The cover of the 1997 Annual Report:
In It To Win It
(Picture of a family leaving a Pamida store.)
Hometown Values
Pamida 1997 Annual Report
<PAGE>
PAMIDA HOLDINGS CORPORATION
Pamida Holdings Corporation (ASE:PAM), through its primary operating
subsidiary, Pamida, Inc., operates 149 mass merchandise retail stores in 15
Midwestern, North Central and Rocky Mountain states. A typical stores carries a
broad assortment of value-priced hardlines and softlines merchandise and offers
one-stop shopping convenience to small, rural communities.
(Map of store locations for Pamida, Inc.)
HOMETOWN VALUES
The "Hometown Values" part of our Pamida corporate logo represents our
commitment to offer our customers value-oriented merchandise. Equally as
important, it serves as a constant reminder of the way we conduct our business.
Pamida stores are located in small, rural communities. Pamida customers are
our friends and neighbors, and they're right in expecting a pleasant and
positive shopping experience, one neighbor to another. "Hometown Values" means
being part of the community and placing great emphasis on meeting the value
needs of our customers.
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
Years Ended
---------------------------------------
February 2, January 28, January 29,
Fiscal Year 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales .............................................................. $ 633,189 $ 736,315 $ 711,019
Sales % (decrease) increase ................................... (14.0)% 3.6% 8.2%
Comparable store sales % (decrease) increase .................. (2.6)% (0.7)% 5.2%
Gross profit ....................................................... 154,090 177,688 177,367
Percent to sales .............................................. 24.3% 24.1% 24.9%
Selling, general and administrative expenses ....................... 125,105 151,096 143,585
Percent to sales .............................................. 19.8% 20.5% 20.2%
FIFO EBITDA ........................................................ 41,525 41,378 48,484
Percent to sales .............................................. 6.6% 5.6% 6.8%
(Loss) income before extraordinary item
and special charges ........................................... (796) (2,664) 2,915
Net (loss) income available for common shares before special charges (1,187) (2,655) 2,554
Special charges (net of taxes)* .................................... - 92,355 -
Net (loss) income available for common shares ...................... $ (1,187) $ (95,010) $ 2,554
Net (loss) income per common share information:
Net (loss) income available for common shareholders
before special charges........................................ $ (.24) $ (.53) $ .51
Special charges (net of taxes)..................................... - (18.34) -
----------- ----------- -----------
Net (loss) income available per common share....................... $ (.24) $ (18.87) $ .51
----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding................................. 5,005 5,035 5,025
<FN>
*These items are presented in operations of the Company in the year
end financial statements as follows:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Pre-tax Tax Net
Components of special charges: charge benefit charge
----------- ----------- ---------
<S> <C> <C> <C>
Long-lived assets write-off............................... $ 78,551 $ 3,269 $75,282
Store exit costs.......................................... 21,397 4,324 17,073
----------- ----------- ---------
Total..................................................... $ 99,948 $ 7,593 $92,355
=========== =========== =========
</TABLE>
CONTENTS
Chairman's Letter ............................................................ 2
Initiatives .................................................................. 6
Selected Consolidated Financial Data.......................................... 9
Management's Discussion and Analysis..........................................10
Independent Auditors' Report..................................................16
Financial Section.............................................................17
Corporate Information.........................................................32
Directors & Management .......................................................33
1
<PAGE>
CHAIRMAN'S LETTER TO OUR SHAREHOLDERS, BUSINESS PARTNERS AND TEAM MEMBERS
INTRODUCTION
To be a successful retailer in today's market place, a company must react
quickly to changing market conditions. In order to be a great retailer, the
company must be an initiator of change. For the last four years Pamida has
proven its ability to recognize and react to the dynamic changes taking place in
the retail industry. We are now initiating the type of changes which will make
us a truly great retailer.
(Picture of Steve Fishman, Chairman, Chief Executive Officer & President)
Fiscal 1997 was a pivotal year in our plan to rebuild the infrastructure of
Pamida and to reposition ourselves in the retail industry. We began the year by
announcing the closing of forty stores that did not fit our niche market
strategy and spent much of the first and second quarters executing the store
closing plan. We installed a
- -------------------------------------------------------------------------------
"For the last four years Pamida has proven its ability to recognize and react to
the dynamic changes taking place in the retail industry. We are now initiating
the type of changes which will make us a truly great retailer."
- -------------------------------------------------------------------------------
new warehouse management system at the end of the first quarter and spent most
of the second and third quarters learning how to make the system work properly.
We completed our conversion to a new store-level inventory method which monitors
individual stock keeping units (SKU). The improved data generated at store-level
facilitated the roll-out of an automatic inventory replenishment system during
the third and fourth quarters of the year.
With this aggressive repositioning, we did experience our share of
challenges. I am extremely pleased with the manner in which our team members
responded and with the ability of our management team to stay focused on
bottom-line performance. I am also pleased with our ability to absorb these
major changes and remain true to our long-term strategy.
STRATEGIC MARKET NICHE
In light of all these changes, it is appropriate to restate who we are and
why I believe our business strategy will be successful:
Pamida is the pre-eminent broad-based mass merchandise retailer serving
smaller rural Hometown communities. At the end of fiscal 1997, we served 148
markets in 15 Midwestern states. Over 90% of these markets have trade area
populations of less than 20,000 and, in over 80% of our markets, we are the only
broad-based
- -------------------------------------------------------------------------------
"Pamida is the pre-eminent broad-based mass merchandise retailer serving
smaller rural Hometown communities."
- -------------------------------------------------------------------------------
mass merchandiser. We aim to serve our Hometown customers by providing
convenient access to a broad assortment of value-priced hardlines and softlines
merchandise. Our geographic positioning, combined with the breadth of our
assortments, differentiates us from any other retailer in our markets.
The strength and uniqueness of our franchise has enabled us to prevail in
an industry where many others have failed. We recognize this strength and
continue to make real estate decisions consistent with our strategy. In fiscal
1997, we closed a total of forty-two stores, relocated two smaller units to new
2
<PAGE>
prototype buildings and opened six additional prototype stores in new markets.
Each location was carefully evaluated as to both current competitive conditions
and the anticipated future evolution of the particular market. We finished the
year with a total of 148 stores. The number of new prototype stores has
increased to 36 and now represents over 24% of our current 149 store chain.
We realize that location alone does not guarantee our success. Pamida must
be the most efficient retailer within our chosen niche. We continue to
concentrate on improving our overall operating model and are striving to deliver
value to our customers. Our fiscal 1997 fourth quarter performance suggests that
we are on the right path.
RE-ENGINEERING THE SUPPLY CHAIN
One of the most effective ways to deliver better value to our customers is
to improve the efficiency of our supply chain. During the first quarter of last
fiscal year we installed Catalyst, our new warehouse management system. Catalyst
represented a giant leap forward in technology for Pamida. It was our first
venture into a client-server environment and presented the challenge of learning
how to operate a system utilizing distributed data. Catalyst has now been fully
integrated with our transportation planning package, Manugistics, and our legacy
merchandising system.
This new technology enables our distribution centers to utilize radio
frequency scanning and system-directed work assignments to improve overall
productivity. We now have the capability to cross-dock many incoming shipments,
which means flowing received merchandise immediately to our stores without first
warehousing such merchandise. This saves both time as well as labor expense. The
improved accuracy also provides more reliable data to the rest of Pamida's
organization, thereby facilitating better inventory control.
Also, we are currently constructing a new distribution center in Lebanon,
Indiana. This location will increase our overall distribution capacity and will
help reduce transportation expense on outbound shipments to our Eastern
locations. We plan to open the new facility in July of this year.
UPGRADING OUR MERCHANDISING SYSTEMS
In addition to upgrading our logistics support systems, we were able to
make several major improvements in our merchandising systems. During the second
quarter we completed the conversion of all stores to an individual SKU level
inventory system. We then rolled-out an automatic replenishment program which we
call Min/Max. This new program automatically re-supplies the stores with their
basic assortment of merchandise based on a store-specific rate of sale; and as a
result we have experienced a substantial improvement in the store-level in-stock
position of this basic, higher margin merchandise. This, in turn, has
contributed to the recent favorable trends in both comparable store sales and
maintained margins.
- -------------------------------------------------------------------------------
"...we have experienced a substantial improvement in the store-level in-stock
position of this basic, higher margin merchandise. This, in turn, has
contributed to the recent favorable trends in both comparable store sales and
maintained margins."
- --------------------------------------------------------------------------------
Our plan also calls for continued investment in our management information
systems. In fact, this fiscal year we will invest $5 million in store software
and hardware system upgrades, a new financial system and ongoing development of
merchandising systems. This plan also will address many of the "Year
3
<PAGE>
2000" software programming issues and position Pamida to move forward into the
next century.
WIN 97 -- DELIVERING EVERYDAY HOMETOWN VALUES
Our management team and our team members remain focused on what is
important to our customers and the future of our company. Each year we choose a
primary focus as our WIN strategy. WIN is the acronym for What's Important Now.
This year's focus is to aggressively grow our business by satisfying our
customers. We will do this by maintaining a superior in-stock position on basic
merchandise and by supporting company advertising with 100% of the ad
merchandise needed to meet anticipated demand. We also will strive to have more
of the merchandise our customers need and want, with the goal of selling 5% more
to every person who comes through our doors.
FINANCIAL HIGHLIGHTS
The first half of fiscal 1997 was a challenge for Pamida. Closing the forty
stores and installing a new warehouse management system certainly affected our
operating results. Pamida's management team responded well in this period of
transition, as evidenced by the performance achieved in the second half of the
year. The table below highlights the transition and improved results for our
company:
COMPARATIVE FINANCIAL HIGHLIGHTS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
First Half Second Half
----------------------------- ----------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1997 Fiscal 1996*
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales.............................. $ 287,603 $ 340,914 $ 345,586 $ 395,401
Gross profit....................... 68,671 81,451 85,419 96,237
Percent of sales................... 23.9% 23.9% 24.7% 24.3%
Selling, general and administrative
expenses......................... 60,473 71,690 64,632 79,406
Percent of sales................... 21.0% 21.0% 18.7% 20.1%
FIFO EBITDA........................ 13,975 17,894 27,550 23,484
Percent of sales................... 4.9% 5.3% 8.0% 5.9%
Net (loss) income available
for common shares................ $ (6,226) $ (1,752) $ 5,039 $ (903)
Percent of sales................... (2.2)% (0.5)% 1.5% (0.2)%
Net (loss) income per common
share............................ $ (1.25) $ (.35) $ 1.01 $ (.18)
<FN>
*Excluding after tax store closing charge and write-down of impaired assets
</FN>
</TABLE>
The second-half improvements as a percent of sales in gross profit,
selling, general and administrative expense, EBITDA and net income clearly
illustrate that our combined efforts, investments and difficult decisions are
beginning to show results. We expect to carry this momentum forward into fiscal
1998, although certain planned first quarter expenses will likely delay
bottom-line improvement until later in the year.
4
<PAGE>
IN IT TO WIN IT
The retail industry has always been very competitive. Each year we see more
consolidation, which leaves fewer players vying for a larger share of the
market. Some companies adapt a survival strategy involving short-term decisions
which eventually lead to their demise. At Pamida, we are making good long-term
decisions which we believe will make us stronger every year. We are concerned
with short-term profitability but not at the
- --------------------------------------------------------------------------------
"I believe our market niche, our team members and our management team provide
Pamida with the foundation to successfully execute its long-term growth
strategy. We are not in business to survive-we are in it to win!"
- --------------------------------------------------------------------------------
expense of long-term positioning within the market. I believe our market niche,
our team members and our management team provide Pamida with the foundation to
successfully execute its long-term growth strategy. We are not in business to
survive-we are in it to win!
I appreciate the support we have received from all of our business partners
during the past year. Both the financial community and our vendor partners have
shown their faith in our company during a challenging year of transition. I also
appreciate the special efforts of our team members who worked many hours
executing the store closing plan and maintaining
- --------------------------------------------------------------------------------
"I want to extend a special `Thank You' to our customers who have shown us
that if we provide them with Hometown value, they will reward us with true
Hometown loyalty."
- --------------------------------------------------------------------------------
our daily business. And finally, I want to extend a special `Thank You' to our
customers who have shown us that if we provide them with Hometown value, they
will reward us with true Hometown loyalty.
Wishing the best to you and your family,
/s/ Steven S. Fishman
Steven S. Fishman
Chairman,
Chief Executive Officer & President
5
<PAGE>
INITIATIVES - STRENGTHENING THE INFRASTRUCTURE OF PAMIDA
LOGISTICS AND DISTRIBUTION
During the last three years we have made significant investments in the
merchandise supply chain of our company. In 1995 we installed a transportation
management package, Manugistics, which has allowed us to move product in a more
efficient and timely manner; and in March 1996 we installed a new warehouse
management system, Catalyst. These two systems are designed to coordinate the
movement of merchandise from vendors' loading docks to our stores.
- --------------------------------------------------------------------------------
"During the last three years we have made significant investments in the
merchandise supply chain of
our company."
- --------------------------------------------------------------------------------
Catalyst utilizes client server architecture and provides improved
operating efficiencies within our distribution centers. Team members utilize
radio frequency scanners to fill and track store orders. The scanners also
provide computer directed work assignments which reduce down time by directing
the team member to the next closest job assignment. This new system also has
allowed Pamida to drastically increase the number of orders being cross-docked,
which decreases both storage and handling of merchandise. Product arrives in the
stores quicker and at a lower total cost.
(Picture of a radio frequency scanner used to fill orders
at our distribution center)
This year we will concentrate on improving our utilization of both Catalyst
and Manugistics in order to optimize the return on our investments. We also will
open a new distribution center in Lebanon, Indiana, which
- --------------------------------------------------------------------------------
"We also will open a new distribution center in Lebanon, Indiana, which we will
utilize to provide the distribution capacity associated with the planned growth
of our company."
- --------------------------------------------------------------------------------
we will utilize to provide the distribution capacity associated with the planned
growth of our company. Lebanon is strategically located in the heart of our
Eastern markets and will provide additional freight savings to the company. The
integration of the new distribution center with the Catalyst system and the
Manugistics transportation package will position Pamida's Logistics and
Distribution to support growth into the next century. The opening of this
facility also will permit additional operating efficiencies at our Omaha
distribution centers.
INFORMATION SYSTEMS
In April 1994 Pamida completed the conversion of all stores to full
point-of-sale scanning. During 1995 we installed radio frequency scanners to
facilitate better inventory tracking. 1996 witnessed the chain-wide
implementation of a SKU (stock-keeping unit) inventory control system. Building
upon our prior investments and this foundation of detailed store level inventory
management, we have developed additional proprietary systems to automate the
replenishment of key basic merchandise.
6
<PAGE>
(Artist drawing of our new distribution center in Lebanon, Indiana
scheduled to open July 1997)
These system enhancements have greatly increased product availability in
our stores while decreasing the labor intensive tasks of reordering store
inventories on a manual basis. They also have positioned Pamida for continued
inventory management improvements through the utilization of the Catalyst system
described above and the planned implementation of a new merchandise management
system. We are currently in the pre-implementation stage of this project with
planned completion during 1998.
YEAR 2000
To address the information systems challenges that the year 2000 presents
to our industry, we are proactively capitalizing on this situation by replacing
non-compliant systems with software and systems architecture capable of
propelling Pamida into the next century. Three parallel system initiatives are
- --------------------------------------------------------------------------------
"To address the information systems challenges that the year 2000 presents to
our industry, we are proactively capitalizing on this situation by replacing
non-compliant systems with software and systems architecture capable of
propelling Pamida into the next century."
- --------------------------------------------------------------------------------
currently underway: replacement of our core financial software portfolio,
upgrades to our in-store computer systems, and the first phase of the
merchandising management system. While not totally insulating Pamida from the
potential disruptive influences of the year 2000 computer software issues, these
programs should, in combination with other management initiatives, assure that
we will be well positioned to continue business in the next century as the
leading regional mass merchandise retailer in smaller rural communities.
7
<PAGE>
HUMAN RESOURCES
To be the leading mass merchandise retailer in our hometown communities, we
must consistently develop the skills and talents of our team members and augment
this internal effort by attracting individuals to Pamida who have the
specialized skills and talents we need to further strengthen our organization.
- --------------------------------------------------------------------------------
"..we must consistently develop the skills and talents of our team members and
augment this internal effort by attracting individuals to Pamida who have the
specialized skills and talents we need to further strengthen our organization."
- --------------------------------------------------------------------------------
We have invested in training our team members to allow those with
leadership responsibility and those with leadership potential to develop the
core competencies needed to be effective in their roles. We are also very
committed to developing our merchandising staff internally. We have instituted a
thorough training regimen that provides buyer trainees with the necessary
education and exposure to ensure that they understand the dynamics, values and
needs of our hometown customers and are qualified to assume buyer responsibility
when the opportunity arises.
(Picture of training session in process at the Company's tecnology training
center in Omaha, NE)
Another significant training effort is underway to maximize the
effectiveness of our investment in systems technology. With these new enhanced
systems, the increased use of personal computers and our focus on Year 2000
compliance, skills development has been critical for the technical and
non-technical user alike. A technology training center has been established in
Omaha where a dedicated staff provides systems training to the merchandising
organization and corporate staff. In addition, field trainers are visiting
stores to train team members in the consistent use of our store operating
systems and prepare them for a complete system upgrade later this year.
While we continue to refine all aspects of our business, emphasizing team
member skills development is imperative for consistent execution of our
strategies and the long term success of our chain.
MARKETING
We have made significant improvements in communicating our "Hometown
Values" to our customers through our marketing initiatives. These improvements
extend from our planning process to our weekly advertising circulars and,
finally, to analyzing the return on our marketing investments.
We have streamlined our production process, thereby eliminating three weeks
from our advertising production schedule. This enables our buyers to plan their
advertising closer to a season and to react more quickly to market trends. The
design of our weekly circulars has been enhanced with new layouts and dominant
features in key product categories, which has resulted in a favorable impact, in
terms of both sales and profits. This approach has also been extended to our
in-store signage program resulting in consistent and clear communication with
our customers.
As a result of the foregoing, we have been able to reduce our overall
advertising expenditures by approximately $2 million on a comparable store
basis.
8
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE AND OTHER DATA)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------
February 2, January 28, January 29, January 30, January 31,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ................................... $ 633,189 $ 736,315 $ 711,019 $ 656,910 $ 622,941
Gross profit ............................ 154,090 177,688 177,367 158,906 154,695
Selling, general and
administrative expenses .............. 125,105 151,096 143,585 133,921 124,225
--------- --------- --------- --------- ---------
Operating income ........................ 28,985 26,592 33,782 24,985 30,470
Interest expense ........................ 29,781 29,526 27,367 26,588 25,147
Long-lived asset write-off .............. - 78,551 - - -
Store closing costs ..................... - 21,397 - - -
--------- --------- --------- --------- ---------
(Loss) income before provision for income
taxes and extraordinary item ......... (796) (102,882) 6,415 (1,603) 5,323
Income tax (benefit) provision .......... - (7,863) 3,500 427 3,061
--------- --------- --------- --------- ---------
(Loss) income before extraordinary item . (796) (95,019) 2,915 (2,030) 2,262
Extraordinary item ...................... - 371 - (4,943) -
--------- --------- --------- --------- ---------
Net (loss) income ....................... (796) (94,648) 2,915 (6,973) 2,262
Less preferred dividends
and discount amortization ............ 391 362 361 359 357
--------- --------- --------- --------- ---------
Net (loss) income available
for common shares .................... $ (1,187) $ (95,010) $ 2,554 $ (7,332) $ 1,905
========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 5,004,942 5,034,536 5,024,745 4,999,984 4,999,984
========= ========= ========= ========= =========
Net (loss) earnings per common share:
(Loss) earnings before extraordinary
item ............................. $ (.24) $ (18.94) $ .51 $ (.48) $ .38
Extraordinary item ................. - $ .07 - (.99) -
--------- --------- --------- --------- ---------
Net (loss) earnings per common share $ (.24) $ (18.87) $ .51 $ (1.47) $ .38
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital ..................... $ 28,673 $ 34,082 $ 46,725 $ 41,323 $ 16,515
Total assets ........................ 269,188 258,525 354,367 314,621 309,629
Long-term debt ...................... 168,000 163,746 162,505 160,315 132,006
Obligations under capital leases .... 33,999 36,559 43,050 35,618 37,164
Redeemable preferred stock .......... 1,875 1,826 1,779 1,734 1,690
Common shareholders' (deficit) equity (87,303) (86,116) 8,876 6,322 13,654
OTHER DATA:
Team Members ........................ 5,700 7,200 7,200 6,100 5,900
Number of stores .................... 148 184 184 173 178
Retail square feet (in millions) .... 4.35 5.22 5.09 4.68 4.75
</TABLE>
9
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED FEBRUARY 2, 1997 COMPARED TO YEAR ENDED JANUARY 28, 1996
SALES - As discussed in Note O to the financial statements, the Company
closed forty stores at the end of fiscal 1996 in unprofitable or highly
competitive markets which did not fit the Company's niche market strategy.
Consequently, the Company experienced a planned decrease in total sales for
fiscal 1997 of $103,126 or 14.0% compared to fiscal 1996 due primarily to the
reduced number of stores. During fiscal 1997 the Company opened eight new
prototype stores, of which six are located in new markets and two were
relocations; the Company also closed two stores, resulting in a net increase in
selling area during the fiscal year of approximately 216,000 square feet (not
including changes relating to the forty stores closed as of fiscal year end
1996) to a total of 4,348,000 square feet. As of February 2, 1997, the Company's
store base included 35 of the Company's most recent store prototype, which
represented 28.7% of the Company's total selling square feet.
Comparable store sales during the 53-week fiscal 1997 period decreased by
$8,893 or 1.5% from the 52-week fiscal 1996 period. Comparable store sales on a
53-week to 53-week basis decreased by 2.6%. Sales were affected primarily by
slowed warehouse distributions to stores as a result of the implementation of a
new warehouse inventory management system initiated in the first quarter of
fiscal 1997. The slowed distributions caused a deterioration of merchandise
in-stock positions in most of the Company's stores, resulting in lost sales.
While implementation of the warehouse system was largely completed by August
1996, and in-stock positions at the stores improved thereafter, sales remained
below management expectations due to reduced customer traffic continuing in the
third and fourth quarters. Comparable sales also were affected during much of
the year by low-margin clearance sales in fiscal 1996 which were not necessary
at the same level in fiscal 1997. However, beginning late in the holiday
shopping season and continuing through fiscal year end, sales improved as the
Company demonstrated to customers its improved in-stock position in all product
categories.
The Company experienced substantial comparable store sales increases in
fiscal 1997 in several merchandise categories, the most dramatic of which were
in the pharmacy prescription, junior apparel, grocery and ready-to-wear areas.
Comparable store sales gains also were generated in the hosiery, team sports,
camera, stationery, health aids and bath categories. The Company experienced
comparable store sales decreases in several categories. The largest dollar
decreases on a comparable store basis were in the electronics, automotive,
misses bottoms, men's shoes, electrical and appliance areas. Management believes
that subtle adjustments made to the Company's softlines strategy at the end of
fiscal 1996 to meet customer demand for a deeper selection of basic apparel had
a positive impact on sales and margins in softlines during fiscal 1997.
GROSS PROFIT - Gross profit dollars were affected by the reduced number of
stores in operation during fiscal 1997 as compared to fiscal 1996. The Company's
merchandise gross profit as a percentage of sales improved to 27.8% in fiscal
1997 from 26.8% in fiscal 1996. However, this improvement was diluted by
additional costs related to the implementation of the new warehouse inventory
management system discussed above. Warehouse costs increased to $13,457 from
$11,066 last year and increased as a percent of sales to 2.1% from 1.5% last
year. Delivery costs decreased to $7,637 in fiscal 1997 from $8,845 last year
and amounted to 1.2% of sales in both years. Accordingly, gross profit decreased
by $23,598, or 13.3%, to $154,090 in fiscal 1997 from $177,688 in fiscal 1996
but, as a percentage of sales, increased to 24.3% in fiscal 1997 from 24.1% in
fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE decreased $25,991, or 17.2%, to
$125,105 in fiscal 1997 from $151,096 in fiscal 1996. As a percentage of sales,
selling, general and administrative expense decreased to 19.8% from 20.5% last
year. This reduction was largely attributable to reductions in store level
expenses. Store payroll, controllable and occupancy expenses accounted for 64.2%
of the total decrease in selling, general and administrative expense and
decreased by 14.5%, 17.5% and 13.9%, respectively. Selling, general and
administrative expense also was positively impacted by a 28.9% reduction in
advertising costs which accounted for 18.2% of the gross decrease in selling,
general and administrative expense. All of these areas of expense were impacted
by the elimination of costs related to the forty stores which were closed as of
the end of fiscal 1996. Selling, general and administrative
expense also was impacted by an 11.0% decrease in corporate general and
administrative costs which accounted for 11.3% of the gross decreases in
selling, general and administrative expense. The major components of this
decrease were decreases in the net costs of insurance, professional fees,
management bonuses and related fringe benefits.
10
<PAGE>
Selling, general and administrative expense also was positively impacted by
the elimination of amortization of goodwill and favorable leasehold interests
resulting from the write-off of these items in the fourth quarter of fiscal
1996. The decreases in selling, general and administrative expense were offset
by a $1,246 reduction in other income which was attributable largely to one-time
gains realized in fiscal 1996, primarily from the sale of idle transportation
company assets.
The Company is continuing to focus on controlling selling, general and
administrative expenses. Store operating expenses as a percent of sales are
anticipated to remain relatively constant in fiscal 1998. Certain expense
categories are anticipated to increase somewhat as a percent of sales due to
more normal clearance activity and expected increases in interest expense,
information systems costs, store payroll expenses (due to federally mandated
minimum wage increases) and incentive compensation. The Company expects to begin
to realize operating efficiencies from systems enhancements in the warehouse and
distribution areas in fiscal 1998 and in the merchandising areas beginning in
the second half of fiscal 1998. Further expense leveraging is expected in future
years through internal growth as well as the addition of new stores.
INTEREST expense increased marginally by $255 or 0.9% for fiscal 1997
compared to fiscal 1996. The increase in interest expense for fiscal 1997 was
attributable primarily to higher usage of the revolving line of credit and to
the outstanding promissory notes of the Company which require quarterly
compounding interest payments to be paid in kind. These increases were largely
offset by decreased interest related to lower average outstanding capitalized
lease obligations in fiscal 1997 compared to fiscal 1996.
INCOME TAX PROVISION - No income tax benefit on losses for fiscal 1997 will
be recorded until the Company can establish with a reasonable degree of
certainty the potential utilization of certain tax loss carry forwards from
prior year store closing charges. The effective tax rate in fiscal 1996 was 7.6%
and was impacted by the non-deductible amortization and write-off of goodwill
and the reserves recorded to offset the deferred tax assets.
YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
WRITE-OFF OF LONG-LIVED ASSETS AND STORE CLOSING CHARGE.
During fiscal 1996, weak trends in the retail industry combined with
increasing competition lowered the operating results of the Company. While
operating results in the first three quarters of the year were behind plan,
management focused on strategies to achieve its plan during the important fourth
quarter season.
During the fourth quarter, management reviewed its expectations for near-
and long-term performance of the Company, revised its earnings projections and
reassessed the recoverability of the Company's long-lived assets.
As explained in Note N to the financial statements, in the fourth quarter
of fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No. 121 Accounting For the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of (SFAS 121). This financial accounting standard requires the
Company to perform an analysis of the recoverability of the net book value of
long-lived assets. The Company analyzed cash flows on an individual store basis
to assess recoverability of store level long-lived assets including allocated
goodwill. As a result of this analysis, impairment totaling $27,228 on a pre-tax
basis was indicated at certain stores.
The Company also analyzed the value of its remaining goodwill and favorable
leasehold interests not impaired under the store-level SFAS 121 analysis using
its historical method under Accounting Principles Board Opinion No. 17 (APB 17)
and determined that such remaining amounts also were impaired. The APB 17
analysis projected a fifteen-year forecast period and produced $5,186 of
aggregate undiscounted adjusted net income, including projected adjusted net
losses for fiscal 1997 of $4,522, which included interest expense of $26,242
paid in cash and interest payable `in kind' (PIK) of $4,453, and for fiscal 1998
of $2,863, which included cash interest expense of $26,581 and PIK interest of
$5,121. For fiscal 1999, the Company projected adjusted net income of
approximately $967, which
11
<PAGE>
included cash interest expense of approximately $26,581 and PIK interest of
$5,889. Due to the uncertainty of projections beyond 1999, this level of
adjusted net income was assumed to continue for each of the remaining fiscal
years in the projection period. Accordingly, a non-cash pre-tax charge totaling
$51,323 was recorded as indicated in Note N to the financial statements.
Also, management's fourth quarter review of individual stores' operations
and cash flows resulted in the identification of forty unprofitable or
competitive market stores which did not fit the Company's niche market strategy.
Consequently, a pre-tax charge totaling $21,397 was recorded at January 28, 1996
to cover the costs necessary to close these stores as indicated in Note O to the
financial statements.
SALES for fiscal 1996 increased $25,300 or 3.6% compared to fiscal 1995.
Comparable store sales decreased $4,160 or 0.7%. Excluding the forty stores
closed as of the end of fiscal 1996, comparable store sales increased by 0.1%.
During fiscal 1996 the Company opened ten new prototype stores of which seven
were located in new markets and three were relocations. The Company also closed
ten stores (excluding the 40 stores identified to be closed as discussed above),
resulting in a net increase in selling area of approximately 126,000 square
feet. The openings and closings of stores over the last two fiscal years has
resulted in a net increase in sales of $33,662.
The modest overall sales increases were affected by weak consumer demand
which was generally experienced throughout the retail industry. Management
believes that the Company's geographical niche market positioning combined with
its ability to distribute quality merchandise on a more timely basis tempered
these generally weak retail trends. The Company experienced substantial sales
increases in several merchandise categories, the most dramatic of which were in
the housewares, prescriptions, junior apparel and bath and floor areas.
Substantial sales gains also were generated in paper, cleaning and seasonal
categories. The Company experienced sales declines in several softlines
categories, primarily women's apparel.
The initial operating results of the seven new prototype stores and three
relocated prototype stores opened during fiscal 1996 exceeded the Company's
original sales projections and reflected the success of the Company's niche
market positioning and merchandising strategies. At fiscal year end 1996,
twenty-seven new format stores were in operation, representing 14.7% of all
stores and 18.3% of total Company selling square feet.
GROSS PROFIT increased $321 or 0.2% in fiscal 1996 compared to fiscal 1995
and, as a percentage of sales, decreased from 24.9% in fiscal 1995 to 24.1% in
fiscal 1996. The decline in gross profit percent in fiscal 1996 compared to
fiscal 1995 was attributable primarily to the increased markdown activity which
was necessary to counter sluggish customer demand during most of the year and to
meet customers' pricing expectations during this difficult period for the retail
industry. Markdown expense increased by 23.8% over such expense in fiscal 1995.
During fiscal 1996, the Company experienced margin dollar increases due to
higher sales in several merchandise categories, most notably stationery,
prescriptions, bath and floor and seasonal. While the Company experienced margin
dollar decreases in several softlines categories, they were concentrated
primarily in the women's apparel and fashion areas.
SELLING, GENERAL AND ADMINISTRATIVE expense increased $7,511 or 5.2% from
fiscal 1995. As a percentage of sales, selling, general and administrative
expense increased from 20.2% in fiscal 1995 to 20.5% in fiscal 1996.
Approximately 40% of the total gross increase in selling, general and
administrative expense was attributable to increases in corporate general
administrative costs. Payroll and fringe benefits costs increased by
approximately 13% due to the effect of a full year's salary for the
merchandising, real estate and other corporate personnel added in fiscal 1995 as
well as the costs related to information systems personnel added during fiscal
1996 to support the new systems implementations to enhance efficiencies in
warehouse, distribution and merchandising. In addition, professional fees
increased approximately 54% due primarily to information systems and strategic
planning consulting costs as well as increases in legal fees related to new
store construction and financing.
In addition to the corporate general and administrative cost changes,
advertising expenses as a percent of sales increased from 2.0% to 2.2% due to
increases in the costs of paper and postage. This accounted for approximately
25% of the gross increase in selling, general and administrative expense. Store
controllable expenses increased by 8%, which also accounted for approximately
25% of the gross increase in selling,
12
<PAGE>
general and administrative expense. The change in store controllable expense was
due primarily to increases in the costs of security equipment rentals, charge
card processing fees (due to increased credit card sales volume), utilities and
inventory counting (as a result of changes in procedures to allow for detailed
SKU level counts). Store controllable costs were partially reduced by decreases
in supplies, travel and entertainment costs. Store fixed costs as a percent of
sales increased from 2.8% to 3.0% due primarily to increases in rent expense.
These increases in selling, general and administrative expense were offset in
part by an increase in other income resulting primarily from the sale of idle
transportation assets.
INTEREST expense increased $2,159 or 7.9% for fiscal 1996 compared to
fiscal 1995. The increase in interest expense for fiscal 1996 was attributable
primarily to higher usage of the revolving line of credit in fiscal 1996 and to
the outstanding promissory notes of the Company which require quarterly
compounding interest payments to be paid in kind. The Company also had higher
average outstanding capitalized lease obligations in fiscal 1996 compared to
fiscal 1995.
INCOME TAX PROVISION - The effective tax rate was 7.6% in fiscal 1996
compared to 54.6% in fiscal 1995. The effective tax rate for fiscal 1996 was
impacted by the non-deductible amortization and write-off of goodwill and the
reserve recorded to offset the deferred tax assets. In fiscal 1995, the
effective tax rate was higher than the normal statutory rates primarily as a
result of non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is seasonal with first quarter sales (February
through April) being lower than sales during the other three quarters, while
fourth quarter sales (November through January) have represented approximately
30% of the full year's retail sales in recent years and normally involve a
greater proportion of higher margin sales.
The Company has satisfied its seasonal liquidity requirements primarily
through a combination of funds provided from operations and from a revolving
credit facility. Funds used by operating activities totaled $11,577 in fiscal
1997, and funds provided from operations totaled $4,967 in fiscal 1996 and
$3,816 in fiscal 1995. The change in cash flow from operating activities from
fiscal 1996 to fiscal 1997 was primarily the result of planned net increases in
inventory and other operating assets and decreases in accounts payable and other
operating liabilities. These decreases in cash flow were offset in part by
changes in deferred income taxes. The positive change in cash flow from
operating activities from fiscal 1995 to fiscal 1996 was primarily the result of
net decreases in inventory and accounts payable. These increases in cash flow
were offset in part by current and deferred tax payable changes, principally as
a result of the store closing charge, the changes in profitability of the
continuing operations and changes in other operating assets and liabilities.
Effective March 17, 1997, the term of Pamida, Inc.'s (Pamida) committed
Loan and Security Agreement (the Agreement) was extended to March 2000 and the
maximum borrowing limit of the facility was increased to $95,000 from $70,000,
which had been the limit throughout fiscal 1997. Prior to March 17, 1997,
borrowings under the Agreement bore interest at a rate which was 0.75% per annum
greater than the applicable prime rate. Effective March 17, 1997, borrowings
under the Agreement bear interest at a rate which is tied to the applicable
prime rate or the London Interbank Offered Rate (LIBOR), generally at Pamida's
discretion. The amounts Pamida is permitted to borrow are determined by a
formula based upon the amount of Pamida's eligible inventory from time to time.
Such borrowings are secured by security interests in all of the current assets
(including inventory) of Pamida and by liens on certain real estate interests
and other property of Pamida. The Company and two subsidiaries of Pamida have
guaranteed the payment and performance of Pamida's obligations under the Loan
and Security Agreement and have pledged some or all of their respective assets,
including the stock of Pamida owned by the Company, to secure such guarantees.
The Agreement contains provisions imposing operating and financial
restrictions on the Company. Certain provisions of the Agreement require the
maintenance of specified amounts of tangible net worth (as defined) and working
capital (as defined) and the achievement of specified minimum amounts of cash
flow (as defined). Other restrictions in the Agreement and those provided under
the Indenture relating to the Senior Subordinated Notes will affect, among other
things, the ability of Pamida to incur additional indebtedness, pay dividends,
13
<PAGE>
repay indebtedness prior to its stated maturity, create liens, enter into
leases, sell assets or engage in mergers or acquisitions, make capital
expenditures and make investments. These covenants currently have not had an
impact on the Company's ability to fully utilize the revolving credit facility.
However, certain of the covenants, such as those which restrict the ability of
the Company to incur indebtedness or encumber its property or which impose
restrictions on or otherwise limit the Company's ability to engage in
sale-leaseback transactions, may at some future time prevent the Company from
pursuing its store expansion program at the rate that the Company desires.
Obligations under the Agreement were $57,115 at February 2, 1997 and
$31,588 at January 28, 1996. As noted above, this facility expires in March
2000, and the Company intends to refinance any outstanding balance by such date.
Borrowings under the Agreement are senior to the Senior Subordinated Notes of
the Company. The Company had long-term debt and obligations under capital leases
of $201,999 at February 2, 1997 and $200,305 at January 28, 1996. The Company's
ability to satisfy scheduled principal and interest payments under such
obligations in the ordinary course of business is dependent primarily upon the
sufficiency of the Company's operating cash flow. At February 2, 1997, the
Company was in compliance with all covenants contained in its various financing
agreements.
On December 18, 1992, the promissory notes of the Company were amended
effective as of December 1, 1992 to provide that, until the obligations of
Pamida and the Company under certain of Pamida's credit agreements have been
repaid, the quarterly interest payments on the promissory notes of the Company
will be paid in kind. Pamida paid the Company $315 in fiscal 1996 under a
tax-sharing agreement to enable the Company to pay quarterly dividends to its
preferred stockholders. During fiscal 1996, the Company received $967 from
Pamida under a tax-sharing agreement as a reimbursement for certain tax benefits
derived by Pamida. Such remittance, along with $18 from the exercise of certain
stock options, was used by the Company to redeem Subordinated Promissory Notes
as described in Note L to the financial statements, to repay intercompany
balances totaling $29, and to pay quarterly dividends on preferred stock. Since
the Company conducts no operations of its own, the only cash requirement of the
Company relates to preferred stock dividends in the aggregate annual amount of
approximately $316; and Pamida is expressly permitted under its existing credit
facilities to pay dividends to the Company to fund such preferred stock
dividends. However, the General Corporation Law of the State of Delaware, under
which the Company and Pamida are incorporated, allows a corporation to declare
or pay a dividend only from its surplus or from the current or the prior year's
earnings. Due to the accumulated deficit resulting primarily from the store
closings and the write-off of goodwill and other long-lived assets recognized in
the fourth quarter of fiscal 1996, the Company and Pamida did not declare or pay
any cash dividends in fiscal 1997 and may pay cash dividends in ensuing years
only to the extent that the Company and Pamida satisfy the applicable statutory
standards which include the Company's having a net worth equal to at least the
aggregate par value of the preferred stock which amounts to $2. The cumulative
dividend rate on the preferred stock increases by 0.5% per quarter (with a
maximum aggregate increase of 5%) on each quarterly dividend payment date on
which the preferred stock dividends are not paid currently on a cumulative
basis. Any unpaid dividends are added to the liquidation value until paid in
cash. Such nonpayment of preferred stock dividends does not accelerate the
redemption rights of the preferred stockholders.
The Company made capital expenditures of $4,947 in fiscal 1997 compared to
$9,265 during fiscal 1996. The Company plans to open three new stores in fiscal
1998 and will consider additional opportunities for new store locations as they
arise. Total capital expenditures are expected to be approximately $9,500 in
fiscal 1998. The Company expects to fund these expenditures from cash flow from
its operations. The costs of buildings and land for new store locations are
expected to be financed by operating or capital leases with unaffiliated
landlords. The Company's expansion program also will require inventory of
approximately $1,000 to $1,200 for each new market store, which the Company
expects to finance through trade credit, borrowings under the Agreement and cash
flow from operations.
The recent changes to the Agreement, along with expected improvements in
the Company's cash flow from operations, should provide adequate resources to
meet the Company's near term liquidity requirements. On a long-term basis, the
Company's expansion
14
<PAGE>
will require continued investments in store locations, working capital and
distribution and infrastructure enhancements. The Company expects to continue to
finance some of these investments through leases from unaffiliated landlords,
trade credit, borrowings under the Agreement and cash flow from operations but
ultimately will need to explore additional sources of funds which may include
capital structure changes. Currently, it is not possible for the Company to
predict with any certainty either the timing or the availability of such
additional financing.
INFLATION
The Company uses the LIFO method of inventory valuation in its financial
statements; as a result, the cost of merchandise sold approximates current
costs. The Company's rental expense is generally fixed and, except for small
amounts of percentage rents and rentals adjusted by cost-of-living increases
tied to the Consumer Price Index or interest rates, has not been affected by
inflation.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "1995 Act"). Such statements are made in good faith by the Company
pursuant to the safe-harbor provisions of the 1995 Act. In connection with these
safe-harbor provisions, this management's discussion and analysis contains
certain forward-looking statements which reflect management's current views and
estimates of future economic circumstances, industry conditions, company
performance and financial results. The statements are based on many assumptions
and factors including sales results, expense levels, competition and interest
rates as well as other risks and uncertainties inherent in the Company's
business, capital structure and the retail industry in general. Any changes in
these factors could result in significantly different results. The Company
further cautions that the forward-looking information contained herein is not
exhaustive or exclusive. The Company does not undertake to update any
forward-looking statements which may be made from time to time by or on behalf
of the Company.
15
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pamida Holdings Corporation
Omaha, Nebraska
We have audited the consolidated balance sheet of Pamida Holdings
Corporation and subsidiary as of February 2, 1997, and the related consolidated
statements of operations, common stockholders' equity and cash flows for each of
the years ended February 2, 1997 and January 29, 1995. 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. The consolidated balance sheet of Pamida Holdings Corporation and
subsidiary as of January 28, 1996, and the related consolidated statements of
operations, common stockholders' equity and cash flows for the year ended
January 28, 1996, were audited by other auditors, whose report, dated March 26,
1996, expressed an unqualified opinion on those statements and included an
explanatory paragraph that described the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pamida
Holdings Corporation and subsidiary as of February 2, 1997, and the results of
their operations and their cash flows for each of the years ended February 2,
1997 and January 29, 1995 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
March 7, 1997
(March 17, 1997 as to Note E)
16
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
February 2, January 28, January 29,
1997 1996 1995
(53 Weeks) (52 Weeks) (52 Weeks)
----------- ----------- -----------
<S> <C> <C> <C>
Sales ......................................... $ 633,189 $ 736,315 $ 711,019
Cost of goods sold ............................ 479,099 558,627 533,652
----------- ----------- -----------
Gross profit .................................. 154,090 177,688 177,367
----------- ----------- -----------
Expenses:
Selling, general and administrative ....... 125,105 151,096 143,585
Interest .................................. 29,781 29,526 27,367
Long-lived asset write-off ................ - 78,551 -
Store closing costs ....................... - 21,397 -
----------- ----------- -----------
154,886 280,570 170,952
----------- ----------- -----------
(Loss) income before provision for income
taxes and extraordinary item .............. (796) (102,882) 6,415
Income tax (benefit) provision ................ - (7,863) 3,500
----------- ----------- -----------
(Loss) income before extraordinary item ....... (796) (95,019) 2,915
Extraordinary item ............................ - 371 -
----------- ----------- -----------
Net (loss) income ............................. (796) (94,648) 2,915
Less provision for preferred dividends and
discount amortization ..................... 391 362 361
----------- ----------- -----------
Net (loss) income available for
common shares ............................. $ (1,187) $ (95,010) $ 2,554
=========== =========== ===========
Net (loss) earnings per common share:
(Loss) earnings before extraordinary item. $ (.24) $ (18.94) $ 0.51
Extraordinary item......................... - .07 -
----------- ----------- -----------
Net (loss) earnings per common share....... $ (.24) $ (18.87) $ 0.51
----------- ----------- -----------
</TABLE>
17
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
February 2, January 28,
ASSETS 1997 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash ......................................................................... $ 6,973 $ 7,298
Accounts receivable, less allowance for doubtful accounts of $50 in both years 6,919 9,049
Merchandise inventories ...................................................... 157,490 150,837
Prepaid expenses ............................................................. 2,993 2,953
Property held for sale ....................................................... 1,748 2,218
----------- -----------
Total current assets ...................................................... $ 176,123 $ 172,355
Property, buildings and equipment, (net) ......................................... 42,403 44,153
Leased property under capital leases, less accumulated
amortization of $14,604 and $13,496, respectively ............................ 27,713 30,977
Deferred financing costs ......................................................... 3,176 3,809
Other assets ..................................................................... 19,773 7,231
----------- -----------
$ 269,188 $ 258,525
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 54,245 $ 63,087
Loan and security agreement .................................................. 57,115 31,588
Accrued compensation ......................................................... 3,860 5,923
Accrued interest ............................................................. 7,668 6,992
Store closing reserve ........................................................ 4,521 7,818
Other accrued expenses ....................................................... 10,112 10,823
Income taxes - deferred and current payable .................................. 8,101 8,861
Current maturities of long-term debt ......................................... 47 1,334
Current obligations under capital leases ..................................... 1,781 1,847
----------- -----------
Total current liabilities ................................................. 147,450 138,273
Long-term debt, less current maturities .......................................... 168,000 163,746
Obligations under capital leases, less current obligations ....................... 33,999 36,559
Reserve for dividends ............................................................ 342 -
Other long-term liabilities ...................................................... 4,825 4,237
Commitments and contingencies .................................................... - -
Preferred stock subject to mandatory redemption:
16-1/4% senior cumulative preferred stock, $1 par value;
514 shares authorized, issued and outstanding ............................. 514 514
14-1/4% junior cumulative preferred stock, $1 par value;
6,986 shares authorized; 1,627 shares issued and outstanding;
redemption amount of $1,627, less unamortized discount .................... 1,361 1,312
Common shareholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized; 5,004,942
shares issued and outstanding in both years ............................... 50 50
Additional paid-in capital ................................................... 968 968
Accumulated deficit .......................................................... (88,321) (87,134)
----------- -----------
Total common shareholders' deficit ........................................ (87,303) (86,116)
----------- -----------
$ 269,188 $ 258,525
=========== ===========
</TABLE>
18
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Nonvoting Additional Earnings
Common Common Paid-in (Accumulated
Stock Stock Capital Deficit)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 30, 1994 ........... $ 41 $ 9 $ 950 $ 5,322
Net income ........................ - - - 2,915
Amortization of discount on 14-1/4%
junior cumulative preferred .... - - - (45)
Cash dividends to preferred
stockholders ................... - - - (316)
Conversion of nonvoting common
stock to common shares ......... 9 (9) - -
---------- ---------- ---------- ----------
Balance at January 29, 1995 ........... 50 - 950 7,876
Net loss .......................... - - - (94,648)
Amortization of discount on 14-1/4%
junior cumulative preferred .... - - - (47)
Cash dividends to preferred
stockholders ................... - - - (315)
Stock sold under incentive stock
option plan .................... - - 18 -
---------- ----------- --------- ----------
Balance at January 28, 1996 ........... 50 - 968 (87,134)
Net loss .......................... - - - (796)
Amortization of discount on 14-1/4%
junior cumulative preferred .... - - - (49)
Accrued dividends for preferred
stockholders ................... - - - (342)
---------- ---------- ---------- ----------
Balance at February 2, 1997 ........... $ 50 $ - $ 968 $ (88,321)
========== ========== ========== ==========
</TABLE>
19
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
February 2, January 28, January 29,
1997 1996 1995
(53 Weeks) (52 Weeks) (52 Weeks)
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................. $ (796) $ (94,648) $ 2,915
Adjustments to reconcile net (loss) income to net cash
from operating activities:
Depreciation and amortization .......................... 11,658 15,345 14,962
Provision (credit) for LIFO inventory valuation ........ 874 (585) (675)
Provision (credit) for deferred income taxes ........... 3,305 (6,647) (1,555)
Noncash interest expense ............................... 4,313 3,756 3,315
Accretion of original issue debt discount .............. 160 154 149
Gain on disposal of assets ............................. (56) (982) (58)
Stock incentive benefits ............................... - - 84
Deferred retirement benefits ........................... (125) 13 37
Extraordinary item ..................................... - (371) -
Long-lived assets write-off ............................ - 78,551 -
Store closing costs .................................... (3,726) 21,397 -
(Increase) decrease in merchandise inventories ......... (7,527) 4,532 (30,951)
Increase in other operating assets ..................... (5,622) (3,847) (486)
Increase (decrease) in accounts payable ................ (8,842) (6,749) 8,153
Increase (decrease) in income taxes payable ............ (3,250) (4,607) 3,942
Increase (decrease) in other operating liabilities...... (1,943) (345) 3,984
----------- ----------- -----------
Total adjustments .......................................... (10,781) 99,615 901
----------- ----------- -----------
Net cash from operating activities ......................... (11,577) 4,967 3,816
Cash flows from investing activities:
Proceeds from disposal of assets .............................. 917 1,163 980
Principal payments received on notes receivable ............... 16 15 14
Assets acquired for sale ...................................... (391) - -
Capital expenditures .......................................... (4,947) (9,265) (12,888)
Construction notes receivable ................................. (5,845) (4,412) -
----------- ----------- -----------
Net cash from investing activities ......................... (10,250) (12,499) (11,894)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under loan and security agreement net .............. 25,527 10,986 12,417
Principal payments on other long-term debt .................... (1,335) (193) (177)
Dividends paid on preferred stock ............................. - (315) (316)
Principal payments on promissory notes ........................ - (641) (1,029)
Payments for deferred finance costs ........................... (54) (13) (200)
Principal payments on capital lease obligations ............... (2,636) (2,071) (1,894)
Proceeds from sale of stock ................................... - 18 -
----------- ----------- -----------
Net cash from financing activities ..................... 21,502 7,771 8,801
----------- ----------- -----------
Net (decrease) increase in cash ............................... (325) 239 723
Cash at beginning of year ..................................... 7,298 7,059 6,336
----------- ----------- -----------
Cash at end of year ........................................... $ 6,973 $ 7,298 $ 7,059
=========== =========== ===========
20
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest..................................................... $ 24,804 $ 25,691 $ 24,021
Income taxes:
Payments to taxing authorities........................... 386 3,622 1,785
Refunds received from taxing authorities................. (442) (231) (672)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
CAPITAL LEASE OBLIGATIONS INCURRED WHEN THE COMPANY ENTERED
into lease agreements for new store facilities and equipment. $ 11 $ 620 $ 9,721
Capital lease obligations terminated............................ - 154 -
Amortization of discount on junior cumulative preferred stock
recorded as a direct charge to retained earnings............. 49 47 45
Payment of interest in kind by increasing the
principal amount of the notes................................ 4,313 3,702 3,263
Provision for dividends payable................................. 342 - -
Conversion of 919,587 shares of nonvoting common
stock, $.01 par value, to common stock
Common stock............................................. - - 9
Nonvoting common stock................................... - - (9)
</TABLE>
21
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pamida Holdings Corporation (the "Company") was formed for the sole purpose
of acquiring Pamida, Inc. ("Pamida") through a merger in a leveraged buy-out
transaction which was consummated on July 29, 1986.
Consolidation - The consolidated financial statements include the results
of operations, account balances and cash flows of the Company and its
wholly-owned subsidiary, Pamida, and of Seaway Importing Company ("Seaway") and
Pamida Transportation Company, wholly-owned subsidiaries of Pamida. All material
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year - All references in these financial statements to fiscal years
are to the calendar year in which the fiscal year ends.
Line of Business - Through Pamida, the Company is engaged in the operation
of retail discount stores in a fifteen-state Midwestern, North Central and Rocky
Mountain area. Seaway imports primarily seasonal merchandise for sale to Pamida.
Pamida Transportation Company operated as a contract carrier for Pamida until
July 1995, at which time independent contractors were engaged to provide all
transportation needs of the Company. Due to the similarity in nature of the
Company's businesses, the Company considers itself to be a single business
segment.
Cash Flow Reporting - For purposes of the statement of cash flows, the
Company considers all temporary cash investments purchased with a maturity of
three months or less to be cash equivalents. There were no temporary investments
at February 2, 1997 and January 28, 1996.
Merchandise Inventories - Substantially all of the Company's inventory is
stated at the lower of cost (last-in, first-out) or market.
Property, Buildings and Equipment - Property, buildings and equipment are
stated at cost and depreciated on the straight-line method over the estimated
useful lives. Buildings and building improvements are generally depreciated over
8-40 years, while store, warehouse and office equipment, vehicles and aircraft
equipment are generally depreciated over 3-10 years. Leasehold improvements are
depreciated over the life of the lease or the estimated life of the asset,
whichever is shorter.
Leased Property Under Capital Leases - Noncancellable financing leases are
capitalized at the estimated fair value of the leasehold interest and are
amortized on the straight-line method over the terms of the leases.
Long-lived Assets - When facts and circumstances indicated potential
impairment, the Company evaluates the recoverability of assets carrying values,
including goodwill, using estimates of future cash flows over remaining assets
lives. When impairment is indicated, any impairment loss in measured by the
excess of carrying values over fair values.
Deferred Financing Costs and Original Issue Debt Discount - Deferred
financing costs are being amortized using the straight-line method over the
terms of the issues which approximates the effective interest method. Original
issue debt discount is being amortized using the effective interest method over
the terms of the issues.
Pre-Opening Expenses - Costs related to opening new stores are expensed as
incurred.
Earnings Per Share - Earnings per share were calculated using the weighted
average common shares and dilutive common share equivalents outstanding during
the year using the treasury stock method.
Management's Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation - The Company accounts for its stock-based
compensation under the provisions of Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees (APB 25).
Reclassifications - Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
22
<PAGE>
B. MERCHANDISE INVENTORIES
Total inventories would have been higher at February 2, 1997 and January
28, 1996 by $6,574 and $5,700, respectively, had the FIFO (first-in, first-out)
method been used to determine the cost of all inventories. On a FIFO basis, net
income (loss) before extraordinary item would have been $78, $(95,604) and
$2,666, respectively, for fiscal years 1997, 1996, and 1995. During fiscal years
1997, 1996, and 1995, certain inventory quantities were reduced resulting in a
liquidation of certain LIFO layers carried at costs which were lower than the
cost of current purchases, the effect of which increased net income by $116,
$125, and $102, respectively.
C. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consists of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Land and land improvements .. $ 4,013 $ 3,943
Buildings and building
improvements............... 22,076 21,578
Store, warehouse and office
equipment.................. 59,668 55,638
Vehicles and aircraft
equipment.................. 1,513 1,578
Leasehold improvements ...... 16,497 15,362
-------- --------
103,767 98,099
Less accumulated depreciation
and amortization .......... 61,364 53,946
-------- --------
$ 42,403 $ 44,153
======== ========
D. OTHER ASSETS
Other assets consist of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Construction notes receivabe.. $ 10,257 $ 2,767
Unamortized software
costs, net ................. 7,541 3,357
Other ........................ 1,975 1,107
-------- --------
$ 19,773 $ 7,231
======== ========
E. FINANCING AGREEMENTS
Effective March 17, 1997, the term of Pamida's committed Loan and Security
Agreement (the Agreement) was extended to March 2000 and the maximum borrowing
limit of the facility was increased to $95,000 from $70,000, which had been the
limit throughout fiscal 1997. Prior to March 17, 1997, borrowings under the
Agreement bore interest at a rate which was 0.75% per annum greater than the
applicable prime rate. Effective March 17, 1997, borrowings under the Agreement
bear interest at a rate which is tied to the applicable prime rate or the London
Interbank Offered Rate (LIBOR), generally at Pamida's discretion. The amounts
Pamida is permitted to borrow under the Agreement are determined by a formula
based upon the amount of Pamida's eligible inventory from time to time. Such
borrowings of Pamida under the Agreement are secured by security interests in
substantially all of the current assets (including inventory) of Pamida and by
liens on certain real estate interests and other property of Pamida. The Company
and two subsidiaries of Pamida have guaranteed payment and performance of
Pamida's obligations under the Agreement and have pledged some or all of their
respective assets, including the stock of Pamida owned by the Company, to secure
such guarantees.
The Agreement contains provisions imposing operating and financial
restrictions on the Company. Certain provisions of the Agreement require the
maintenance of specified amounts of tangible net worth (as defined) and working
capital (as defined) and the achievement of specified minimum amounts of cash
flow (as defined). Other restrictions in the Agreement and those provided under
the Indenture relating to the Senior Subordinated Notes will affect, among other
things, the ability of Pamida to incur additional indebtedness, pay dividends,
repay indebtedness prior to its stated maturity, create liens, enter into
leases, sell assets or engage in mergers or acquisitions, make capital
expenditures and make investments.
The maximum amount of borrowings under the Agreement during fiscal 1997 and
1996 was $69,256 and $63,884, respectively. The weighted average amounts of
borrowings under the Agreement for fiscal 1997 and 1996 were $43,002 and
$35,544, respectively; and the weighted average interest rates were 10.0% and
10.4%, respectively.
23
<PAGE>
Long-term debt consists of:
Feb. 2, Jan. 28,
1997 1996
------- --------
Senior Subordinated Notes,
11.75%, due March 2003 ...... $140,00 $140,000
Industrial development bonds,
8.5%, due in monthly install-
ments through 2005 .......... 411 1,745
Senior promissory notes, 15.5%,
due in 2003, interest paid
in kind quarterly ........... 4,926 4,231
Subordinated promissory notes,
16%, due in 2003, interest
paid in kind quarterly ...... 13,454 11,500
Junior subordinated promissory
notes, 16.25%, net of
unamortized discount of $878
and $1,038, due in 2003,
interest paid in kind quarterly 9,256 7,604
-------- -------
168,047 165,080
Less current maturities ....... 47 1,334
-------- --------
$168,000 $163,746
======== ========
As of February 2, 1997, the fair value of long-term debt was $153,900
compared to its recorded value of $168,000. The fair value of long-term debt was
estimated based on quoted market values for the same or similar debt issues or
rates currently available for debt with similar terms. The aggregate maturities
of long-term debt in each of the next five fiscal years are as follows: 1998 -
$47; 1999 - $47; 2000 - $47; 2001 - $47; and 2002 - $47.
The Senior Subordinated Notes and the promissory notes are unsecured and
are subordinate borrowings under the Agreement. Presently, under the most
restrictive debt covenants, the Company is not permitted to pay dividends on its
common stock.
The senior subordinated and junior subordinated promissory notes of the
Company were amended to provide that until the obligations of the Company and
Pamida under certain loan agreements have been paid in full, the quarterly
interest payments on the notes will be paid in kind by increasing the principal
amount of each note on the applicable quarterly payment date by the amount of
accrued interest then being paid in kind. Interest on the notes paid in kind
accrues at a rate which, in each case, is two percentage points higher than the
applicable cash interest rate.
F. INCOME TAXES
Components of the income tax provision (benefit) are as follows:
Years Ended
--------------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Current:
Federal .... $ (3,155) $ (993) $ 4,048
State ...... (150) (223) 1,007
-------- -------- --------
(3,305) (1,216) 5,055
-------- -------- --------
Deferred:
Federal ..... 3,189 (5,865) (679)
State ....... 116 (782) (876)
-------- -------- --------
3,305 (6,647) (1,555)
-------- -------- --------
Total (benefit)
provision ... $ -- $ (7,863) $ 3,500
======== ======== ========
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
Years Ended
---------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Statutory rate ......... (34.0)% (34.0)% 34.0%
State income tax effectO (2.8)% (1.3) 5.5
Amortization of the excess
of cost over net assets
acquired ............. - 23.9 12.2
Valuation allowance ....... 25.1 3.6 0.1
Accretion of discount on
junior subordinated debt 6.8 0.1 0.8
Other ..................... 4.9 0.1 2.0
-------- -------- --------
0.0% (7.6)% 54.6%
======== ======== ========
24
<PAGE>
Significant temporary differences between reported and taxable earnings
that give rise to deferred tax assets and liabilities were as follows:
Feb. 2, Jan. 28,
1997 1996
--------- --------
Net current deferred tax liabilities:
Inventories ......................... $ 15,302 $ 13,681
Valuation allowance ................. - 3,869
Prepaid insurance ................... 210 514
Other ............................... 453 366
Supplier allowances ................. (41) -
Post employment health costs ........ (189) (237)
Accrued expenses .................... (941) (1,300)
Store closing costs ................. (2,570) (7,159)
--------- ---------
Net current deferred
tax liabilities ................ 12,224 9,734
--------- ---------
Net long-term deferred tax liabilities:
Property, buildings and
equipment ...................... 2,862 3,109
Other ............................. 1,436 438
Valuation allowance ............... 4,069 5
Capital loss carryforward ......... - (5)
Capital leases .................... (3,089) (2,602)
Tax benefit carryforward .......... (3,518) -
--------- ---------
Net long-term deferred
tax liabilities ..................... 1,760 945
--------- ---------
Net total deferred tax
liabilities ...................... $ 13,984 $ 10,679
========= =========
Net long-term deferred tax liabilities are classified with other long-term
liabilities in the consolidated balance sheets of the Company. As of February 2,
1997 the Company had net operating loss carryforwards totaling $4,034 which
expire in 2012 and the Company had tax credit carryforwards totaling $1,973
which expire in 2006 through 2011.
G. LEASES
The majority of store facilities are leased under noncancelable leases.
Substantially all of the leases are net leases which require the payment of
property taxes, insurance and maintenance costs in addition to rental payments.
Certain leases provide for additional rentals based on a percentage of sales and
have renewal options for one or more periods totaling from one to twenty years.
Leases have been categorized as capital or operating leases in conformity with
the definition in Statement of Financial Accounting Standards No. 13, Accounting
for Leases.
At February 2, 1997 the future minimum lease payments under capital and
operating leases with rental terms of more than one year amounted to:
Fiscal Year Ending Capital Operating
Leases Leases
--------- ---------
1998..................... $ 5,802 $ 10,010
1999..................... 5,659 8,800
2000..................... 5,442 6,879
2001..................... 5,352 5,639
2002..................... 5,267 5,103
Later years.............. 41,384 46,069
--------- ---------
Total minimum obligations $ 68,906 $ 82,500
--------- ---------
Less amount representing
interest................ 33,126
---------
Present value of net minimum
lease payments.......... 35,780
Less current portion..... 1,781
---------
Long-term obligations..... $ 33,999
=========
The minimum rentals under operating leases have not been reduced by minimum
sublease rentals of $191 due in the future under noncancelable subleases.
Total rental expense related to all operating leases (including those with
terms less than one year) is as follows:
Years Ended
-------------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Minimum rentals ..... $ 10,938 $ 11,715 $ 9,585
Contingent rentals .. 258 399 477
Less sublease rentals (735) (852) (918)
-------- -------- --------
$ 10,461 $ 11,262 $ 9,144
======== ======== ========
H. SAVINGS AND OTHER POSTEMPLOYMENT BENEFIT PLANS
Pamida has adopted a 401(k) savings plan that covers all employees who are
21 years of age with one or more years of service. Participants can contribute
from 1% to 15% of their pre-tax compensation. Pamida has currently elected to
match 50% of the participant's contribution up to 5% of compensation. Pamida's
savings plan contribution expenses for fiscal years 1997, 1996, and 1995 were
$770, $749, and $716, respectively.
Prior to December 1993, the Company had agreed to continue to provide
health insurance coverage and pay a portion of the health insurance premiums
until age 65 for individuals who retire if the individual was eligible to
participate in the plan, had attained age 55, had completed ten or more
consecutive years of service and
25
<PAGE>
elected to continue on the Company plan. The plan is unfunded, and the Company
had the right to modify or terminate these benefits. In December 1993, the
Company amended the Plan to no longer offer postretirement health benefits for
employees retiring after February 1, 1994.
The components of periodic expense for postretirement benefits in fiscal
1997, 1996 and 1995 were as follows:
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Annual postretirement benefit
expense:
Interest cost ............. 16 32 42
Amortization of
unrecognized
net obligations ............ (44) (6) --
-------- -------- --------
Annual postretirement
benefit expense ............ $ (28) $ 26 $ 42
======== ======== ========
The accumulated postretirement benefit obligation consists of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Accumulated postretirement
benefit obligation ......... $ 194 $ 395
Unrecognized gain ............ 299 223
-------- --------
Accrued expense .............. $ 493 $ 618
======== ========
A 5% and a 10% increase in the cost of covered health care benefits was
assumed for fiscal 1997 and 1996, respectively. The rate of 5% used as of
February 2, 1997 is assumed to remain level after fiscal 1997. At January 28,
1996, the 10% was assumed to decrease incrementally to 5% after five years and
remain level thereafter. Assuming a 1% increase in the health care trend rate,
the annual postretirement benefit expense would remain the same for fiscal 1997
and increase by $1 for fiscal 1996, and the unfunded accumulated postretirement
benefit obligation would increase by $4 and $13 for fiscal 1997 and 1996,
respectively. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0% for both fiscal 1997 and
1996.
I. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The Company is obligated to redeem all outstanding shares of senior
cumulative and junior cumulative preferred stock on December 31, 2001, at a
price not to exceed the liquidation value which is $1,000 per share plus any
accrued dividends. Subject to certain loan restrictions, the Company may, at any
time, redeem all or any portion of the preferred shares outstanding at a price
of $1,000 per share plus any accrued dividends.
Each share of senior cumulative and junior cumulative preferred stock
entitles its holder to receive a quarterly dividend of 16.25% and 14.25% per
annum, respectively, of the liquidation value from the date of issuance until
redeemed. Both series of preferred stock are non-voting, and any unpaid
dividends are added to the liquidation value until paid.
The General Corporation Law of the State of Delaware, under which the
Company and Pamida are incorporated, allows a corporation to declare or pay a
dividend only from its surplus or from the current or the prior year's earnings.
Due to the accumulated deficit resulting primarily from the store closings and
the write-off of goodwill and other long-lived assets recognized in the fourth
quarter of fiscal 1996, the Company and Pamida did not declare or pay any cash
dividends in fiscal 1997 and may pay cash dividends in ensuing years only to the
extent that the Company and Pamida satisfy the applicable statutory standards
which include the Company's having a net worth equal to at least the aggregate
par value of the preferred stock which amounts to $2. A liability and provision
for preferred stock dividends have been recorded in the fiscal 1997 financial
statements. The cumulative dividend rate on the preferred stock increases by
0.5% per quarter (with a maximum aggregate increase of 5%) on each quarterly
dividend payment date on which the preferred stock dividends are not paid
currently on a cumulative basis.
The difference between the fair value of the junior cumulative preferred
stock at issuance and the mandatory redemption value is being recorded through
periodic accretions, using the effective interest method with a related charge
to retained earnings.
J. STOCK OPTIONS
On November 24, 1992, the Board of Directors of the Company adopted the
Pamida Holdings Corporation 1992 Stock Option Plan (the "Plan"), which was
approved by the Company's stockholders in May 1993. The Plan, administered by a
Committee of the Board of
26
<PAGE>
Directors, provides for the granting of options to key employees of the Company
and its subsidiaries to purchase up to an aggregate of 350,000 shares of Common
Stock of the Company. Options granted under the Plan may be either incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code,
or non-qualified options. Options granted under the Plan will be exercisable
during the period fixed by the Committee for each option; however, in general,
no option will be exercisable earlier than one year after the date of its grant,
and no incentive stock option will be exercisable more than ten years after the
date of its grant. The option exercise price must be at least 100% of the fair
market value of the Common Stock on the date of the option grant. No
compensation expense related to stock options was recorded during fiscal 1997,
1996 or 1995.
The Company accounts for its stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25), which utilizes the intrinsic value method. The
effect on 1997 and 1996 net income and earnings per share of accounting for
stock-based compensation using the fair value method required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123) is immaterial.
The weighted average fair value of options granted during the year was
$0.70 and $2.86 per option for fiscal 1997 and 1996, respectively. The fair
value of options granted under the Plan was estimated at the date of grant using
a binomial options pricing model with the following assumptions:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Risk-free interest rate............... 6.0% 7.0%
Dividend yield........................ 0.0% 0.0%
Expected Volatility................... 8.1% 8.1%
Expected life (years) ................ 6.6 years 6.7 years
A summary of the Company's stock-based compensation activity related to
stock options for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
February 2, 1997 January 28, 1996 January 29, 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 296,546 $ 5.05 227,545 $ 4.33 171,750 $ 3.63
Granted ..................... 86,800 2.37 122,205 6.80 75,000 5.75
Expired/terminated .......... (80,530) 4.66 (48,246) 6.22 (19,205) 3.63
Exercised ................... -- -- (4,958) 3.63 -- --
Outstanding-end of year ..... 302,816 $ 4.39 296,546 $ 5.05 227,545 $ 4.33
</TABLE>
There were 123,616, 85,474 and 61,681 options exercisable at February 2,
1997, January 28, 1996 and Janaury 29, 1995, respectively.
The following table summarizes information about stock options outstanding
as at February 2, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------ -------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Excercies Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1.94-$2.78 83,800 9.5 Years $ 2.36 -- $ --
3.63-5.75 171,016 7.3 Years 4.60 114,016 4.20
7.19 48,000 8.1 Years 7.19 9,600 7.19
----------- ----------- ----------- ----------- ----------- -----------
Totals $1.94-$7.19 302,816 8.0 Years $ 4.39 123,616 $ 4.43
</TABLE>
27
<PAGE>
K. CAPITAL STOCK
In October 1994, 919,587 shares of nonvoting common stock of the Company
were converted into the same number of shares of common stock. After giving
effect to such conversion, the Company had 5,004,942 shares of common stock and
no shares of nonvoting common stock outstanding at the end of fiscal 1997 and
1996.
L. EXTRAORDINARY ITEMS
On July 31, 1995, the Company made an offer to purchase for cash 39.5% of
the aggregate outstanding principal amount of 14% Subordinated Promissory Notes
(Notes) of Pamida Holdings Corporation. The offered purchase price was 50% of
the principal amount to be purchased. In the third quarter of fiscal 1996, the
Company redeemed Notes tendered in the aggregate principal amount of $1,281 and
made cash payments of $641, resulting in an after-tax gain of $371.
M. COMMITMENTS AND CONTINGENCIES
Pamida has employment agreements with three key executive officers which
expire in 2000 and 2001. In addition to a base salary, the agreements provide
for a bonus to be paid if certain Company performance goals are achieved. Also,
in March 1997, the Board of Directors approved a long-term incentive
compensation program in order to enhance retention of certain key members of
management. Payout is tied to continued employment and future Company common
stock price appreciation.
The terms of the senior and junior preferred stock and the senior,
subordinated and junior subordinated promissory notes provide that, upon the
occurrence of an event of noncompliance with respect to the preferred stock or
event of default with respect to the promissory notes, the Company is required
to pay higher dividend and interest rates with the amount of the increase
depending on the nature of the event of noncompliance or default.
During fiscal 1996, the Company received $967 from Pamida as a
reimbursement for certain tax benefits derived by Pamida. Such remittance, along
with $18 from the exercise of certain stock options, was used by the Company to
redeem Subordinated Promissory Notes as described in Note L, to repay to Pamida
intercompany balances totaling $29, and to pay quarterly dividends on preferred
stock totaling $315.
In June 1994, the Company received $1,316 from Pamida as a reimbursement
for certain tax benefits derived by Pamida. Such remittance was used by the
Company to make a principal payment on its outstanding promissory notes of
$1,029 and to repay Pamida certain intercompany advances aggregating $287.
In connection with the Company's self insured retention of worker's
compensation liabilities and future rental payments on a warehouse, on February
2, 1997, the Company had standby letters of credit outstanding totaling
approximately $1,188.
N. IMPAIRMENT OF LONG-LIVED ASSETS RECORDED IN FISCAL 1996
During fiscal 1996, weak trends in the retail industry combined with
increasing competition lowered the operating results of the Company.
Therefore, during the fourth quarter of fiscal 1996, management reviewed
its expectations for near- and long-term performance of the Company and revised
its earnings projections to reflect developing and projected trends, primarily
in comparable-store-sales growth, gross margins, operating expenses and interest
expenses. Consequently, the recoverability of the Company's long-lived assets
was also reassessed.
In the fourth quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 Accounting For the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of (SFAS 121). This
financial accounting standard requires the Company to perform an analysis of the
recoverability of the net book value of long-lived assets. The Company analyzed
cash flows on an individual store basis to assess recoverability of store level
long-lived assets including allocated goodwill.
As a result of this analysis, impairment was indicated at certain stores,
and a noncash pre-tax charge was recorded as illustrated in the table below. The
impairment losses were based on fair value which was determined through
discounted cash flows for the particular stores utilizing a rate commensurate
with the associated risks. The effect of this accounting change was to increase
the net loss for the year by $24,693 or $4.90 per common share.
The Company also analyzed the value of its remaining goodwill and favorable
leasehold interests not impaired
28
<PAGE>
under the store-level SFAS 121 analysis using its historical method under
Accounting Principles Board Opinion No. 17 (APB 17) and determined that such
remaining amounts also were impaired. For this analysis the value of the
goodwill and favorable leasehold interests was determined by projecting
aggregate net income and adjusting it by adding back amortization of intangible
assets. With respect to the projections of net income used to evaluate
intangible assets impairment, management made several assumptions in projecting
their best estimate of the results of future operations of the Company. The most
significant assumptions were an estimated remaining useful life of goodwill of
fifteen years, modest annual comparable store sales growth, gross margin rates
consistent with those experienced over the past fiscal year in the stores not
being closed, an annual expense escalation consistent with recent inflation
trends and the ability to refinance debt maturities as they come due.
These assumptions resulted in aggregate undiscounted adjusted net income
for the fifteen-year forecast period of approximately $5,186, which reflects
aggregate pre-tax interest expense of approximately $398,000 payable in cash and
$86,000 payable "in kind" (PIK). The $5,186 of aggregate adjusted net income for
the fifteen-year forecast period also reflected projected adjusted net losses
for fiscal 1997 of $4,522, which included cash interest expense of $26,242 and
PIK interest of $4,453, and for fiscal 1998 of $2,863, which included cash
interest expense of $26,581 and PIK interest of $5,121. For fiscal 1999, the
Company projected adjusted net income of approximately $967, which included cash
interest expense of approximately $26,581 and PIK interest of $5,889. Due to the
uncertainty of projections beyond 1999, this level of adjusted net income was
assumed to continue for each of the remaining fiscal years in the projection
period. As a result of this evaluation in fiscal 1996, management concluded that
the remaining goodwill and favorable leasehold interests were fully impaired.
Pre-Tax Components of Long-Lived Asset Write-Off As Reflected in the
Statement of Operations for the year ended January 28, 1996:
SFAS APB
121 17 Total
-------- -------- --------
Goodwill $ 20,607 $ 49,406 $ 70,013
Favorable leasehold
interests 4,245 1,917 6,162
Property, buildings
and equipment 2,376 - 2,376
-------- -------- --------
Total $ 27,228 $ 51,323 $ 78,551
======== ======== ========
The goodwill was originally recorded in July 1986 when Pamida Holdings
Corporation acquired Pamida, Inc. through a leveraged buy-out and represented
the excess of the purchase price over the fair value of the net assets acquired.
Goodwill had been amortized on a straight-line basis over a forty-year period
but, due to the trends cited above, its estimated remaining useful life was
adjusted to fifteen years during the fourth quarter of fiscal 1996.
29
<PAGE>
O. STORE CLOSINGS IN FISCAL 1996
As discussed in Note N above, the Company's operating performance during
fiscal 1996 was below plan. Management's analysis of individual stores'
operations and cash flows resulted in the identification of forty unprofitable
or competitive market stores which did not fit the Company's niche market
strategy. Consequently, a charge was recorded at January 28, 1996 as indicated
below to cover the costs necessary to close these stores. The Company received
positive net cash flow from closing the stores due to cash generated from the
disposition of related inventories. The amounts the Company will ultimately
realize from the disposal of assets or pay on the resolution of liabilities may
differ from the estimated amounts utilized in arriving at the income statement
effect.
Pre-Tax Income
Components of fiscal 1996 Statement
Store Closing Costs Effect
--------
Real estate exit costs and
write-off of property,
buildings, and equipment ........... $ 11,455
Inventory liquidation ................ 9,080
Professional charges ................. 314
Severance and other costs and fees ... 548
--------
Totals ............................... $ 21,397
========
The store closing reserve balance as of January 28, 1996 included amounts
related to real estate, inventory, severance, professional fees and other costs
of closing the forty stores. The liquidation of the closing stores inventory was
completed in the second quarter of fiscal 1997. All known ancillary costs of the
store closings have been paid except those related to the remaining real estate.
During fiscal 1997, the Company negotiated settlements on twenty closed store
properties which had been leased, two which have been subleased, and sold four
closed store properties which had been owned. As of February 2, 1997, the
Company remains liable for lease obligations on twelve closed store properties
and owns four closed store properties. The Company anticipates that final
disposition of the remaining obligations and properties will be completed in
fiscal 1999. There were no adjustments made during fiscal 1997 to the store
closing reserve other than cash inflows and outflows related to the store
closings.
The store closing reserve is presented in the balance sheets as follows:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Store closing reserve
(short-term) $ 4,521 $ 7,818
Amount included in other
long-term liabilities 2,190 2,619
-------- --------
Total $ 6,711 $ 10,437
======== ========
30
<PAGE>
P. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 2, 1997 and January 28, 1996:
<TABLE>
<CAPTION>
April 28, July 28, October 27, February 2,
Fiscal 1997 1996 1996 1996 1997 Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales ................................. $ 131,786 $ 155,817 $ 151,980 $ 193,606 $ 633,189
Gross profit .......................... 31,575 37,096 36,446 48,973 154,090
Net (loss) income ..................... (4,742) (1,294) 189 5,051 (796)
Less provision for preferred
dividends and discount
amortization ..................... 93 97 99 102 391
----------- ----------- ----------- ----------- -----------
Net (loss) income available
for common shares ................ $ (4,835) $ (1,391) $ 90 $ 4,949 $ (1,187)
=========== =========== =========== =========== ===========
Net (loss) earnings
per common share .................. $ (.97) $ (.28) $ .02 $ .99 $ (.24)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
April 30, July 30, October 29, January 28,
Fiscal 1996 1995 1995 1995 1996 Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 153,961 $ 186,953 $ 176,206 $ 219,195 $ 736,315
Gross profit............................ 36,813 44,638 42,802 53,435 177,688
Net (loss) income before
Extraordinary item.................. (2,179) 608 130 (93,578) (95,019)
Extraordinary item...................... - - 371 - 371
----------- ----------- ----------- ----------- -----------
Net (loss) income....................... (2,179) 608 501 (93,578) (94,648)
Less preferred dividends and
discount amortization............... 91 90 90 91 362
----------- ----------- ----------- ----------- -----------
Net (loss) income available
for common shares................... $ (2,270) $ 518 $ 411 $ (93,669) $ (95,010)
=========== =========== =========== =========== ===========
Net (loss) earnings
per common share $ (.45) $ .10 $ .08 $ (18.60) $ (18.87)
=========== =========== =========== =========== ===========
</TABLE>
31
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
DIRECTORS AND MANAGEMENT
DIRECTORS
L. David Callaway, III M. Saleem Muqaddam
Chairman and Chief Executive Officer, Vice President,
Express Messenger Systems, Inc. (1) (2) Citicorp Venture
Capital, Ltd. (1 (2)
Stuyvesant P. Comfort Peter J. Sodini
Business Development and President and Chief
Investment Analyst, Executive Officer,
Microsoft Corporation (1) (2) The Pantry, Inc. (1) (2)
Steven S. Fishman Frank A. Washburn
Chairman, Executive Vice President,
Chief Executive Officer, Chief Operating Officer,
and President and Secretary
(1) Member of Compensation and
Stock Option Committees
(2) Member of Audit Committee
MANAGEMENT
Steven S. Fishman Donald G. Hendricksen
Chairman, Chief Executive Officer, Senior Vice President,
and President* Stores - Pamida, Inc.
Frank A. Washburn Paul L. Knutson
Executive Vice President, Senior Vice President,
Chief Operating Officer, Human Resources - Pamida, Inc.
and Secretary*
George R. Mihalko Stephen D. Robinson
Senior Vice President, Senior Vice President,
Chief Financial Officer, Treasurer, General Merchandise
and Assistant Secretary* Manager, Hardlines - Pamida, Inc.
Kurt Streitz
Senior Vice President, Chief
Information Officer - Pamida,Inc.
* Executive Officers
32
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CORPORATE INFORMATION
CORPORATE OFFICES
8800 "F" Street
Omaha, Nebraska 68127-1574
FORM 10-K
A copy of the Company's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained by writing to Pamida Holdings
Corporation, Attn: Investor Relations, P.O. Box 3856, Omaha, Nebraska
68103-0856.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Omaha, NE
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Thursday, May 22, 1997,
at 8:30 a.m. at the Omaha Marriott, 10220 Regency Circle, Omaha,
Nebraska 68114.
MARKET PRICE OF COMMON STOCK
The Common Stock of Pamida Holdings Corporation is listed and traded on the
American Stock Exchange under the "PAM" ticker symbol. The high and low
selling prices for the Common Stock on the American Stock Exchange for
fiscal 1997 and fiscal 1996 were as follows:
High Low
------ ------
FISCAL 1997:
4th Quarter ......... 2 5/16 1 1/2
3rd Quarter ......... 2 3/8 1 5/8
2nd Quarter ......... 3 1/4 2 1/8
1st Quarter ......... 3 1/4 2 1/8
FISCAL 1996:
4th Quarter ......... 4 3/16 2 1/2
3rd Quarter ......... 4 5/8 2 1/4
2nd Quarter ........ 6 4
1st Quarter ......... 7 3/4 6
As of March 24, 1997, there were 297 record holders of the Company's Common
Stock.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
New York, New York
FORWARD-LOOKING STATEMENTS
This annual report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "1995
Act"). Such statements are made in good faith by the Company pursuant to the
safe-harbor provisions of the 1995 Act. In connection with these safe-harbor
provisions, this annual report contains certain forward-looking statements which
reflect management's current views and estimates of future economic
circumstances, industry conditions, company performance and financial results.
The statements are based on many assumptions and factors including sales
results, expense levels, competition and interest rates as well as other risks
and uncertainties inherent in the company's business, capital structure and the
retail industry in general. Any changes in these factors could result in
significantly different results. The Company further cautions that the
forward-looking information contained herein is not exhaustive or exclusive. The
Company does not undertake to update any forward-looking statements which may be
made from time to time by or on behalf of the Company.
33
