk, as custodian. However, Mr.
Wolk has renounced all voting and investment power with respect to those
shares of URT which are held by him for his two sons, and disclaims
beneficial ownership of such shares. Such shares, being listed separately
here, are not included under the shares listed as beneficially owned by
Allan Wolk.
(4) Based on information supplied by URT's transfer agent. Does not include
160,000 shares
-39-
reported in a Schedule 13D, dated June 14, 1989, as owned by John T.
Gervasoni, Scorpio's reported president and 100% shareholder, as to which
no confirmation of ownership has been made by URT's transfer agent.
(5) Includes 780,174 shares owned by Allan Wolk and 6,480 shares owned by his
wife. Mr. Wolk believes that his wife will vote the shares owned by her in
favor of proposals which he favors, but disclaims beneficial ownership of
such shares.
(*) Less than one percent.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of their purchase in 1983 from an unaffiliated third party
seller, Allan Wolk and his brother, Sheffield Wolk, a former director of PEC,
are the owners of the land and building on which the PEC store in Fort
Lauderdale, Florida is located. Such property was and continues to be subject to
a lease with PEC as tenant, which had been negotiated by the prior owner. During
the 1995 fiscal year, PEC made and paid for certain renovations to the premises.
Based on the provisions of the lease, the owners agreed to be responsible for
$26,225 of the cost of such renovations which, with interest, is being deducted
by PEC over a period of 36 months.
In December, 1984, PEC entered into a long-term lease with Allan Wolk and
Sheffield Wolk for premises owned by them in Orlando, Florida. The lease term
commenced in December, 1984, and is for a period of twenty years with two
additional five year terms. The lease is a triple net lease. The lease provides
for a net minimum rental rate of $125,000 per annum from the rental commencement
date through March 31, 1985; a rate of $140,000 per annum during the following
five year period; a rate of $145,000 per annum during the next five year period;
a rate of $160,000 during the next five year period; and increases of $5,000
during every five year period thereafter. Notwithstanding the foregoing,
commencing with the sixth rental year, if net sales at the store during any
rental year are less than $1,800,000, the annual net minimum rental rate for
such year will be the same as that which had been in effect during the preceding
five year period. The lease was approved by disinterested directors and, in the
opinion of management, is as reasonable as those which could have been obtained
from unaffiliated third parties.
Because of the profitability of the above-referenced Fort Lauderdale and
Orlando stores, the leases for such two stores were among the leases which PEC
elected to assume during its Chapter 11 proceeding with the approval of the
Bankruptcy Court (See "LEGAL PROCEEDINGS").
During the first approximately nine months of the 1996 fiscal year, there
had been a lease in effect between PEC, as tenant, and Allan Wolk, his sister
and two children of his brother, as landlord, applicable to a store operated by
PEC in North Miami Beach, Florida. Because the North Miami Beach store had
recently become unprofitable for PEC, and remained unprofitable for PEC even
after the landlord had authorized PEC, in July 1995, to begin paying rent at a
lower amount than that required under the lease between the parties, the lease
applicable to such store was among the leases as to which PEC elected, with the
approval of the Bankruptcy Court, to exercise its right to reject as a result of
the Chapter 11 proceeding. Such lease had previously been approved by
disinterested directors (See "LEGAL PROCEEDINGS").
-40-
In April, 1989, PEC's board of directors authorized PEC to enter into
agreements with its officers and directors under which they would be entitled to
be indemnified by PEC and have their expenses advanced to them in the event of
any claim against them in their capacities as officers and directors. Such
agreements were entered into with all then-existing officers and directors of
PEC on or about May 22, 1989. On or about July 14, 1995, and pursuant to the
further authorization of the board of directors on such date, PEC entered into
indemnification agreements with the two additional officers and directors, Brian
Wolk and Jason Wolk, who were appointed to their respective positions subsequent
to 1989. The indemnification agreements so entered into with Brian Wolk and
Jason Wolk are in the same form as the indemnification agreements entered into
in 1989 with the then-existing officers and directors.
On or about October 16, 1995, URT loaned to PEC the sum of $250,000 for its
short term holiday season cash needs. Such loan was evidenced by a promissory
note under which PEC was required to repay such amount to PEC on November 19,
1995 with interest at the rate of 7% per annum. Such amount was so repaid by PEC
to URT on or about December 13, 1995.
In order for PEC to be able to effect the Plan of Reorganization on the
terms described above, URT, in exchange for the issuance to it of 20,000,000
shares of PEC's authorized common stock (including 218,730 treasury shares),
agreed that, subject to the terms of the Plan, it would contribute $350,000 to
the capital of PEC, waive an aggregate of $75,000 of dividends payable by PEC to
URT with respect to the period running from January 1, 1996 to March 31, 1997,
guarantee the approximately $1,284,000 which is due to PEC's principal suppliers
after the Effective Date pursuant to the arrangements described in "LEGAL
PROCEEDINGS" above and lend $700,000 to PEC. In order to facilitate the issuance
of such shares to URT, URT also waived its right to convert to common stock the
Series A preferred stock of PEC which is owned by URT. The loan by URT to PEC
was made on the Effective Date and is required to be paid back by PEC with
interest at the prime rate charged by Chase Manhattan Bank, N.A. over a period
of four years beginning on the third anniversary of the Effective Date. The debt
so owed by PEC to URT is subordinate to the amounts owed to PEC's principal
suppliers, and is secured by a second mortgage on PEC's Mobile, Alabama
property.
On or about March 25, 1997, URT and PEC agreed that the above-described
$700,000 loan from URT to PEC would be reduced by an amount equal to the lesser
of $200,000 or the difference between $1,000,000 and the total shareholders'
equity of PEC determined in the audited financial statements as of the end of
its 1997 fiscal year, without taking such debt reduction into account, and cause
the amount of such aggregate debt reduction to be transferred to the capital
account of PEC in exchange for shares of a new class of cumulative preferred
stock, entitled Series C preferred stock, in an amount as shall be determined by
dividing the amount of such aggregate debt reduction by $100. The Series C
preferred stock to be so issued will have a par value of $100 and a cumulative
preferred dividend of 10% per annum. The approval of the holders of a majority
of the shares of Series C preferred stock, voting as a separate class, shall be
required with respect to all matters on which the shareholders have a right to
vote.
-41-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
Page
----
1. Financial Statements
Table of Contents 16
Independent Auditors' Report 17
Peaches Entertainment Corporation
Financial Statements:
Balance sheets as of March 30,
1996 and April 1, 1995 18
Statements of operations for each of
the years in the three year period
ended March 30, 1996 19
Statements of shareholders' equity
for each of the years in the three
year period ended March 30, 1996 20
Statements of cash flows for each
of the years in the three year period
ended March 30, 1996 21
Notes to financial statements. 23
2. Financial Statement Schedules
Schedules have been omitted which are
not applicable or where the required
information is shown in the financial
statements or the notes thereto.
3. Exhibits
-42-
Exhibit No.
- -----------
3.1 Articles of Incorporation of Peaches Entertainment Corporation
("PEC") dated March 3, 1982, incorporated by reference to Exhibit
No. 3.3 to URT Industries, Inc. ("URT") and PEC's Registration
Statement No. 2-81065.
3.1-1 Amendment to PEC's Articles of Incorporation dated January 17,
1983, incorporated by reference to Exhibit No. 3.3-1 to URT's and
PEC's Registration Statement No. 2-81065.
3.2 By-Laws of PEC incorporated by reference to Exhibit No. 3.4 to
URT's and PEC's Registration Statement No. 2-81065.
3.3 Form of Amendment to PEC's Articles of Incorporation,
incorporated by reference to Exhibit No. 3.5 to PEC's
Registration Statement No. 2-81065.
10.35 Lease dated July 1, 1984 between Shirley Wolk and PEC applicable
to North Miami Beach, Florida premises, incorporated by reference
to Exhibit No. 13.46 to URT's Registration Statement No. 2-63747.
10.36 Lease dated December 13, 1984 between Allan Wolk and Sheffield
Wolk and PEC applicable to Orlando, Florida premises,
incorporated by reference to Exhibit No. 13.47 to URT's
Registration Statement No. 2-63747.
10.40 Amendment to Lease dated February 25, 1986 between Allan Wolk and
Sheffield Wolk and PEC applicable to Orlando, Florida premises,
incorporated by reference to Exhibit No. 10(ss) to URT's Form
10-K Annual Report for the year ended March 29, 1986.
10.47 Indemnification Agreement dated May 22, 1989 between Allan Wolk
and PEC, incorporated by reference to Exhibit 10.47 to PEC's Form
10-K Annual Report dated June 27, 1989.
10.48 Indemnification Agreement dated May 22, 1989 between David
Jackowitz and PEC, incorporated by reference to Exhibit 10.48 to
PEC's Form 10-K Annual Report dated June 27, 1989.
10.54 Lease dated December 22, 1989 between Sunbeam Properties, Inc.
and PEC applicable to Miramar, Florida premises, incorporated by
reference to Exhibit 10.54 to PEC's Form 10-K Annual Report dated
June 27, 1991.
10.57 Management and Intercorporate Agreement dated as of March 29,
1993 between URT and PEC, incorporated by reference to Exhibit
10(dddd) to URT's Form 10-K Annual Report dated June 25, 1993.
10.58 Amended and Restated Employment Agreement, dated December 14,
1994, between David Jackowitz and PEC, incorporated by reference
to Exhibit 10(ffff) to URT's Form 10-K Annual Report dated June
29, 1995.
-43-
10.59 Agreement No. 1 dated as of October 1, 1994 to Management and
Intercorporate Agreement dated May 29, 1993 between URT and PEC,
incorporated by reference to Exhibit 10(iiii) to URT's Form 10-K
Annual Report dated June 29, 1995.
10.60 Letter Agreement dated January 1, 1996 between URT and PEC
pertaining to termination of Management and Intercorporate
Agreement dated March 29, 1993, incorporated by reference to
Exhibit 10(jjjj) to URT's Form 10-K Annual Report dated April 25,
1997.
10.61 Letter Agreement dated January 1, 1996 between URT and PEC
pertaining to services of Allan Wolk, incorporated by reference
to Exhibit 10(kkkk) to URT's Form 10-K Annual Report dated April
25, 1997.
10.62 Indemnification Agreement dated July 14, 1995 between Brian Wolk
and PEC.
10.63 Indemnification Agreement dated July 14, 1995 between Jason Wolk
and PEC.
10.64 PEC's Amended Plan of Reorganization, dated October 23, 1996,
incorporated by reference to Exhibit 1 to PEC's Form 8-K dated
April 7, 1997.
10.65 Order Confirming PEC's Amended Plan of Reorganization, as
Modified, dated January 17, 1997, incorporated by reference to
Exhibit 2 to PEC's Form 8-K dated April 7, 1997.
10.66 URT Promissory Note dated January 27, 1997 made by PEC to URT.
10.67 Security Agreement dated January 27, 1997 between PEC and URT.
10.68 Mortgage Agreement with Assignment of Rents, Security Agreement
and Fixture Filing dated January 27, 1997 by PEC in favor of URT.
10.69 Reimbursement Agreement dated January 27, 1997 between PEC and
URT.
10.70 Subordination Agreement dated January 27, 1997 between PEC, URT
and selected creditors.
10.71 Subordination Agreement dated January 27, 1997 between PEC, URT
and creditor.
10.72 Surrender and Waiver Agreement dated January 27, 1997 between PEC
and URT.
10.73 Waiver Agreement dated March 1, 1997 between PEC and URT.
10.74 Stock Purchase Agreement dated March 24, 1997 between PEC and
URT.
-44-
27 Financial Data Schedule
(b) Reports on Form 8-K.
A report on Form 8-K, dated January 16, 1996, was filed by PEC
on or about January 26, 1996 to report PEC's filing for
protection from its creditors under Chapter 11 of the Bankruptcy
Code and the closing of three stores. PEC filed Forms 8-K dated
July 10, 1996, August 22, 1996 and November 22, 1996, on or
about such dates, in order to report the effects of such Chapter
11 proceeding on PEC's ability to file this annual report and
certain quarterly reports. PEC filed a report on Form 8-K dated
April 7, 1997, on or about such date, in order to report on the
Plan of Reorganization.
-45-
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.
PEACHES ENTERTAINMENT CORPORATION
By: s/Allan Wolk
------------------------
Allan Wolk,
Chairmain of the Board
Dated: April 25, 1997
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. Title Date
By: s/Allan Wolk April 25, 1997
--------------------------------
Allan Wolk,
Chairman of the Board ,
President (Principal
Executive Officer) and Director
By: s/Brian Wolk April 25, 1997
--------------------------------
Brian Wolk, Executive
Vice President and Director
By: s/Jason Wolk April 25, 1997
--------------------------------
Jason Wolk, Executive
Vice President, Treasurer
(Principal Financial and
Accounting Officer),
Secretary and Director
-46-
Index of Exhibits to Form 10-K of Peaches Entertainment Corporation
(Commission File No. 0-12375) for year ended March 30, 1996
Exhibit No. Description
10.62 Indemnification Agreement dated July 14, 1995 between Brian Wolk
and PEC.
10.63 Indemnification Agreement dated July 14, 1995 between Jason Wolk
and PEC
10.66 URT Promissory Note dated January 27, 1997 made by PEC to URT.
10.67 Security Agreement dated January 27, 1997 between URT and PEC.
10.68 Mortgage Agreement with Assignment of Rents, Security Agreement
and Fixture Filing dated January 27, 1997 by PEC in favor of URT.
10.69 Reimbursement Agreement dated January 27, 1997 between URT and
PEC.
10.70 Subordination Agreement dated January 27, 1997 between PEC, URT
and selected creditors.
10.71 Subordination Agreement dated January 27, 1997 between PEC, URT
and creditor.
10.72 Surrender and Waiver Agreement dated January 27, 1997 between URT
and PEC.
10.73 Waiver Agreement dated March 1, 1997 between URT and PEC.
10.74 Stock Purchase Agreement dated March 24, 1997 between URT and
PEC.
27 Financial Data Schedule